In part two of our funding series, we take a look at impact investments and how they could help to fund forward-thinking organisations and entrepreneurs.
What is an impact investment?
Impact investment is generally provided in the form of a loan or equity and targeted at organisations that aim to spark positive, considerable environmental and/or social change. Renewable energy companies, natural disaster charities and education schemes could all be eligible for impact investment. Generally speaking, ventures that address the United Nations’ Sustainable Development Goals (UN SDGs) are likely to meet the requirements to qualify for impact investment.
There are a growing number of impact investment organisations that manage various loan and equity funds on behalf of investors. Often these funds are blended (with private and public money) in order to stretch the funding and offer favourable terms. This sector is relatively young in comparison to traditional business funding, but there is a real impetus here, so expect to have increasing options over the decade.
Pros of Impact Investment Funding
- Financial boost for your impact venture
- Access to the investor’s network and experience
- Great PR
- Opens the opportunity for further investment
- Funding comes with mentoring
- Loan offered with an extended payment holiday in many cases
Cons of Impact Investment Funding
- May have to repay the investment (loan)
- Often requires an asset to secure a loan against
- Financial KPIs to hit
- Forced to focus on commercial plan
- Competitive process
- Loans repayment rates are similar to commercial rates
The different types of impact investment
Equity impact investment
Investment might come from a single angel investor, a group of angel investors or from a managed fund. Investment is made in exchange for shares in the company as with traditional equity funding. Investors are keen to see the potential for a financial return and a positive impact (social, environmental, etc).
Loan impact investment
Specialist organisations make loans to companies who will make both financial and social returns on the investment. Loan terms tend to be more generous compared to traditional commercial loans due to the social/environmental benefit of the investment. Loan amounts vary from €25,000 to €500,000+ depending on the stage of the impact venture and the funder. On a positive note for the impact entrepreneur, it is not common for the impact investors to take a personal guarantee on their loans.
Convertible loan impact investment
A convertible loan is a loan with potential to convert into equity after a period of time. They are typically used for early-stage impact ventures with great potential for growth. A fixed interest rate is established upon agreement as well as the corresponding value of the loan in terms of shares. This approach can be useful if loan and equity impact investment proves challenging to secure.
The Funding Process
- Prepare business plan and pitch deck
- Identify suitable impact investors
- Complete application form (Either digital or hard copy)
- Present impact venture to funder
- Provide additional information if required
- Due diligence process
- Complete legal terms and paperwork
- Receive funding
|Global Impact Investment Network||What is impact investment and where can it be found?|
|Global Innovation Fund||The website of one of the world’s leading impact investors|
|Big Issue Invest||A UK-based impact investment fund run by the Big Issue|
ABOUT THE AUTHOR
Alex has over 15 years experience in founding and running businesses, the most recent company having raised over £50m in funding for businesses based across the globe. He has a thorough knowledge of business funding options and can draw on many successful consultancy engagements to bring impetus to venturing. Alex has now set his focus to working with entrepreneurial teams looking to make a positive impact on the climate crisis and the broader UN Sustainable Development Goals.