Billed as a ‘game-changing’ moment in social impact investment, last month’s £3m plus deal structured by social lender Fair Finance will allow it to help 100,000 financially excluded Londoners over the next five years with low interest microloans.

While the headline news may have been that banking giant Santander underwrote  £1m of debt finance, following Societe Generale and BNP Paribas which each provided half a million pounds, ‘the lynchpin’, says Mark Cheng, the financial strategist behind the deal, was the £750,000 patient capital underwritten by philanthropists and socially-minded investors to cover costs.

“With costs covered, including expected defaults, all the risk was effectively absorbed and the deal became much more attractive for banks to come in and fund loans – it was crucial to the deal,” says Cheng.

The reward to the socially-minded investors willing to shoulder all the risk of this ambitious deal is their money back within 7 years with up to 5% interest per annum, providing that Fair Finance makes a surplus.

Cheng says making money was not the draw for these investors; rather it was the social impact their money could deliver, that their money would go round again and that it could help create a sustainable charity.

“They saw it as an end to the begging bowl for the charity – no more charitable donations. As businesspeople it really appealed to them,” says Cheng.

Raising this initial finance was swift, taking a few weeks: “The philanthropists we presented to got the concept right away. They were very taken with the idea that an investment strategy could be used and their money could be recycled.”

Securing funds from the banks took more than a year and a half and much resolve. An additional £350,000 was provided by the Big Society Finance Fund.

The funding means that over the next five years Fair Finance will be able to open eight more branches and make about £14m of lending available to some 100,000 financially excluded Londoners.

The loans will be for basic purchases such as washing machines, school uniforms, funeral expenses and christening presents. Most of these people are already using high-cost credit companies, including doorstep and payday lenders (charging between 450%-2,500% APR), and Fair Finance expects to save them tens of millions of pounds in interest. It will be asking about 45% APR for its loans.

Another exciting aspect for social impact investing is that the deal could provide a model for other microloan enterprises.

Cheng says: “There are many more microloan ventures out there that could use this model. We think this can be a way to grow the funding pie for them.”

Mark Cheng

Mark Cheng is the founder and executive director of Chelwood Capital, a social investment firm that provides strategic and corporate finance advice to social enterprises and mission-driven businesses looking to access the capital markets.