Social enterprise lending

Social enterprise lending is a form of social finance which refers to the practice of offering loans and other financing vehicles below current market rates to social enterprises and other organisations pursuing social goals. This is often referred to as 'patient lending', or financing with 'soft' terms. Patient lending recognises that projects with social outcomes often reach profitability later than commercial projects. Softening the terms of a loan means that a social lender may offer provisions such as longer loan terms, lower interest rates and repayment 'holidays' where capital and interest repayments and are not due until the project is profitable. Social lenders might also offer small grants as part of an investment package.

Social lending and social investors increased in popularity and number in the 1990s, in part as a reaction to the trend within charities, social enterprises and other voluntary and community organisations towards increasing their percentage of earned income and away from depending on shrinking sources of grant income. As a non-profit organisation develops new income streams, there is typically a funding gap between necessary investment in capacity, staff or infrastructure and profitability. This trend coincided with an increased tendency, in both the US and the UK, of government to turn to the voluntary and community sector to offer public services and provide solutions to social problems. Finally, the proliferation of venture capital firms in the tech boom of the mid-nineties highlighted the successful practices of venture capitalists and other private investors, and those practices eventually spilled over to the non-profit world. This trend began in the US, most notably on the west coast, and eventually spread to the UK and Europe.

Social lending and venture philanthropy are the direct result of applying private sector funding models to the public or voluntary sector. This is demonstrated by the recent trend for social investors to offer performance-related loans (often referred to as 'quasi-equity') and share equity in social businesses with the appropriate legal structure; two practices which are directly borrowed from venture capital.

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