Funding and financing options for a new social enterprise

Just like any other businesses, social enterprises need financing at various stages of their life cycles – establishment, growth and expansion. Banks can provide a comprehensive suite of financing options ranging from micro loans and business loans to unsecured overdraft. In addition to banks, budding social entrepreneurs can also explore a few other avenues.

1. Start with your own money

It is rather important for new entrepreneurs to show their commitment to the business, and one way is to own equity invested in paid-up capital. It can be difficult to borrow from financial institutions at early stages of setting up a business, as there is no track record of how the business has been doing. Even if you are able to obtain bank loans, you have to take note of the terms and conditions, as well as interest rate fluctuations.

2. Look around to family and friends

Another source of funds is your family and friends. In general, loans from family and friends have more flexible terms and could have a longer repayment period. The interest rate is usually lower, if any, and less security is required compared to banks.

However, do note that transactions of this nature can be complex. There is a real possibility of misunderstandings, which can cause damage to relationships. It will be therefore be advisable to establish clear understanding of the period of loan, whether you are expected to pay interest, and if so, how much.

3. Look out for grants and government-assisted schemes

Your social enterprise may qualify for a grant of government support to help you get started. You may also be eligible for a subsidised or zero-interest loan. In addition, support schemes can provide expert advice, information or subsidised consultancy.

There are financing programmes from the government such as the ComCare Enterprise Fund from the Ministry of Social and Family Development. The Social Enterprise Association of Singapore is also an example of a sector developer which might be able to offer assistance to a budding social entrepreneur.

4. Approach your banker

Bank loans are the most common sources of additional financing. Before lending, a bank will want to know more about your business and if the financing is sound. Typically, a credible business plan is required, as well as evidence of a successful business track record.

It will be helpful if you are able to offer some form of security and/or have invested money in the business yourself. DBS Bank, for example, offers a Social Enterprise Package that provides social enterprises access to cash management solutions and business loans at preferential rates.

5. Find your business angels

Equity finance is another way of raising share capital from external investors in return for a share of business. This may take many forms, including a share of future profits, but is most frequently associated with co-ownership of the business to some degree.

The process may be time consuming as potential investors will seek background information on you and your business. Depending on the investor, you may lose a certain amount of management autonomy and time will need to be invested to provide information for the investors to monitor.

You can also try to gain access to capital from impact investors, where investments are made with the intention of generating social impact, alongside financial returns.

First steps

A new business venture is the beginning of a great adventure. With the right philosophy, the right partners and the right bank, it can be the start of a lifelong journey and a unique legacy.

But there is one more critical piece of advice that experienced social entrepreneurs will give you: Walk before you can run. Too many social enterprises fail because they overstretch themselves and expand too quickly.

Ambition and vision are essential – but the foundations of lasting business success are prudence, meticulous planning, and slow, steady growth.

This article is contributed by DBS Bank, which is championing social entrepreneurship across the region as the centerpiece of the bank’s social responsibility efforts. DBS has also partnered with NUS Enterprise to organise the DBS-NUS Social Venture Challenge a regional start-up competition for social ventures.