Capital campaigns can be a slog! Most organizations face similar challenges: donor fatigue, the time it takes to raise funds, rising development costs, and concerns about falling short of your fundraising goals. But what if there were another way to raise funds for your cause?
Enter the world of impact investing! You may have read about this idea as it’s starting to gain popularity, but it’s been around since early 1970’s. Ford Foundation started investing in nonprofits as a way of expanding capacity. In fact, the Nonprofits Insurance Alliance Group, the publisher of Blue Avocado, was an early recipient of a $500,000 loan at 2% interest in the 1980s as part of the Ford Foundation’s foray into impact investing. NIAC paid that loan back with interest and 30 years later provides insurance protection to 18,000 other nonprofits and has grown to nearly $500 million in assets.
And now there’s a growing movement among foundations toward impact investing, which includes equity investments, loan guarantees, and everything in between. Typically, these investments are structured as low interest loans, or in industry jargon, “debt with a concessionary investment return.” What’s important to note is that impact investing looks for both a financial and a social return. For instance, a 2% loan to a local Boys and Girls Club to purchase a new property would definitely count as an impact investment. The point here is the foundation earns 2% in interest and supports the Club’s mission.
The F.B. Heron Foundation came up with the following visual to help explain what impact investing can look like. It’s important to note that foundations can actually invest in private companies and still count it as an impact investment. As an example, think of an equity investment into a company developing a new cancer-fighting drug. Shown below, you can see how grants are part of this spectrum, too. While grants offer a social return, they are not designed to be repaid, yielding zero financial return, hence their spot on the far end of the spectrum. However, a loan is meant to be paid back while supporting an organization’s mission.
Cynics in the room will say, “I don’t want a loan from a foundation, I want a grant!” To them I would say, “Well, I want a pony, but that’s not going to happen either!” That said, receiving a loan from a foundation may not preclude you from a grant and could even help your chances. It shows a level of sophistication and demonstrates that your organization is thinking creatively and is financially astute.
There are several ways a low interest loan might be able to help you reach financial and programmatic goals. If your nonprofit is looking to build a multi-million-dollar project, donors and funders may make multi-year pledges. While that’s helpful, these funds can trickle in over several years while you’re waiting to purchase a property. A loan can help you buy the property now while you wait for the pledges to materialize.
The first step in the borrowing process is to determine what your sources and uses of funding are going to be. Likely, you may have a gap in what you need and what you can raise. For illustration purposes here, let’s say you’re purchasing a $1 million property. Your fundraising team believes they can raise $800,000 from donors, foundations, and government sources. So, you’re left with a $200,000 nut to crack.
Step two in this process is to determine what you can afford. By using our handy-dandy cash flow projection template posted on the American Nonprofits website here, alongside other helpful resources, you can figure out your monthly and yearly debt payments and amortization schedule. Assuming you can get a 5% loan for 30 years, your annual payment would be less than $13,000. But just because you need the $200,000 loan, it may not mean you can afford it.
Step three in the process is to show that you can actually afford a loan payment and have sufficient funds to operate the programs. The cash flow projection tool I just shared is designed to help with this process. At the end of the day, you need to show whoever is going to lend you money that your organization has at least $15,000 in net income to make this payment. Typically, you need to show that you have some cushion in your projections to cover the debt payments.
I suggest you do a little homework and talk with a banker to run through all the numbers, ideally someone on your board who is familiar with your work and finances. Together you should be able to determine how much you need, how much you can afford, and what terms and conditions make sense for your organization. Once you have a better sense of what a loan could look like, then reach out to your funders with this creative solution.
Keep in mind that while all foundations can invest in nonprofits, many of them may not be familiar with these new funding tools and strategies. You may need to turn the tables and do some “capacity building” for your local funder. Share resources and examples of how other foundations have provided additional types of funding beyond grants.
There are several affinity networks in this space that provide capacity building to foundations. Mission Investors Exchange is a leading impact investing resource for foundations. Confluence Philanthropy is another for private and community foundations. Another suggestion is the Community Foundation Field Guide to Impact Investing. While the focus of the latter is on community foundations, much of the information is transferable to other types of foundations. And remember, together we are stronger!
If all of this has your head spinning, feel free to email me with questions. Trust me, if I can figure this out, so can you!
Marc Rand has focused the last twenty years on supporting the nonprofit sector through capacity building and finance. He spends his time creating new and innovative ways of supporting organizations through finance as the Executive Director of American Nonprofits, which includes operating the NIAC and Bridge to Bridge Loan Funds. He is the former Program Director for Loans and Affordable Housing at Marin Community Foundation, one of the country’s largest community foundations. Prior to being a funder, Marc served with the Peace Corps in Romania where he led a team that developed five credit unions focused on underserved population. Before his service with the Peace Corps, Marc served as a Capital Markets Analyst with First Union National Bank.