Explain the term ‘social enterprise’.
CAMBRIDGE
A level and AS level
Year Examined
October/November 2017
Topic
Social Entrepreneurship
👑Complete Model Essay
What is a Social Enterprise?
A social enterprise is a business with a dual mission: to achieve social, environmental, or cultural goals alongside generating profit. Unlike traditional businesses primarily focused on maximizing shareholder profit, social enterprises prioritize their social mission. Profits are reinvested to further this mission rather than being distributed solely to shareholders.
Key characteristics of a social enterprise include:
- Social Impact: They address social problems, promote community development, or contribute to environmental sustainability. Examples include Fairtrade businesses, organizations providing employment opportunities for disadvantaged groups, and companies focused on renewable energy.
- Financial Sustainability: While prioritizing social good, they aim to operate sustainably by generating revenue through trading activities. This independence distinguishes them from charities solely reliant on donations.
- Accountability and Transparency: They are transparent about their operations and social impact, often measuring and reporting on their progress towards their stated goals.
Sources of Finance for Social Enterprises
Social enterprises access a range of funding sources, each with advantages and disadvantages depending on the organization's specific needs and circumstances.
- Bank Loans: A traditional lending method where a financial institution provides a lump sum repaid with interest. Suitable for larger investments but requires a strong credit history and collateral.
- Overdrafts: Allow businesses to withdraw more money from their account than available, providing short-term flexibility but often at high-interest rates. Best suited for managing temporary cash flow issues.
- Share Capital: Involves selling shares in the company to investors in exchange for ownership. Social enterprises, often structured as limited companies, can utilize this but dilute existing ownership and control.
- Venture Capital: Provides funding from investors seeking high-growth potential, often in exchange for equity and a degree of influence in business decisions. Suitable for enterprises with scalable social impact models.
- Trade Credit: Allows deferring payment to suppliers, providing short-term finance. Common for businesses with established supplier relationships but depends on supplier terms.
- Sale of Assets: Involves selling off unused or underutilized assets to raise capital. Offers a quick injection of funds but can be short-sighted for growing businesses needing their assets.
- Retained Profit: Utilizing previous profits to fund growth. Ideal for profitable social enterprises as it avoids interest payments but requires strong financial performance.
- Crowd Funding: Raising funds from a large number of individuals, often online, in exchange for rewards, equity, or donations. Effective for raising awareness and engaging the public with the social mission.
Factors Affecting Choice of Finance
Several factors influence a social enterprise's funding decisions:
- Business Ownership: Sole traders have fewer options compared to limited companies that can issue shares.
- Profitability: Profitable enterprises can access retained profits, while less profitable ones might rely on grants or loans.
- Amount of Finance Needed: Large sums may necessitate bank loans or equity finance, while smaller amounts could be sourced through crowdfunding or trade credit.
- Short or Long Term Finance: Overdrafts suit short-term needs, while long-term investments might require loans or equity.
- Purpose of Finance: Working capital is often funded differently than fixed asset purchases.
- Ease of Obtaining Finance: Start-ups might struggle to secure loans, while established businesses with good credit have more options.
- Stage of Development: Early-stage businesses might rely on grants or angel investors, while mature ones can access public markets.
- Cost of Finance: Interest rates, equity stakes, and other costs influence the overall financial burden.
- Attitude to Risk: Debt financing increases financial obligations, while equity finance dilutes ownership.
- Effect on Control of Business: Borrowing preserves ownership but incurs debt. Equity finance dilutes ownership but brings in expertise.
- State of the Economy: Economic booms encourage lending, while recessions restrict borrowing.
Conclusion
Choosing the right financing mix is crucial for social enterprises. By understanding the various sources available and the factors influencing their selection, these businesses can secure sustainable funding that supports both their financial viability and their social mission. Balancing financial sustainability with social impact is the hallmark of successful social enterprises, allowing them to create lasting positive change while remaining financially viable in the long term.
Sources:
- Marc J. Epstein, "Measuring Social Impact: Learning What Works", Stanford Social Innovation Review, 2015.
- Dees, J. Gregory, "Enterprising Nonprofits", Harvard Business Review, 1998.
Explain the term ‘social enterprise’.
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A-Level Business Studies Essay Guide: Sources of Finance for Social Enterprises
This guide will help you write a successful A-Level Business Studies essay on sources of finance for social enterprises. It will cover the key concepts, provide relevant tips, and suggest examples to illustrate your points.
Understanding Social Enterprises
Firstly, it's crucial to define a social enterprise. These are businesses that aim to achieve a social mission while generating profits. They use their profits to benefit the community, tackle social problems, or promote sustainability. Unlike traditional businesses, social enterprises prioritize their social goals alongside financial sustainability.
Sources of Finance for Social Enterprises
Social enterprises have access to various funding sources, each with advantages and disadvantages. Here are some of the most common options:
Bank Loans
Bank loans are a common source of finance for businesses, including social enterprises. They offer a fixed interest rate and repayment terms, making them predictable. However, banks may be hesitant to lend to social enterprises due to their potentially lower profit margins or the difficulty in assessing their social impact.
Overdraft
An overdraft provides short-term borrowing for a business's current account. This can be helpful for managing cash flow but carries high interest rates. It's not a suitable long-term solution for social enterprises, especially those with limited profit margins.
Share Capital
Limited company social enterprises can raise share capital by selling shares to investors. This provides long-term funding, but it dilutes ownership and control of the business. Investors expect a financial return, so social enterprises must ensure they can deliver both social and financial value.
Venture Capital
Venture capitalists invest in high-growth businesses with the potential for significant returns. They often provide funding in exchange for equity, giving them a stake in the social enterprise. This can be beneficial for social enterprises with a clear business model and strong growth potential.
Trade Credit
Trade credit is a form of financing that allows businesses to buy goods and services on credit from suppliers. This can help social enterprises manage their cash flow, but it's essential to manage the credit terms and avoid excessive debt.
Sale of Assets
Social enterprises can sell assets they no longer need, such as equipment or property, to generate funds. This can be useful for short-term financing but may impact their operational capabilities if they sell essential assets.
Retained Profit
Retained profit is the profit a business keeps after paying dividends to shareholders. For social enterprises, this can be a valuable source of finance, especially if they are already profitable. It avoids the cost of borrowing and reduces reliance on external investors.
Crowdfunding
Crowdfunding allows businesses to raise funds from a large number of individuals, typically through online platforms. This can be a powerful tool for social enterprises, as it allows them to connect with supporters and build a community around their mission. However, crowdfunding campaigns require significant effort and may not always reach funding targets.
Factors Affecting the Choice of Funding
The choice of funding for a social enterprise depends on several factors:
Business Ownership
The type of ownership, whether sole trader, partnership, or limited company, influences the available funding options. For example, a limited company can raise share capital but will dilute ownership and control.
Profitability
A profitable social enterprise has more options, including retained profit and bank loans. However, if profitability is low, alternative sources like crowdfunding or grant funding might be more appealing.
Amount of Finance Needed
The amount of finance required determines which options are suitable. A large sum may necessitate venture capital or a share issue, while a smaller amount could be addressed through an overdraft or trade credit.
Short or Long Term Finance
Short-term finance options like overdrafts are suitable for immediate needs, while long-term financing like bank loans or share capital are better for sustainable growth.
What Finance is Required For
The purpose of the financing, such as expanding operations, purchasing equipment, or covering working capital, should be considered. Different funding sources are better suited to specific needs.
Ease of Obtaining Finance
The availability of finance depends on factors like the social enterprise's track record, creditworthiness, and the current economic climate. A strong track record makes borrowing easier. Strong brands or a successful track record may enable access to a larger pool of funds.
Stage of Development
Early-stage social enterprises may rely on crowdfunding or grants, while established businesses with a proven track record can access more traditional funding sources.
Cost of Finance
Interest rates, loan fees, and equity dilution costs should be carefully considered. Retained profit is ideal as there are no interest payments. However, it is only available to previously profitable businesses. High interest rates can make borrowing expensive, especially for social enterprises with already limited margins.
Attitude to Risk
Social enterprises with a higher risk tolerance may be willing to take on debt or dilute ownership through share capital, while those with a lower risk appetite might focus on less risky options like grants or retained profit.
Effect on Control of Business
Funding options like venture capital and share capital can dilute the control of the original founders. Social enterprises must weigh the benefits of increased funding against the potential loss of control.
State of the Economy
A strong economy with low interest rates makes borrowing easier. However, a recession can make it more challenging to secure financing.
Conclusion
Choosing the right source of finance is crucial for social enterprise success. By understanding the different options and the factors influencing the decision, social enterprises can make informed choices that support their social mission and financial sustainability.
Essay Tips
Here are some additional tips to help you write a compelling essay:
- Structure your argument logically, starting with an introduction that defines social enterprises and outlines the main points you'll discuss. Each paragraph should focus on a specific source of finance, its advantages and disadvantages, and the factors influencing its suitability for social enterprises.
- Use relevant examples to illustrate your points. Search for real-world examples of social enterprises using different funding sources. This demonstrates your understanding of the topic and helps to make your essay more engaging.
- Analyze the impacts of various financing options on the social enterprise's goals, ownership, and control. Consider both positive and negative impacts.
- Conclude your essay by summarizing your main points and reiterating the importance of choosing the right source of finance for social enterprise success.
By following these guidelines and tips, you can write a well-structured and insightful essay on sources of finance for social enterprises. Remember to use clear and concise language, and back up your arguments with evidence and examples.
Extracts from Mark Schemes
Explain the term ‘social enterprise’.
Answers may include:
Understanding of sources of finance
- bank loans
- overdraft
- share capital
- venture capital
- trade credit
- sale of assets
- retained profit
- crowd funding
Understanding of factors affecting choice of funding
- business ownership
- profitability
- amount of finance needed
- short or long term finance
- what finance is required for
- how easy finance will be for business to obtain
- stage of development of the business
- cost of finance
- attitude to risk
- effect on control of business
Limited company can raise share capital but will dilute ownership and control.
Track record of success makes borrowing easier. Well known firm with recognised brands likely to be a PLC and able to offer new share issue to raise large amounts of finance.
State of the economy – borrowing is easier in a boom when confidence is high. Business may delay growth until it is easier to borrow money.
High interest rates make borrowing expensive. Retained profit would be ideal as no interest to pay but only available to a previously profitable business.
High amount of funding for fairly short term could use overdraft or retained profit, one with high interest, the other with none. Would need a quick return from the growth to justify the overdraft.
Short term injection of low amount of cash could sell assets no longer needed or sale and lease back. If a business is growing this may not be the ideal source of finance as will need more assets not less.