Social investment can be a powerful tool to help social enterprises grow and expand their impact, but the right and wrong reasons to borrow must be considered. It’s crucial to understand that taking on debt can either enhance or strain your organisation’s cash flow, depending on how and why you borrow.
Before deciding to take on debt, you must answer one key question: Why are we borrowing?
If your board or senior team hasn’t thoroughly examined this, it might not be the right time to borrow. Below are some good and bad reasons for taking on social investment, along with considerations for property acquisition.
Right reasons to borrow
- To finance growth plans
Borrowing to finance growth is a sound decision if you have a detailed plan for how this growth will occur. This plan must outline the financial outcomes and how the debt will be repaid. For example, expanding a marketing team alone won’t guarantee growth – it needs to be part of a larger strategy that shows clear revenue generation. - To launch a new product or service
New launches can be risky, but having a cash buffer to absorb early losses while building a revenue stream is a smart move. Once the new product or service is profitable, you can use the cash flow to service the debt. - To manage cash flow on contracts paid in arrears
For organisations with multi-year service contracts, borrowing to cover upfront costs can be viable. If you have strong contract management and a proven track record, this can be an attractive option for social investors. - To bring forward impact-driven expenditure
Borrowing to accelerate projects funded by reliable future fundraising is a good idea. Instead of waiting for funds to accumulate, organisations can use social investment to deliver impact sooner, benefiting their communities more quickly.
Wrong reasons to borrow
- To replace lost grant funding
Loans are not suitable for replacing lost grants, which are typically restricted to specific program funding. Without secured future grants to repay the loan, social investors are unlikely to lend. - To refinance directors’ loans
Social investors are hesitant to lend money that will immediately be used to pay off directors’ loans. Investors want their funds to be tied directly to delivering social impact. - To hire a fundraiser or salesperson
Hiring someone to generate income isn’t a sure bet. It can take time for results to materialise, and the loan may be used up before any significant income is generated. - To fund early-stage enterprises
Borrowing at the start of a new venture is often too risky unless the lender specialises in early-stage support and provides risk-bearing capital alongside advice.
What about acquiring property?
Buying property can be a valuable investment, but weighing the risks carefully is essential. Consider the following:
- Is the property acquisition directly tied to your mission?
- Does owning property make more financial sense than renting or other alternatives?
- Can your organisation maintain stable income streams to cover the loan even if interest rates rise?
- If your situation changes, can your organisation change tack and sell the property without incurring large losses or penalties?
If you can’t answer “yes” to all of these questions, proceed with caution.
Getting help with social investment
Social investment can accelerate your impact when backed by strong plans and realistic expectations. If you’ve reflected on the right and wrong reasons to borrow and are still considering borrowing, seek advice from resources like Good Finance or the Reach Fund.
