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Last updated: 24 November 2008
A new study by the University of Warwick Business School finds that many social enterprises could be as capable of accessing commercial finance as mainstream businesses.
Latest research from the University of Warwick Business School finds little evidence that social enterprises are either riskier or less well understood by finance providers than conventional small and medium-sized businesses.
Anecdotally, social enterprises often report difficulties accessing finance. However, this research found no significant difference between social enterprises and mainstream businesses in the number that had been rejected by finance providers.
The report was based on surveys of a subset of the social enterprise population that were structured as industrial and provident societies or companies limited by guarantee. It suggests that these social enterprises are more likely to be dependent on grant finance and use less commercial finance.
It concludes that this grant dependence is more likely to reflect the debt-aversion or pessimism of their financial managers, than external constraints on accessing commercial finance.
The report by Dr Stuart Fraser reveals that:
The report also observes that there is a marked perception among smaller social enterprises that they will be rejected by mainstream finance providers.
It is suggested this pessimism – as well as a lack of good financial advice, and their tendency to be located in deprived areas – may contribute to the greater reliance of social enterprises on grant finance.
The report recommends that better communication between social enterprises and finance providers must be fostered to counter the unwarranted perception that banks are unwilling to lend to the sector.
The report finds strong evidence that increased use of commercial finance reduces grant dependence, and concludes that existing government policies are proving effective at assisting the transition away from grant dependence.
The report calls for more work to be done to improve the quality of financial advice available to social enterprises, particularly those experiencing serious financial problems.
The Government recognises that despite these findings, some social enterprises still encounter problems in accessing commercial finance. Whilst the market for debt finance has improved, last November's Social Enterprise Action Plan outlines the steps Government is taking to improve the ability of social enterprises to access risk capital.
The analysis in the report, funded by the DTI and supported by the OTS, is based on data on SMEs from the 2004 Small and Medium-Sized Enterprise Finance survey, and data from the 2006 Social Enterprise Finance Survey (comprising companies limited by guarantee or industrial and provident societies with less than 250 employees).