Bank of America Merrill Lynch, Esme Fairbairn Foundation and Nesta have launched a 7m pilot social investment fund for arts organisations as an alternative to grant or private loan funding.

It is supported by Arts Council England and the Calouste Gulbenkian Foundation has provided additional funds for the Arts Impact Fund. It was convened by the Cabinet Office after research identified a 28m investment demand from arts organisations.

The funders describe the three-way funding model, with contributions from private, public and philanthropic funds, as co-mingling. A spokeswoman said they were not revealing how much each organisation had contributed to the fund.

Rob Wilson, minister for civil society, said: We believe that the Arts Impact Fund and this pioneering new model is just the start and we want to see it scaled up and replicated in other sectors to address a range of social challenges.

The expectation is that the fund will identify arts organisations that should be expanded; establish the demand for social impact funding in the sector; demonstrate how arts organisations can show financial and social returns, and establish the fund mechanics before a larger fund is set up.

From 15 April arts organisations that can demonstrate the need for finance, explain the social impact it will have, and how they intend to pay back the loan, will be able to apply for loans of between 150,000 and 600,000 with an interest rate of between 4 per cent and 7 per cent. Successful applicants will be announced every six months over two years and their performance and social impact measurements will be published.

Once the two-year pilot has concluded the organisations hope to establish where demand is long-term, whether a larger fund could be set up, or if it could be expanded to other areas.

On Monday the arts charity IdeasTap announced that it would close this summer after failing to secure future funding. It had been set up by Peter De Haan and funded mainly though his charitable foundation, which will soon run out of money.

Helen Goulden, executive director at Nesta. said: It has never been more important to think imaginatively about how to increase access to finance for arts organisations. The Arts Impact Fund not only opens up opportunities for social investment for the whole sector, but brings together public, charitable and private finance in support of that mission. These first two years will be critical to understanding the long-term potential of impact funds of this kind to support the arts.

Caroline Mason, chief executive of Esme Fairbairn Foundation, added: We are investing in the Arts Impact Fund because we believe that cultural expression is essential to a strong, healthy society. We think this fund will test out how, in addition to grant funding, investment can help organisations and the arts sector to become more financially sustainable.