"Why would our organization want a loan from a foundation when we can have a grant?”
This is the question the board chair asked the executive director when she proposed approaching a funder about a program-related investment.
Of course nonprofit organizations would prefer non-refundable money, grants that never need to be repaid. After all, most nonprofit revenue comes from contributions and many nonprofits rely on foundations for these funds.
However, as a growing number of foundations are either experimenting with or fully executing strategies for impact investing, executive directors, development directors, and board members risk leaving money on the table when they ignore these low-cost debt tools for their projects.
So what do funders mean when they talk about impact investing? The term "impact investing" can encompass a variety of financing tools. For the purpose of this conversation with our board chair though, let’s explore program-related investments (PRIs) which can take the form very favorable types of debt or even loan guarantees.
Examples of PRIs include
A low-interest loan to help a nonprofit purchase a new building
A loan guarantee that helps an organization secure a traditional loan from a bank, credit union, or CDFI
A forgivable loan for a new initiative that need not be repaid if certain programmatic milestones are met
Organizations must consider many factors when contemplating a program-related investment. Here are three questions to start with
Is my organization embarking on a new program, project, or development that requires new capital for launch? Program-related investments can be the perfect type of capital to help fund a large new initiative such as launching a social enterprise or building a new facility. PRIs are not typically the right tool for funding operating expense or program costs (unless they are very short-term bridge financing for timing or cash-flow issues). Just as your foundation partners may be interested in providing a one-time capital grant in addition to general operating funding, they may also want to support your organization with a one-time favorable loan to help you with your project.
Does my organization have a method of repaying a PRI? For PRI loans, funders will be interested in projects that have a built-in repayment method. For example, a PRI that helps the organization launch a new fee-for-service program could be repaid with program fees. A PRI to acquire land or a building might be repaid with revenue that would have historically been paid as rent. Funders want your organization to be set up for success and won’t want you to take on debt that cannot clearly be repaid.
What is my organization’s level of readiness to solicit a funder or about a PRI? Because of board members’ fiduciary responsibilities, they may shy away from taking on debt. Ensuring that your board and leadership are informed about IRS regulations and providing examples of other successful projects that have been financed with similar tools will help board members become comfortable with soliciting funders for new types of loans or credit enhancements for your project. Also, having basic financials that illustrate how the financing fits within your capital structure and how loans will be repaid can help educate your team and also help you prepare for your conversation with funders.
Program-related investments are not the right fit for all organizations and projects. But exploring PRI options with funders can create many benefits. Discussing PRIs may give your organization access to new funder budgets outside of their traditional grant making. Soliciting funders for PRIs may give your organization access to funders who have not been aligned with your organization for traditional grantmaking but who are interested in your project for a PRI investment. And bringing favorable, friendly PRI funding to your project may decrease any perceived financial risks for your project and consequently attract more capital from other sources.
Educating yourself and your organization leadership on trends in impact investing is a great first step in ensuring you are setting your organization up to take advantage of a PRI when the timing is right.
For information purposes only. Not to be considered legal or tax advice.