Financing the Social Mission: The Impact of Financial Constraints on Sustainability Practices of Social Enterprises

Abstract

Background: Social enterprises are hybrid organisations because they pursue social or environmental goals while using commercial activities to support their operations. Their ability to protect these goals depends greatly on how they are financed.

Purpose: This paper examines how and why financial constraints affect the sustainability practices of social enterprises. It connects financing literature with stakeholder theory, institutional theory, and resource dependence theory.

Method: The study uses a qualitative synthesis of 53 academic sources covering social enterprise, financing, impact investment, sustainable entrepreneurship, and organisational theory.

Findings: The findings reveal five main themes. First, social enterprises face financial constraints that are different from those of ordinary commercial organisations. Second, they respond to these constraints by using different sources of finance, from philanthropy to commercial capital. Third, financing choices influence sustainability practices through resource dependence, stakeholder pressure, and legitimacy. Fourth, impact investment can help reduce financial constraints, but its impact is limited by measurement and legitimacy challenges. Fifth, continued financial pressure can create a risk of mission drift, while strong governance can help protect the social mission.

Conclusion: The study provides an integrated explanation linking financial constraints to sustainability practices. The paper's main contribution is to show that financing and sustainability are closely connected. It also provides useful insights for managers, impact investors, and policymakers who want to strengthen the financial sustainability of social enterprises without weakening their social mission.

Novelty: This study is novel because it explains how financial constraints affect sustainability practices, not just that they do. It shows this effect is indirect, working through financing choices, stakeholder pressure, and legitimacy rather than acting directly. This link has received limited attention in existing research, which this paper directly addresses.