Social impact investing works by connecting investors with entrepreneurs and companies that are making a positive difference in the world and are in need of additional funding to grow and expand operations.
Social Impact Investing: Connecting Investors with Worthy Entrepreneurs
In most situations, these companies are located in sectors or geographic areas that are underserved by financial institutions. Because of varying factors, these companies have trouble getting financing from traditional sources such as banks and therefore aren't able to realize their full growth potential.
For example, many companies that receive funds from social impact investors are located in developing countries like Kenya and Cambodia, where the financial industry is not quite developed enough yet to provide small startups with funding.
Once these companies have proven their business models and have a successful existing business, they begin to reach out to non-traditional sources of capital, such as Lendahand. Companies like Lendahand represent investors in countries with mature economies, who want to make a difference in developing countries by investing in their businesses, communities, and infrastructure.
Potential investors need to know that their money will be invested in opportunities that will actually make a social impact, as well as bring them potential returns from their investments. That's why in-depth due diligence is always done on companies before they are ever brought onto an investment platform or fund.
The key that makes an impact investment different from charity is the fact that investors expect returns. Through various structures, investors have been able to structure situations that benefit investors and entrepreneurs. By setting up investments in the form of equity, debt, and royalties, amongst others, investors are able to use their money to fund companies while generating a healthy return for their portfolios.
How Do Companies in Developing Countries Benefit?
The companies that receive the investments are able to use the capital in many ways. The first is through job creation. By hiring more employees these companies are able to produce more of their goods or services and provide more return to their communities. These new jobs provide economic growth in their local economies by putting money in the pockets of workers, who can then spend that money in their local communities.
Many of the companies that we invest in are focussed on improving the living conditions of their local communities as well. By improving access to basic needs such as water and solar electricity, these companies not only provide jobs, but they also make the lives better of the people in their communities.