What does alternative finance in the UK mean for the social sector?

TSIC recently attended the launch of a report by Nesta and Cambridge University on “Alternative Finance in the UK”. The report explores a broad range of alternative finance models and their implications for the wider economy, with some comment on potential implications for the social sector, which is continually seeking different sources of funding as public budgets shrink. Of the nine types of alternative finance outlined, the most frequently used ones in the social sector to date are rewards and donation crowdfunding, wherein refer to individuals donate towards a specific project to receive non-financial rewards (e.g. a book or a product) or no return at all, as well as community shares, which refers to withdrawable share capital issued by co-operative societies.

The report argues that the alternative finance market, which is estimated to triple in size from 2013 to 2014, has provided “significant additional giving to social good projects”, as around 80% of the donors who reported giving to social sector campaigns said they were using funds in addition to what they would normally give to charitable causes. Although the funding channelled through community shares, rewards and donation crowdfunding to social sector organisations is equivalent only to 0.6% of the annual philanthropic giving by individuals in the UK (See data at NCVO), the growth rate of these three types of alternative finance is averaging 126% per annum, while philanthropic giving by individuals has remained more or less stagnant in recent years.

While the growth of alternative finance in the social sector is promising, the amount of funding channelled through these mechanisms to date remains quite small. There needs to be more enabling initiatives for major forms of alternative finance like P2P business lending and equity crowdfunding to consider not only the financial return, but also the social return. BuzzBnk is such an example as it is the first platform in the UK to provide loans-based crowdfunding to social enterprises and charities.

Another potential limitation of alternative finance is that it is still not able to fill the “missing middle” range between £50,000 and £200,000, where funding for social enterprises is most scarce but critical for successful ones to scale up. In one of our previous briefings on “Financing Social Enterprises in the UK”, we identified that across the vast array of social investment funds, there are only a handful focused on investments within this range due to a combination of high risk appetite required and high transaction costs that deter both individual and institutional investors. Rewards and donation crowdfunding focus primarily on early-stage projects, as the average amount raised is between £3,800 and £6,100. While community shares can address this gap to an extent, with £175,000 on average raised, this form of finance is limited to organisations that are incorporated as co-operative or community benefit societies. Many small organisations seeking growth finance thus will need to look elsewhere.

As the alternative finance market continues to grow, we need to focus on both the funding options available to the social sector, as well as to build the capacity of social sector organisations to engage with alternative finance, through training and knowledge-sharing forums. We’d love to hear your thoughts or recommendations: tweet to us @TSICLondon #AltFin.

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