Yunus Social Business (YSB) in a collaborative research project into the social-business landscapes in India, Kenya, Colombia and Brazil, has identified lack of access to debt and broader non-financial support as the two major challenges to sustainable Social Businesses in Kenya.
The study dubbed, Enterprise Support Landscape study, identifies that 68% of social businesses in Kenya face a challenge in raising debt capital. Collateral requirements, high funding costs and limited access to networks were cited as the key barriers to obtaining debt capital. The report was done in partnership with IKEA Foundation.
The study also points to mismatch in the sector focus of impact investors and entrepreneurs, lack of direct exposure to international investor, high due diligence cost and low valuation as the greatest challenge to accessing equity funding as affirmed by 61% of the surveyed social entrepreneurs.
“Adequate funding enables underserved social businesses to support their growth, increase their impact and achieve long term sustainability. Our study shows most of these businesses continue to struggle because traditional source of financing do not fit their growth pattern. More innovative and flexible financing methods are required to improve the growth trajectory of these businesses. However, funding alone is insufficient and needs to be coupled with accessible and tailored capacity building support to social businesses,” said Susan Ngalawa, Investment Director, Yunus Social Business, Kenya.
The study further emphasizes on the need to provide non-financial assistance such as strategic guidance, functional strategy support, ecosystem contacts customized technical assistance and business development, coupled with fundraising support especially for early-stage companies, since they are perceived as high default risk for debt investments as a result of low cash flow visibility and therefore likely to stagnate. Almost half of those surveyed indicated that they were more likely to reach out to Board Members or other entrepreneurs for non-financial support as compared to existent investors. More surprisingly is organizations such as accelerators and banks were the least likely to be sort for this support.
The report also recommends business development and ecosystem building activities outside urban cities with the aim to provide exposure to social business in remote areas to create a more inclusive sourcing approach as well as open up a larger pool of impactful investment opportunities.
“The pandemic has brought urgency to solving long-simmering problems with the way social businesses are funded, especially those led by underserved entrepreneurs. We need social companies with rural community roots and outside urban centers more than ever as we seek to build back a better, more equitable economy,” she added.
Additionally, the study identifies lack of clear, conducive transparent legal and regulatory environment have caused the investor community to perceive social businesses as a high risk and potentially less profitable than other types of businesses.
The Enterprise Support Landscape Studies are a series of four in-depth reports that build on, and add to, existing local research to depict the social-business landscape in Kenya, India, Colombia and Brazil. It captures views from social-business entrepreneurs and ecosystem support-providers, highlighting gaps in the social-business support landscape and proposing actionable solutions.