Even for relatively large charity or social enterprises, it can be challenging to find sufficient unrestricted funds via bank finance to scale up their activities or develop a new line of business. The reason behind this can be found in the higher level of restrictions regular banks and governmental entities often require any type of investment source to comply with. Due to an elevated number of restrictions, banks and governments are often unable to invest in social lending, since social investment loans typically are unsecured loans and therefore come with a higher risk that few regular and commercial banks are willing to take.
This is where social impact lending enters the picture. Social lending is a source of large scale unsecured finance with fewer restrictions than bank finance. The social impact lending platforms seek to connect potential investors with social enterprises that through these investments intend to address social problems and look to fund preventative interventions.
What is Social Impact Lending?
Social impact lending has risen from the financial challenges that social enterprises and charities face with the aim of supporting businesses and projects that have wider community benefits or social impact (hence the name “social impact lending”).
Examples of social impact lending could be providing social enterprises and charities with the affordable loans they need in order to build the capacity of high-impact social organisations and, in this regard, make their social plans come true, for instance building affordable homes in the community and providing houses and assisted living services for disabled people.
Social Impact Bonds Explained
A social impact bond, also known as a social benefit bond or a pay for success bond, is an outcome based payment-by-results contract between social investors and organisations whose goal is to improve the social outcome for a specific group of people, for instance by delivering a service such as helping homeless people find a home, helping people find jobs or preventing prisoners from reoffending.
Social impact bonds are not bonds in the conventional sense since the rate of return is not fixed. On the contrary, the amount repaid to an investor depends on the achieved social outcome. If the social service provided by the charity organisation has proven successful, the government will make sure to repay the investors.
Advantages of Social Impact Finance
Social Impact Finance becomes especially relevant when governments fall short in testing new innovations and upscaling successful social programmes. In fact, this is why social lending and social impact bonds were designed in the first place; to bring in impact investors who can provide flexible funding to social programmes initiated to meet the needs of vulnerable citizens.
Since this type of social finance is typically financed with the help from specialist intermediaries who act as social investors, there is a good chance that these investors can contribute with professional advice on how specific social programmes can be improved, thus delivering a more efficient social impact.
LendAHand: A Social Lending Platform
An example of a social crowdlending platform is LendAHand.com, on which interested investors can find crowdfunding projects aiming at eradicating poverty in developing countries and in general change the lives of people in need to the better – while still striving to make it possible for investors to earn a financial return.
On this social lending site, investors can expect to find social impact loans in more than 25 countries with interest rates ranging from 2% to 7% and with some loans having guaranteed 50% repayment of initial investment in case of default.
Some former social lending crowdfunding projects on the platform covers investments in the installment of solar panels in Kenyan schools, thereby making studying in the early morning and late afternoon possible, as well as investments in helping Indian women expanding their businesses, thus enhancing their position in the economy. What all social loans on the LendAHand crowdlending platform have in common is the fact that they all share an ultimate purpose of improving the socio-economic status of people living in developing countries.
Risks Associated with Social Impact Lending
There will always be a risk associated with investing in crowdlending, be it traditional peer-to-peer loans or social impact loans. Before committing to an investment in a specific project, you should make sure to have read about and understand all the aspects of risks involved in social lending.
There are, however, some ways of mitigating the risk associated with investing in a social impact loan. For instance, you can limit your risk by investing through a local partner, since the local partners often maintain financial reserves that can and will be used to cover loan defaults, if it should become necessary (so called guarantees).
Of course, there is always a risk that the local partner will go bankrupt or become insolvent, e.g. as a result of political and regulatory changes, natural disaster or epidemics, assumption of excessive credit risks or, simply, fraud. In the unlucky case of bankruptcy or insolvency of a local partner, investors might experience partial or, worst case scenario, full loss of investment.