For any business, working capital is akin to the oil that keeps a machine running smoothly. Unfortunately, the credit landscape is fraught with challenges for early-stage social entrepreneurs in terms of collateral requirements and high-interest rates.
Social impact enterprises also bear the high cost of challenging perceptions, finding the right price point for social impact products and services, shifting behaviour patterns, and gaining user acceptance. While venture debt and working capital facilities may be available to some start-ups, it is nearly impossible for fledgeling social enterprises to avail of small ticket loans as their lack of credit history necessitates stringent (and consequently, costly) due diligence. Overall, making them less attractive borrowers. Additionally, social enterprises that do not conform to traditional business models or have unconventional programmatic approaches face even more hurdles.
The current economic climate and on-going pandemic have only added to the barriers. Social enterprises who are at the inflexion point of piloting or expanding their programs were experiencing a dire need of working capital. With over 120+ social enterprises in our fold, at UnLtd India, we began to explore potential avenues of funding that would meet short-term requirements yet yield long-term benefits.
The answer lay in mobilising philanthropic capital to create a revolving loan fund – a product which has been used effectively over decades but hasn’t grown in tandem with demand. We partnered with GivFunds who lend extremely low-cost loans to social enterprises who are able to use such capital for maximum impact.
As this capital doesn’t need to be returned, the lender (in this case, GivFunds) can take a higher risk and provide working capital with no collateral and at lower rates of interest. For philanthropists, this channel of financial support enables them to create greater social impact across sectors as the same capital can be utilised over a period of time to support different social enterprises.
For entrepreneurs, this source of funding can address budget shortfalls required for operational expansion, team building, fixed costs or necessary inputs. In addition, this flexible, low-cost, collateral-free loan facility helps social enterprises build a credit history with none of the punitive costs that traditional forms of credit carry. With every repayment, other social enterprises have the opportunity to build capacity and scale their impact.
Through this new funding pool of INR 1.4 million, 2 agri-based social start-ups were able to access critical capital at the right time. One purchased machinery without which their high-impact program couldn’t be piloted, while for the other, the hurdle of building inventory to increase sales of agricultural inputs was overcome.
“We believe that this financial product with customised tenure and interest rates can be a game-changer to take social enterprises to scale. For this year, we are looking to increase the pool to INR 15 million with pioneering philanthropists and make more than 10 start-up social enterprises bankable.” shares Anshu Bhartia, CEO of UnLtd India.