Eligibility for Social Loans: Understanding the Criteria

In this guide, we provide a comprehensive overview of the key eligibility criteria for SME’s seeking to access social loans. These social loans are distinct from traditional financing options, often placing a strong emphasis on promoting positive social and environmental impact alongside financial viability.

What is a Social Loan?

A social loan is a form of financing extended to businesses that are committed to making a positive social impact. The primary focus of social loans is to support projects that generate tangible social benefits, in addition to financial returns, and contribute to the overall well-being of communities, underserved populations, and societal welfare as a whole. This can encompass a wide range of initiatives, including but not limited to affordable housing, healthcare facilities, educational programs, community development projects, and sustainable infrastructure improvements. The defining aspect of social loans is their emphasis on not only generating financial returns but also catalyzing tangible and measurable social benefits.

Loan Market Association Definition: “Social loans are any type of loan instruments and/or contingent facilities (such as bonding lines, guarantee lines or letters of credit) made available exclusively to finance, re-finance or guarantee, in whole or in part, new and/or existing eligible Social Projects”

Example

A company aims to securing funding to establish a sustainable agriculture initiative aimed at creating employment opportunities for disadvantaged rural communities. This loan would enable the business to develop organic farming practices, provide training and fair wages to local farmers, and support the growth of small-scale agricultural enterprises. By leveraging the social loan, the business would be directly contributing to poverty alleviation, improving livelihoods, and promoting sustainable economic development within the community.

Social Loan Principles: Core Components

Many Financial Institutions have aligned their green lending proposition with the Loan Market Association's (LMA) Social Loan Principles. The LMA's Social Loan Principles are a set of voluntary guidelines that aim to facilitate and support environmentally sustainable economic activity. In addition to meeting all applicable national and international laws and regulations, the SLP is designed to provide a framework for all market participants to understand the characteristics of green lending.

The SLP set out a framework, enabling all market participants to clearly understand the characteristics of a social loan, based around the following four core components:

1. Use of Proceeds
   1. All designated Social Projects should provide clear benefits of a social nature, which will be assessed and, where feasible, quantified by the borrower.
   2. Where funds are to be used, in whole or part, for refinancing, it is recommended that borrowers provide an estimate of the share of financing versus refinancing.
   3. Social Projects directly aim to address or mitigate a specific social issue and/or seek to achieve positive social outcomes including for, but not limited to, a target population(s).
2. Process for Project Evaluation and Selection
   1. The borrower of a social loan should clearly communicate to its lenders:
      1. the social objective(s) and the target population of the Social Projects;
      2. the process by which the borrower determines how the projects to be funded fit within the Social Project Categories
      3. complementary information on the processes by which the borrower identifies and manages perceived, actual or potential social and environmental risks associated with the relevant project(s).
3. Management of Proceeds
   1. Management of proceeds should be attested to by the borrower in a formal internal process linked to the borrower’s lending and investment operations for Social Projects.
   2. The borrower should make known to the lenders any intended types of temporary placement for the balance of unallocated proceeds.
4. Reporting
   1. Borrowers should make, and keep, readily available up to date information on the use of proceeds, such information to be renewed annually until the social loan is fully drawn (or until the loan maturity in the case of a revolving credit facility), and on a timely basis in the event of material developments.

Download Eligibility Criteria

Tese’s Tips

1. Know Your Purpose: Clearly define the purpose of the social loan and how it aligns with your organization's social and environmental impact goals. Articulate a compelling narrative about how the funds will be used to further these objectives.
2. Research and Understand the Lender's Requirements: Thoroughly research the specific requirements and criteria set forth by the lender for social loans. Understanding the lender's focus areas and expectations will enable you to tailor your application to align with their priorities, increasing the likelihood of a successful outcome.
3. Craft a Strong Proposal: Prepare a detailed, well-structured proposal that outlines the specific social and environmental impact of the proposed projects and how the loan will contribute to furthering these goals.
4. Demonstrate Impact: Clearly illustrate the potential positive impact of the loan on society and the environment. Provide evidence of past initiatives or projects that align with social and environmental objectives.
5. Financial Viability: While emphasizing the social impact, ensure that the business plan is financially viable. Provide comprehensive financial statements, cash flow projections, and a clear repayment strategy.
6. Engage with Social Sustainability: Highlight your organization's commitment to social sustainability. Showcase ongoing and planned initiatives related to community engagement, employee well-being, supply chain responsibility, and environmental stewardship.
7. Engage in Dialogue: Establish a dialogue with the lender to effectively articulate your organization's vision, mission, and objectives. Seek to understand the lender's specific criteria and requirements for social loans.
8. Transparency and Reporting: Demonstrate a commitment to transparent and thorough reporting of how the loan funds will be utilized and the subsequent social and environmental outcomes.
9. Seek Expert Guidance: Consider seeking advice from organizations or professionals with expertise in social finance and impact investing. Their insights can help ensure that your application aligns with industry best practices and standards.