THE IMPACT LEAK – Guarantors supporting you
- What impacts the good we do?
Similar to the traditional banking method, Guarantors can pledge money in support of social enterprises requiring financing. Think of the example of a teenager getting a loan from the bank for a car. The parents ‘pledge’ to take responsibility for payments to the bank should the borrower (their daughter or son) default on the loan. They don’t actually give any money; it’s just an agreement to re-pay in times of severe financial issues and for most of us as adults, we know the steps to take to mitigate that situation. As an investor, Guarantors are not required to give money. Their pledge satisfies the bank when the business is too young or low on revenue to qualify for a loan. But instead of a ‘co-signer’, a Guarantor relationship is more arms-length. The advantage is that a social enterprise can acquire business loans and even qualify for lower interest rates because of guarantees. This means that social entrepreneurs can stabilize faster AND plan for growth as compared to personally bootstrapping through their entire startup phase.
Photo by StockSnap via Pixabay
Guarantors can be individuals, governments, foundations and even charities themselves. The terms and conditions will vary according to the deal but it’s even possible to avoid banks as long as the loan details are sufficiently spelled out. Guarantors can often be called upon for advice, similar to a business advisor. Whereas a teenager is unlikely to discuss the operation of the car with the guaranteeing parents, Guarantors offer business advice for growth plans and are often found to be expanding the staff’s network and paving the way for additional investors.
Social finance and Impact Investing is a growing area for companies or organizations with an environmental or social purpose according to the 2015 Responsible Investment Trends Report (RIA Canada). In a survey of investors, 17% of respondents were already providing credit enhancement, primarily guarantees and subordinated debt, while 12% said they may do so in the future. In the past 6 years, these percentages have definitely grown. The main problem is that guarantees and guarantors tend not to be discussed publicly, so the learnings from this method as a social finance tool, are hard to come by. This is not to say that a social entrepreneur can’t access a Guarantor but it is more likely to come through connections and close networks of people who already support the social mission. As more people come to use it as a tool, the ‘ask’ will be refined and duplicated so that it becomes more widespread. It’s an easily understood and common business concept and yet, we don’t apply it to social entrepreneurship.
One example of the successful use of a guarantee was in 2004 when the Centre for Social Innovation first acquired a mortgage for a building they bought in downtown Toronto. While a successful community bond provided the money for a down payment, the City of Toronto acted as a guarantor on the mortgage at the bank. The guarantee then caused a lowering of the interest rate and took a ‘first loss’ position in the debt structure thus satisfying the bank that a large mortgage held by a nonprofit social enterprise would be successful. CSI has gone on to acquire more buildings and more leased space expanding operations in Toronto and New York and the City of Toronto was never called upon to satisfy the loan.
Photo by Zoe Schaeffer via Unsplash
As social entrepreneurs, we need to use whatever financial vehicles we can to help ourselves through the early startup stage. As most social enterprises are product-based, people’s business models tend towards revenue generation from sales but this method keeps your business small. In traditional business, it is much more common to take on debt to stabilize your business and then plan for revenue from product development. Following this path could help the social enterprise sector as more companies could grow to maturity, rather than die from being under-resourced. While coping with a lack of resources is common, it doesn’t help the charitable sector and it doesn’t help social enterprises. We need strong, financially viable organizations to affect the changes we want to see through their properly enacted social missions. Don’t be afraid to ask people to ‘pledge’ their support by acting as a Guarantor. The gain for us all may be immeasurable.