Andrew O’Brien is Director of External Affairs at Social Enterprise UK

Many social enterprises will have seen the news reported today by the BBC and others that 18% of SMEs are at risk of closing and are due to run out of cash. This comes on top of criticism of the Coronavirus Business Interruption Loan scheme (CBILS). CBILS provides loans for businesses backed by a government guarantee to provide working capital during the COVID-19 pandemic.

We’ve seen criticism of the scheme already in terms of how slow some banks have been to respond but also rejections of good businesses for loans and demands of personal guarantees. Not to mention that interest rates seem to vary from 7-30% depending on the institution providing the loan.

SEUK has been in regular contact with the government during this crisis about getting support for our sector. We believe that social enterprises need more support than normal businesses because of the challenging markets we operate in and the people that we seek to help.

However, one “line” that the government has been using during this crisis is that social enterprises can get access to existing support such as CBILS. Clearly, as the reporting today has showed, the CBILS is not even working for mainstream SMEs.

But this begs the question, if social enterprises could always access commercial loans, with appropriate guarantees, what was the point of the social investment market? Why didn’t the government just create a “social enterprise finance guarantee” instead of setting up Big Society Capital, the Access Foundation and supporting the growth of a range of social investment finance intermediaries? 

As the government pointed out in its original vision for social investment, social enterprises (as well as charities and voluntary organisations) work in unique circumstances that make access to traditional commercial finance challenging. These are not just issues of awareness or understanding (although these continue to exist) but also fundamental structural issues.

The government has understood for many years that working in very deprived communities, broken or non-functioning markets, delivering frontline public services and working with vulnerable groups creates imbalances between risk and reward for commercial investors.

In short, social enterprises do very valuable and important work for society and our economy. That’s why governments have always actively encouraged their development. But because of the environments they work in, risk can be high. Unlike in traditional capital markets or VC, banks and investors cannot generate big returns to offset risks and in most cases, social enterprises would not be able to pay large returns because the margins in their work are lower than in the traditional private sector.

This is why we have devoted so much time and effort creating a social investment market to try and meet the needs of this diverse group of businesses working in challenging environments.  

Commercial loans can work for some, but not for most – particularly for those on the frontline helping communities get through this pandemic. Cheaper loans, blended finance and repayable grants are necessary to meet the full needs of the sector.

If this was the case in the “good times”, surely it is even more the case now when we face an economic shutdown?

Being in the midst of an economic and social crisis it was natural that quick responses from government would create gaps in support. But these are gaps that need to be filled quickly, not ignored or deflected.

Governments of every colour have supported social enterprises and encouraged entrepreneurs to sacrifice personal gain for social good. Now that social enterprises have their backs against the wall due to COVID-19, will the government stand behind them or not?

By its own logic, CBILS was never going to be enough. We need urgent action from the government to work with social enterprises and social investors to design a package of finance that can work for social enterprises.