Most of us do-gooders have heard of social finance, an approach to managing money that gives back to society or the environment while still producing a financial return. We hear about social enterprises harnessing finance this way, but charities and nonprofits are often confused about what’s available to them and how to take advantage of these alternative funding options.

According to Joanna Reynolds, program manager at MaRS Centre for Impact Investing, it’s crucial that sector organizations get involved.

“The nonprofit sector is a very resilient, creative and forward-looking sector that has tackled problems that nobody else has looked at, and it will definitely be able to add a huge value to how we change financing,” she says.

But before you can effectively engage in social finance you need to understand it, and it’s not exactly black and white. It involves thinking and collaborating in ways that reflect the increasing complexities of our social systems and encompasses a wide range of new financing methods and tools to help in the effort to continuously improve them. These include bridge loans, start-up loans, micro-lending, RRSP investments, mortgages, social impact bonds, grants, equity investing, social enterprise lending and other program-related investments.

Social finance essentially targets a niche that neither traditional investment nor purely philanthropic supports can reach. It combines projects that are aimed at addressing issues in communities, the environment, education, health, housing, or related areas with effective business models to attract investment and generate revenue that will eventually filter back into those projects.

For instance, the Kingston Community Building Co-op is eligible through the Canadian Workers Co-op Federation to tap into self-directed RRSP investments. This means that members of the community can purchase shares in the co-op by transferring existing RRSP funds, or by paying cash and counting it as part of their annual RRSP contribution. Once the founders discovered this and worked to promote it in their community, they were able to raise $180,000 through these investments alone. Combined with regular share sales, they raised a total of $360,000 in a matter of weeks.

“At the broadest level what this is doing is allowing our community project to move ahead and not be overly challenged by very high commercial rents. But I think it’s done so much more,” says project initiator Andrew McCann.

“A lot of new relationships have been built between architects and engineers, lawyers and coop volunteers, chartered accountants – all sorts of people who’ve gotten involved who didn’t know each other before. So we’re building community capacity here in Kingston, and that’s a really big part of the benefit.”

This type of community involvement is often at the heart of social finance projects, especially when initiated by charities and nonprofits. Many organizations in Ontario, for example, are taking advantage of the provincial program to buy power back to the energy grid, and though each project is a little different, this often involves contributions from community members.

The Community Power Fund was established in 2007 to help support the development of these local renewable energy projects, and has since been providing grants, loans, and investment equity to eligible organizations.

According to Executive Director Deborah Doncaster, these start-up funds are meant to help charities, churches, and other interested groups cover the predevelopment costs of green energy systems. Organizations must then fundraise to pay for the actual cost of the systems, and often end up asking members of the community to make donations or to purchase shares in the project. Once installed, the systems help to generate revenue for these organizations, sometimes simply offsetting their own electricity costs.

In Vancouver a charity called the Eastside Movement for Business & Economic Renewal Society (EMBERS) has developed two social enterprises that will hopefully be turning profits soon, says founder and CEO Marcia Nozick.

EMBERS is a community economic development charity that works to combat poverty and build stronger, sustainable communities. In 2008 it launched a social enterprise called Staffing Solutions – a temporary staffing agency that aims to empower disadvantaged people to be economically self-sufficient – as a way of both having a greater impact on the community and eventually raising funds to further support its workers and improve their skills.

It received multi-year start-up grants and other support along the way, and was even voted top social enterprise in Vancouver this year, winning a $10,000 grant from TELUS and $5,000 worth of in-kind consulting from KPMG. Nozick says their success raising funds has everything to do with understanding business.

“You have to have a very strong business case, that’s all,” she says. “I see too many social enterprises that start up because they see a social need, but they don’t really understand their markets or business. And you really need to know business.”

You also need to know what’s available to you and how to access these fiscal opportunities, but this alone can be a challenge. Reynolds says to those on the outside, social finance continues to seem like a very uncoordinated system.

“If you’re not already involved, how do you know about it? You can’t go to your bank to find out about community loan funds,” she says. “There’s not a system available to most people to learn about alternative forms of financing.”

The MaRS Centre for Impact Investing is trying to change that by acting as a social finance hub and incubator in Canada. It pulls together actors from all sectors – government, community and private – to increase the awareness and effectiveness of social finance, bringing it more and more into the spotlight.

The Canadian Task Force on Social Finance, assembled in 2010, is also helping it to move forward. Part of its mandate is to recommend that federal and provincial governments, foundations, and institutional investors take actions to develop needed support infrastructure, intermediaries and policy.

But for now, social finance remains a somewhat loosely coordinated system. The best way to engage as it continues to move forward at the policy level is to go online and access the many resources and individuals that can help you find your way into the world of social finance.

But why bother looking into it?

Charities and nonprofits can benefit immensely from exploring alternative funding options, and the philanthropic side of these finance tools usually meshes with their moral values. Though they tend to have their hands full addressing the immediate needs of the communities they serve, finding the time and resources to diversify their funding base and build stronger financial departments can be fundamental to an organization’s growth and stability.

Most charities depend on grants and donations as primary forms of funding, and hesitate at the thought of taking on significant debt. Some simply lack the knowledge of where to look and how to use these other funds.

Loans can be extremely useful for organizations looking to build, providing capital to buy new equipment or to finance construction. They can also come in handy when seeking ways to bridge gaps between grant funding and project-based funding. But nonprofits should also be considering entrepreneurship and other revenue-generating opportunities to help secure their fiscal centres.

Developing new lines of business that will eventually act as consistent sources of revenue enables charities to regain some control and focus more soundly on the services they provide. It also opens the door for new partnerships and corporate sponsors, and creates opportunities to expand into new communities.

Though the current lack of significant structure surrounding social finance in Canada can be intimidating to those just starting to get involved, Reynolds says remaining curious and continuing to seek answers is critical.

“Because these questions and ideas are already on the table, the change is already happening,” she says. “The nonprofit sector has an opportunity to shape the direction of social finance to the betterment of the sector and the communities they serve. So I really encourage people to stay engaged.”

Photos (from top) via iStock.com. All photos used with permission.

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