In most of the cases, social enterprises start from the scratch, so funding is crucial for the development or their sustainability. There are many available resources, but which of them is suitable for your enterprise is a personal issue.
Bootstrapping/Self-funding
Self-funding or bootstrapping is called when you manage to keep savings for a purpose. This method can help you to start your social enterprise totally independent. It can be achieved through some time of saving, either month maybe years, depending the level of the required amount for starting your Social Enterprise. The independence is one of the most important advantages but there is on the other hand the fact that is a time-consuming procedure. Sometimes, the savings are not enough, so probably you will need someone else’s contribution.
Friends & family
Asking for funding from your personal network could be an extension of bootstrapping. Friends and family are an easy way of receiving the amount of money needed, however, the nature of the relationship between the agreed parts, can occur difficulties.
Given the fact that there is always the possibility for inability of returning the funds, it is always recommended to document the agreement, by specific terms and time limits, to ensure that the investor beloved ones are not going to feel mistreated or deceived.
The benefits of a choice like this are the fact that friends and family will not evaluate your goals or intentions, simply because they believe in you as a person. So, I will not be difficult to pursue them to support you financially. Another advantage is the fact of flexibility in possible delays or re-planning of the fund return terms, regarding time for example.
On the other hand, the relationship is under risk. The reasons which will put your relationships in danger are related mostly with the lack of consequents in case of rescheduling the return of fund or the possible misunderstandings regarding the goals of the enterprise. It is impossible to be totally objective when blending personal relationship with business and that is a good reason to rethink before you attempt to mix them.
High-net-worth individuals / Angel Investors / Venture Capitalists
There are many wealthy people out there who help start up enterprises or social enterprises to establish. Some of them participate only for the purpose/social mission of the project while others look forward to raising equity. Some them pursuit an active role in your business while others do not.
Government funding
Government funding usually come in the form of an award given by the state or local government to an eligible grantee. The benefit of this type of funding is that does not require money return. Government grants can contribute to start a Social Entrepreneurship, especially when you have an idea which will benefit society in ana innovative way. The con in this choice is that usually Government funding is rare, or the criteria are too hard to be reached. In an overview, if the state announces competitions, you can give it a try, otherwise it is recommended to choose more proactive actions for getting the funding.
Bank Loans
It is one of the most famous ways of funding, especially some years ago. Nowadays the levels of interest have fallen dramatically. The reasons are the detailed information required and also the proven success of your business or guaranteed elements in order to give you a loan and the other. The bank will ask for your credit history and much information regarding your ability to return with (usually) high interest rates. If you lack alternative options, it is highly recommended to search between the banks and choose one that will make it less difficult to you.
Crowdfunding
Crowd funding is rising the last years. The very beginning of crowdfunding was around the breakthrough of financial crisis and lately it has been used for raising capital for Social Enterprises. More than a decade later crowdfunding has spread around the developed world. A huge number of investors donate or invest an amount of money, small or not. Internet has a significant role in crowdfunding because it is the main channel of spreading the word and gaining funding. The most famous examples of crowdfunding are Kickstarter and Indiegogo, which established more than a decade ago. These platforms give the opportunity to raise capital in the form of funds, through online donations of products or services of individuals, as well as to creative and innovative business projects and support only donation-based projects. Also, they do not allow contributors to become an investor or a shareholder. In the next sections many types of crowdfunding such as loan based, reward-based crowdfunding, equity based and donation-based crowdfunding will be presented.
DEFINITION: CROWDFUNDING
“The practice of funding a project or a venture by raising many small amounts of money from a large number of individuals, typically via the Internet, as well as social media” (Prive, 2012; Mollick, 2014).
Loan based crowdfunding
Loan-based crowdfunding is the procedure in which public people provide funds to an organization in order to cover their financial needs (Steinberg and DeMaria, 2012).
Through this model, individuals may approach other professionals for a loan in return for interest. Social entrepreneurs who are facing difficulties unable to apply for a typical loan and are searching for alternative choices should investigate debt-based crowdfunding further. It is needed, given the fact that as in the case of bank loans, applicants must prove theircreditworthiness.
DEFINITION: CREDITWORTHINESS
Creditworthiness describes someone’s ability to responsibly handle and repay debt.
Considering the above, startups or social enterprises in their very beginning will face problems that have not yet proved that they are capable of fully establishing credit. Social Enterprises which have the requirements to apply for a loan through debt-based crowdfunding, the interest rates vary. Usually it happens because of the fact that lending money to unestablished startups and professionals there is a high risk included to this action and as a result some investors may set steeper rates.
Reward based crowdfunding
In reward-based crowdfunding, the sponsors invest a small amount in return of a reward. The reward’s size depends on the amount of money invested. Social entrepreneurs should have on mind that this kind of crowdfunding is suitable only for the beginning and the fact that anyone can become a possible sponsor, so there are not any kind of restrictions (Hebert, 2015).
Equity-based crowdfunding
In this type of crowdfunding, investors offer large amounts of money. There is no reward for this investment, only the right of the investor to take a small portion of equity in the firm itself (Hebert, 2015). No contracts or agreements are required in order to receive funds. The advantages of this type of investment are that in case of bankruptcy, the Social Entrepreneur does not owe anything to the investor. The invested money can be paid back by sharing of future revenues. This condition is called ‘moral hazard’ and describes the situation where an entrepreneur may take too much risk, given the fact that there is no threat for bankruptcy (Taylor,2015) and should be paid attention in order to avoid this possibility.
Donation based crowdfunding
Donation-based is the type of crowdfunding in which the entrepreneur is asking for donation of small amounts from a large number of donators. The payback from the entrepreneur’s side can be rewards which are increasing as the amount of donation does. In case the amount is too small, then there is no reward. Donation-based crowdfunding can also be used in an effort to raise money for charitable actions and causes, and as a result it can be an ideal choice for a social enterprise.
Considering the above crowdfunding methods, it seems that the donation-based model is safer for social entrepreneurs who face burdens while trying to raise capital in a short time period. On the other hand, the reward-based crowdfunding model, it is ideal for social enterprises in their very beginning because it does not require financial return. Regarding the equity-based crowdfunding model, it is recommended in cases where it is needed to avoid bureaucratical procedure, given the fact that contracts are not required. On the other hand, it offers the chance to attract larger numbers of investors comparing to other crowdfunding models. However, this model has potential loss of investment in the event of bankruptcy, so for this reason, the founders should be cautious, and they should also organize in a strict way their financial data.
