The Extent of Bankers Awareness, Attitude Towards Social Enterprises Business Modes - Dissertation Example

?Literature review: What is a social enterprise? In most of the existing researches relating to social enterprises (Bank of England, 2003, Smallbone et al 2001; Conaty, 2001; Westall, 2001; Department of Trade and Industry, 2002; Shaw, Shaw and Wilson, 2002), a social enterprise has generally been considered to be a profit-making organization that puts its prime focus on various types of social as well as environmental goals. It, however, holds financial objectives as well to fulfill its social and environmental goals. A social enterprise generally creates an extensive plan for utilizing its profits to fulfill its social objectives. At the time of defining social enterprises, legal status or ownership related issues are generally not taken into account. Major focus is placed on the objectives of the organizations. Social enterprises can be of different types. For example, a social enterprise can take the form of share capital organization, or it may be a non-share capital enterprise that is generally known to be as non-profit corporation, or it may take the form of a cooperative, or it may be built through partnership, or it may take the shape of a sole proprietorship. (Conaty, 2001; Martin and Thompson, 2009; Brooks, 2008) Very often, a social enterprise is created as a profit making independent organization having some particular social values implanted in its business activities. Some times a social enterprise is built in order to generate revenues for financing the activities of a non-profit enterprise, while in some other cases a social enterprise is simply a profit-generating subsidiary of a non-profit corporation. Most of the social enterprises operate at breakeven point or generate quite small level of profits. However, some social enterprises can be quite profitable. Everything depends on the purposes for which the social enterprises are set up. (Brooks, 2008; Pearce, Kay and Gulbenkian, 2003) Smallbone et al (2001) has identified two crucial points of social enterprises that distinguish them from other profit making enterprises. First, Smallbone et al (2001) has stated that the social enterprises are quite dynamic participants in the traditional market economy as they sell goods or services in order to generate revenue for extending support to some social or environmental causes in their locality or in some bigger front. Second, Smallbone et al (2001) is of the opinion that the utilization of surpluses generated through their economic activities for fulfilling a social objective is the prime distinguishing characteristic of social enterprise. How social enterprises are financed: A number of literatures have put some focus on the financing of social enterprises (Smallbone et al 2001; Bnak of England, 2003, Conaty, 2001; Westall, 2001). Various studies have tries to identify the source of funds that social enterprises utilize to fulfill their noble objectives. In these studies it has been found that social enterprises generally are not capable of generating sufficient amount of revenues from the sales of goods and services for financing their social or environmental goals. The researchers have suggested that this shortfall in funding is most of time made up with grants. Grants towards social enterprises are generally provided by local, provincial or central government. Smallbone et al (2001) pointed out in his study that most of the types of social enterprise need grant support at the time of their initiation and early trading times. However, the level of grant support required generally varies on account of their activities and sizes. Smallbone et al (2001) interviewed 80 entrepreneurs who had set up social enterprises and they found that 39 percent of them obtained grants from European Commission, 49 percent from regional or central administration and 33 percent from the local government. This kind of funding is generally utilized to finance expenditures on capital. Conaty (2001) identified two largest sources of funds to finance expenditure on capital in social enterprises. One of them is funding through the grants of local government and the other one is grant from other constitutional agencies. Adding to these, grants generally come from various other sources like voluntary contributions of individuals, funding through lottery, and donations from charitable organizations, etc. Social enterprises generally obtain an interesting blend of various sources of grants. Existing literatures have also identified some non-grant funding for social enterprises. For example, Conaty (2001) conducted a research on the basis of 40 case studies on social enterprises in UK. He highlighted a few instance of non-grant sources of funding in case of social enterprises, mainly loans extended by CDFIs and issues of ethical share issues. Smallbone et al (2001), on the other hand, found that majority of social enterprises surveyed had managed to have soft loans and some variety of grant for the purpose of investing in capital formation in initial years, and many of them secured loans for starting up their businesses from banks. There also exist a few evidences that suggest that social enterprises are increasing their demand for financing through loans. Loan finance is increasingly being viewed as a feasible option of funding activities of social enterprises. This kind of change in trend in the nature of funding social enterprises is also indicating a significant cultural alteration in approaches relating to funding social enterprises. In some other study (Bank of England, 2003), however, it was pointed out on the basis of some findings social enterprises still use loans and equity not so extensively as they use grants, specifically those social enterprises that are small in size. The study highlighted a survey that had been carried out by London Rebuilding Society and had found that Only 2 a few social enterprises approached banks for getting loans in order to finance their activities. In its study, Bank of England (2003) talked about another survey conducted by the Merseyside Social Enterprise Initiative which had found that with dependency on grant and short term finance, social enterprises had been less likely to take into account the option of funding through loans. In its own survey conducted by the Bank of England itself (2003), it found that a high percentage of social enterprises had resorted to kind of borrowing, but the interesting thing was that as high as 76 percent of those social enterprises had a plan to enlarge their business activities by financing through grants more intensively than form any other form of finance. The study has found that among the social enterprises around the UK the use of grants as a form of funding is more prominent among small-sized organizations, specifically in case of those that have been founded in some voluntary sector. Majority of these small social organizations do not have the capacity to generate adequate income from their trading activities for covering the cost of their activities in the social front. While grants are very often regarded as a vital means of funding an organization at the very beginning, and are, of course, lees expensive than any other external source of finance, in some cases, grants are found to put some kind of restriction the capability of an organization in developing as an enterprise. However, for those organizations that work with some social objectives and operate in difficult markets, grants continue to occupy a significant position in the front of financing costs of social activities. (Pearce, Kay and Gulbenkian, 2003) Do social enterprises experience difficulties in obtaining finance from traditional lenders, like banks? Looking at the high prevalence of grant finance for social enterprises, various existing literatures have tried to find out whether social enterprises face any difficulties form obtaining finance from traditional lenders, like banks and others. Some studies have documented a few instances of social enterprises applying for some particular kinds of external funds and facing problem receiving it. For instance, Smallbone et al (2001) pointed out that many social enterprises’ application for loans are turned down by banking authorities on account of status of the enterprises. They also found that access to funds from traditional lenders, like banks, for social enterprises to a large extent gets hindered on account of incapability of social enterprises in providing adequate collateral for securing the loan. Not only that, the problem relating to accessing to bank loans but also can be attributed to some extent to a lack of sufficient knowledge among the social enterprises themselves and to some extent to the perception and requirements of the lending organizations. Some of the difficulties faced by social enterprises are similar to those faced by profit-making small and medium enterprises (SMEs). However, there are some other factors that are also responsible for having lower access to traditional financing instruments (Westall, 2001). For example, risks related to reputation faced by banks at the time of investing in social enterprises play a vital role in making banks reluctant about giving loans to social enterprises. Banks fear that if they enforce repayment to a social enterprise, then it might create huge bad publicity for the bank that might hurt its reputation. Social enterprises very often claim that bankers do not properly understand the sector of social enterprises. This kind of shortcomings of bankers in understanding this sector can be attributed partially to the commercial nature of banks. Commercial banks have certain responsibility towards their depositors as well as shareholders, and hence the motivations of commercial banks are quite different from that of those organizations which operate with social objectives. Besides their commercial motives, lack of appropriate perception regarding social enterprises among bankers can be attributed to the structure of social enterprises along with the complex feature of their income streams. (Martin and Thompson, 2009; Brooks, 2008) However, some specialized banks extend loan to social enterprises. These banks are quite flexible and accessible to the requirements of the sector. In UK, CDFIs are found to be more interested than commercial banks in lending social enterprises and helping them in developing their business plans. CDFIs also stand by social enterprises at the time of their financial difficulties, while commercial banks do not show much interest in helping social enterprises at the time of crisis. Thus managers of social enterprises naturally showed a higher tendency in choosing grants over loans. (Bank of England, 2003) Bank of England (2003) in their survey has found a widespread attitude among the managers of non-profit-making social enterprises that borrowing is a risky option and hence they should finance their social objectives through grants. These managers are reluctant to pay interest on loans as they belief that the interest payment could otherwise be used for compensating some core activities of the enterprises. Banks lends to SMEs with a general expectation that the SMEs would make some kind of investments in personal financial instruments. However, social entrepreneurs do not generally invest their own funds in a business that is generally conducted not to achieve some financial gain. Very often, absence of sufficient personal capital invested in the business is perceived as an obstacle in getting adequate loans form banks. (Pearce, Kay and Gulbenkian, 2003) In this background, it would be quite interesting to examine the environment of banking finance in the sector of social enterprises. The existing studies that has examined the financial environment of social enterprises has considered the issue of banking finance among various other financial issues, but there has been a lack of literatures that have placed sole focus on the awareness and attitude of bakers towards lending social enterprises. The current study aims at conducting a thorough review of bankers’ actual awareness regarding business and operational modes of social enterprises, their attitudes towards social enterprises’ business modes and social enterprises’ ability to attract funds from traditional lenders like banks in the context of social enterprises operating in London. In the existing studies it has found that bankers would not be much likely to lend those funds. In this scenario, it would be interesting to examine the extent to which bankers are reluctant of giving funds to social enterprises in reality and the actual reasons behind their attitudes. Research Objectives: Given the research aim discussed in the earlier section, the research objectives of the study can be stated as follows: To build an enhanced understanding of awareness of bankers regarding the nature of operation of social enterprises. To identify the bankers’ attitude towards lending social enterprises and to find out the sources of having the attitude they have built. To examine the ability of social enterprises in attracting funds from traditional lending organizations like banks. Research Questions: On the basis of the research objectives stated above the following research questions can be set for the proposed research: To what extent bankers are aware of actual modes of business of social enterprises? Do they go by general opinion or they conduct some real research regarding the operation of social enterprises before taking their decision regarding extending funds to them? What is their attitude towards the ability of social enterprises in repaying loans? What are the factors that have contributed to the building the attitude bankers have regarding the repaying ability of social enterprises? To what extent social enterprises are able to attract funds from bankers? What do managers of social enterprises think about their ability to attract funds from traditional lenders? References: 1. Bank of England. 2003. The Financing of Social Enterprises: A Special Report by the Bank of England. Bank of England Public Enquiry. 2. Department of Trade and Industry. 2002. Social enterprise: A strategy for Success. DTI:London. 3. Shortall, J. 2009. Introduction to Understanding and Accessing Social Investment: A Brief Guide for Social Entrepreneurs and Development Practitioners. Seep Network and Virtue Ventures. 4. Westall, A. 2001. Value Led, Market Driven: Social Enterprise Solutions to Public Policy Goals. London: IPPR 5. Conaty, P. 2001 Homeopathic Finance – Equitable Capital for Social Enterprises. New Economics Foundation. 6. Shaw, E., Shaw, J. and Wilson, M. 2002. Unsung Entrepreneurs: Entrepreneurship for Social Gain. University of Durham Business School. 7. Smallbone, D., Evans, M., Ekanem, I. and Butters, S. 2001. Researching Social Enterprise. Centre for Enterprise and Economic Development Research: Middlesex University. 8. Pearce, J., Kay, A., Gulbenkian, F. C. 2003. Social enterprise in any town. Calouste Gulbenkian Foundation. 9. Brooks, A. C. 2008. Social entrepreneurship: a modern approach to social value creation. Pearson Prentice Hall. 10. Martin, F., and Thompson, M. 2009. Social Enterprise: Developing Sustainable Businesses. Palgrave Macmillan. Read More