Who we fund is a complicated question and it depends on the stage of relationship our borrowers have with us. Here, we explain what we look for in a social enterprise when we first give them a loan and how that bar increases over time over subsequent loans.
Before reading further, it might be useful to read how we lend through multiple rounds of loans here. Because we fund over multiple rounds, our first bar for the initial loan to a social enterprise can be relatively low. Subsequent loans will raise the bar (financially and impact-wise) slowly as we provide support.
This allows us to place less onerous due diligence and compliance requirements on smaller social enterprises whose priority is often about surviving and growing. For example, the comparatively low requirements of our first loan are outlined below:
1. Social impact
For simplicity’s sake, we ask social enterprises to align themselves with the Sustainable Development Goals (SDGs). Together with our experience of analysing hundreds of social enterprises, and understanding the social entrepreneurs’ motivations, we then judge if the social enterprise makes an impact. This is a relatively low bar to pass.
2. Ability to repay
Being in the lending business, this is key for us. There are 2 general situations in which we consider that a social enterprise can repay. The social enterprises have a:
a) Proven business model with at least 2 cycles of revenue; OR
b) Binding sales contract
3. Ability to legally accept and repay debt capital
4. Activities, products and services of the social enterprise are legal
5. Preferably with no other major source of funding/capital
In later stages, we increase this bar to require more information from the social enterprise. The purpose is not for our reporting and compliance purposes, but rather to help the social enterprise develop governance and controls that would aid them as they grow.
For example, in measuring social impact, we might start off requiring the social enterprise to be aligned to the Sustainable Development Goals (SDGs), and have the right motivations in creating impact. However, in subsequent loans, we might raise the requirements to include Theory of Change Models, Logic Models (Log Frames), or Base/Mid/End-line surveys. This would improve the way the social enterprise thinks about impact, reviews their various programs, and represent themselves to external parties.
Because of the staggered nature of their borrowings, and hence these requirements, we can help the social enterprises increase their sophistication according to the organisation’s size. By aiming to lend to thousands of social enterprises, we hope such efforts would raise the average sophistication of social enterprises and help them become more effective at creating impact.