According to the European Social Enterprise Monitor, limited access to funding is the main challenge for many social entrepreneurs. As a result, social entrepreneurs often operate complex hybrid business models, combining both nonprofit and for-profit funding sources. Relying heavily on grants, especially in their early stages, they face difficulties transitioning to investments and loans as they grow.

To address this funding gap and foster a thriving ecosystem, we need:

• Tailored financial tools, combining quasi-equity for hybrid organizations and equity for for-profit models, along with grants, loans, guarantees, and other instruments.

• A patient approach, recognizing that creating lasting impact requires time for experimentation, adaptation, and ongoing evaluation.

• Intermediaries who can connect potential investors and donors with social enterprises and who offer capacity-building support.

Impact Investing

As investors increasingly factor in the environmental and societal impact of their capital, impact investment is gaining momentum.  Surveying over 200 impact fund managers globally, the Impact Finance Research Consortium reveals that while achieving social impact alongside market-rate returns is feasible, it is challenging. Market-rate-seeking investors often equate financial performance with impact, neglecting the need for impact measurement. On the other hand, below-market-rate investors actively contribute to their investees' impact, focus on impact data, and are willing to accept lower returns.

As environmental and social issues escalate, impact investors must address problems neglected by capital markets, support investees in prioritizing social impact in their growth strategies, and seek out entrepreneurs from nontraditional backgrounds that mainstream private equity and venture capital players are overlooking, even at the cost of increased difficulty and lower financial returns.

Investors seeking for change:

Impact Invest runs an alternative investment fund, providing credits and investments to entrepreneurs and actors in Sweden, who offer solutions for better health and well-being. In addition, they support social entrepreneurs with leadership and growth programs and individual consultations, and help financiers, both in Sweden and abroad, as fund managers and advisers.

She Entrepreneurs is a leadership program founded by The Swedish Institute, supporting highly motivated women entrepreneurs in the Middle East and North Africa who are building sustainable, scalable businesses that drive social or environmental change

Data shows that only 17% of ex-offenders in the UK find a job within a year of their release, and without stable employment, many become re-offenders. The Forward Trust Fund was established to support ex-offenders with existing businesses or business ideas. Among the ventures it has invested in are bakeries, breweries, and nightclubs. Over the years, its impact has expanded, and today the Fund supports various marginalized groups, including people affected by drug or alcohol issues, homelessness, or unemployment

Microfinance - bridging the funding gap 

Microfinance is increasingly recognized as another crucial tool for bridging the funding gap and promoting greater inclusivity and accessibility in finance. Originating in the 1970s with the establishment of the Grameen Bank in Bangladesh by Dr. Muhammad Yunus, microfinance has effectively supported the growth of micro-enterprises and empowered economically disadvantaged individuals to start their own businesses. It offers a variety of services, including micro-credits (small loans), guarantees for bank loans and rent leases, micro-insurances, and equity and quasi-equity extended to both individuals and micro-enterprises. These are often accompanied by capacity development support to help vulnerable individuals enter the labor market and entrepreneurs to develop their businesses and measure their impact.

A good example in the field of microfinance is Mikrofonden Sweden. Established in 2010 through collaboration between a cooperative bank, a startup consultancy, and a rural action network, Mikrofonden has grown to become one of Sweden's leading social investors. Over the years, they've invested more than 2 million euros in 150 social enterprises. Uniting both public and private investors, Mikrofonden operates a national fund and seven regional microfunds, with an investment focus on work integration social enterprises, rural development, and alternative housing. Borrowers must adhere to the European Commission’s criteria for a social enterprise, and submit a business plan, financial budget, and evidence of social impact upon application.

Impact investing indeed is evolving as a powerful force for change, blending financial returns with tangible societal and environmental benefits. As highlighted by various global initiatives, from Sweden's Impact Invest and Mikrofonden to the UK’s Forward Trust, there is a growing commitment to fostering social entrepreneurship, bridging funding gaps, and supporting marginalized communities. While challenges remain—especially in balancing financial performance with measurable impact—it is clear that investors and institutions willing to prioritize social goals can create long-term, sustainable change. The future of impact investing will rely on collaboration and dedication to addressing society's most pressing issues.

Check out the Alternative Finance Roadmap which consolidates the most relevant funding sources for Baltic social entrepreneurs. Created through the IBESI project, it encompasses the various existing public and private instruments: grants (including venture philanthropy), debt and equity capital, crowdfunding, and Social Impact Bonds.