What Is Blended Finance?

In short

Blended finance is the use of grants and other low-cost concessional money from public or philanthropic sources to make an investment attractive enough for private investors to join. The low-cost money absorbs risk that would otherwise keep private capital away, so that businesses with social or environmental impact can raise funding that neither source would provide alone.

Blended finance is one of the most used and least explained terms in development funding. Most definitions are written for institutions structuring deals worth tens of millions of dollars.

This guide is written for the people on the other side of the table: founders and leaders of growing businesses in Africa who want to know what blended finance is, how it works, and whether it can help them raise the money they need.

Key takeaways

Blended finance combines concessional money, such as grants, guarantees and low-cost loans, with commercial investment in the same business or project.
The concessional money is there to reduce risk, so that private investors who would otherwise stay away can invest.
Most blended finance is arranged in large deals: 181 deals worth US$25.8 billion in 2025, about US$140 million each on average, far more than a small growing business needs.
A business can build its own blend over time: grants first, to prove the model and reduce risk, then investment. ARK calls this disaggregated blended finance.

Blended finance is a way of structuring funding, not a type of fund or a financial product. It brings together two kinds of money with different expectations. Concessional money comes from governments, development agencies and foundations, and accepts a lower return, or none, in exchange for impact. Commercial money comes from banks and investors, and expects a market return for the risk it takes.

Definitions differ between organisations, but they share three features:

Leverage. Development or philanthropic money is used to attract commercial finance.
Impact. The investment advances a development, social or environmental goal.
Returns. Private investors still expect a financial return that reflects the risk.

The OECD’s blended finance guidance (opens in a new tab) puts the emphasis on mobilisation: development finance is used deliberately to bring in additional commercial money for sustainable development in developing countries. Convergence (opens in a new tab), the global network for blended finance, describes the concessional part as catalytic: public or philanthropic money whose job is to increase private investment. The shortest version comes from the Addis Ababa Action Agenda, quoted in the ODI Global case study ARK co-wrote (opens in a new tab): “combining concessional public finance with non-concessional private finance”.

How does blended finance work?

Blended finance works by using concessional money to remove a specific risk that is stopping private investors from investing. Investors weigh risk against return, and many businesses with real impact fall on the wrong side of that calculation: the technology is unproven, demand is uncertain, the market is unfamiliar, or the deal is too small to justify the cost of assessing it. Concessional money changes the calculation.

The risks investors see, and how concessional money removes them
The risk an investor sees	How concessional money removes it
The business model has not been proven	A grant pays for a pilot or a feasibility study
Customers may not pay, or may not change their behaviour	Results-based finance pays out when agreed results are achieved
The business might fail and the investment be lost	A first-loss layer or a guarantee absorbs losses before the investor does
The team lacks the systems or skills investors expect	Technical assistance pays for advice, training and systems
The deal costs too much to prepare	A design-stage grant covers the cost of preparation

A good blend uses no more concessional money than it needs, and leads to investment that would not have happened without it. Funders call this test additionality.

What are the main types of blended finance?

Convergence identifies four common structures (opens in a new tab). Concessional capital is the one used most often.

The four common structures of blended finance
Structure	What it is	What it means for a business
Concessional capital	Debt or equity on better-than-market terms, including first-loss positions	Cheaper funding, or a cushion that makes other investors comfortable
Guarantees and risk insurance	A commitment to cover part of an investor’s losses if things go wrong	A lender or investor can accept a risk it would otherwise decline
Technical assistance	Grant-funded support provided alongside an investment	Help to build the systems, skills and reporting investors expect
Design-stage grants	Grants that pay to design or prepare a transaction	The up-front work of getting a deal ready is paid for

Blended finance terms in plain English

Concessional finance: Funding on more generous terms than the market offers, such as a grant, a low-interest loan or a long repayment period.
Catalytic capital: Money that accepts more risk, a longer wait or a lower return, so that other investors come in.
First-loss capital: The layer of funding that absorbs losses first, protecting the investors above it.
Development finance institution: A government-backed investor, such as British International Investment, that invests in private businesses in developing countries.
Results-based financing: Funding that is released when agreed results are achieved, rather than in advance.
Technical assistance: Grant-funded advice, training or systems support provided alongside investment.
Additionality: The test that concessional money makes something happen that would not have happened otherwise.
Investment-ready: Having the track record, numbers, governance and documents an investor needs to reach a decision.

Why does blended finance matter for small growing businesses?

Because the businesses that most need investment are the ones conventional finance is least set up to serve. Small growing businesses are commonly defined as commercially viable firms with between 5 and 250 employees seeking roughly US$20,000 to US$2 million (opens in a new tab) in growth capital. They sit in what is known as the missing middle: too large for microfinance, too small or too risky for most banks and investors.

The gap is large. The World Bank describes the finance gap facing small and medium-sized enterprises as running into the trillions of dollars (opens in a new tab) across emerging and developing economies. In sub-Saharan Africa alone, the International Finance Corporation puts unmet demand for finance among micro, small and medium-sized enterprises at about US$331 billion (opens in a new tab).

Blended finance exists to close gaps like this, but most of it works at a scale small businesses cannot reach directly. Convergence’s State of Blended Finance 2026 (opens in a new tab) counted 181 deals worth US$25.8 billion in 2025 (opens in a new tab), about US$140 million each on average. The median deal in 2024 was US$65 million (opens in a new tab), and even among deals aimed at small and medium-sized enterprises in sub-Saharan Africa the median has been US$30 million (opens in a new tab). Many of those deals are funds and facilities that go on to lend to or invest in businesses. A founder who needs US$300,000 is a long way from the table where the blending happens.

What is disaggregated blended finance?

Disaggregated blended finance is ARK Group International’s term for building the blend at the level of the individual business, one source of funding at a time, rather than inside a single large structured deal. The business wins grants, uses them to remove the risks that deter investors and to become investment-ready, and then, where it is needed, raises private finance on the strength of what the grants made possible. This is how ARK works with funders and partners.

Conventional and disaggregated blended finance compared
Compared	Conventional blended finance	Disaggregated blended finance
Where the blending happens	Inside a fund, facility or large project	In the business’s own funding journey
Typical scale	Tens of millions of dollars	Tens or hundreds of thousands, building over time
Who puts it together	Development finance institutions and fund managers	The business, with its advisers
Timing	Concessional and commercial money usually committed together	Usually in sequence: grants first, investment after
What the grant does	Improves the risk and return of the whole structure	Pays to prove the model, remove a named risk and show readiness

The logic is the same as in any blended finance: concessional money goes first and takes the risk that private money will not. The difference is that this route is open to a business that will never be part of a US$65 million transaction.

A blended finance example: Freetown Waste Transformers

Freetown Waste Transformers turns organic waste into electricity and fertiliser in Freetown, Sierra Leone, using biodigesters that cost US$250,000 to US$500,000 each. Investors treat waste management as a high-risk sector, so conventional investment was hard to obtain. The company built its funding in layers.

Own and partner fundingPilot digesterCo-funded by the founder and the technology partner to prove the concept.
GrantsJust under £500,000Two key grants, one of them from the GSMA Innovation Fund, linked to its DortiBox waste collection app.
Development investmentUS$3.9 millionAgreed in 2022 with the impact investor Climate Fund Managers.
Possible scale-up investmentUS$20.3 millionA further opportunity if the development phase succeeds.

How Freetown Waste Transformers built its funding, first layer at the bottom

ARK advised the company through this process. The case study ARK co-wrote with ODI Global (opens in a new tab) concludes that the grants strengthened the company’s investment readiness and reduced risk for later investors. In particular, the grant-funded DortiBox app dealt with a central risk in the business model: whether the digesters would receive a reliable supply of sorted organic waste.

How can a small business use blended finance?

Name the risk. Work out what is stopping an investor from saying yes: unproven demand, untested technology, thin financial records, or something else.
Find a grant that pays to remove it. Look for funds whose purpose matches that piece of work, whether it is a pilot, a feasibility study or new systems. Why grant applications get rejected explains how funders choose.
Plan what the grant leads to. Before applying, set out how delivering the grant will increase revenue, cut costs or make the business more investable. This is the defence against grant dependency.
Build your readiness. Keep accounts up to date, governance clear and impact data collected. Grant due diligence is good practice for investor due diligence. Built to Scale, ARK’s accelerator, is designed for this stage.
Approach investors whose aims match yours. Expect it to take time. Freetown Waste Transformers was in talks with its investor for 12 months before the investment was agreed.

What are the limits of blended finance?

Blended finance is useful, but it has limits that a business should understand before building a funding plan around it.

Grants are competitive and uncertain. They cannot be relied on as the only source of funding.
It takes time. Applications, due diligence and investor conversations run over many months.
It is not for every business. If a business can raise commercial finance on reasonable terms, concessional money is not needed, and funders will see that.
It is small next to the need. US$25.8 billion of deals in a year is modest against a financing gap measured in trillions.
It is under pressure in Africa. As aid budgets were cut, blended finance in sub-Saharan Africa fell by 46% to US$4.6 billion in 2025 (opens in a new tab), according to Convergence.
It can create dependency. A business that moves from grant to grant without a route to revenue or investment has not reduced its risk.

Frequently asked questions

What is blended finance in simple terms?

Blended finance means mixing two kinds of money in one business or project: low-cost or free money from public and philanthropic sources, and commercial money from investors. The first reduces the risk so that the second is willing to come in.

What is an example of blended finance in Africa?

Freetown Waste Transformers, a waste-to-energy company in Sierra Leone, used its own funds and grants of just under £500,000 to prove its model, and in 2022 agreed a US$3.9 million development investment with the impact investor Climate Fund Managers.

What is the difference between blended finance and impact investing?

Impact investing is an investment strategy: the investor seeks a financial return alongside social or environmental impact. Blended finance is a way of structuring funding that combines concessional and commercial money. An impact investor may take part in a blended deal.

What is the difference between blended finance and concessional finance?

Concessional finance is one ingredient. It becomes blended finance only when it is combined with commercial money in the same business or project.

Is a grant a form of blended finance?

Not on its own. A grant becomes part of a blend when it is used to bring commercial investment into the same business or project.

Who provides blended finance?

On the concessional side: governments, aid agencies, development finance institutions, multilateral development banks and foundations. On the commercial side: banks, investment funds, institutional investors, impact investors and individual investors, including members of the diaspora.

What is blended finance? A plain-English guide for growing African businesses

In short

Key takeaways