A New Financial Tool: Social-Impact Bonds

A new approach, called the social-impact bond, turns upside- down the typical way that governments finance social services.

Usually nonprofits financed by state and federal governments provide services, such as health care, job training, and substance-abuse treatment. Payments to nonprofits are typically based on the number of people the programs enroll, not on how well they serve them.

Here’s how the new approach works:

Who pays upfront: Foundations, donors, or other investors give a nonprofit the money to finance social services.

Who pays later: Government pays back the people who put up the money, with a bonus—but only if the nonprofit meets specific performance goals.

What happens when nonprofit projects fail: Investors don’t get any of their money back and the government pays nothing for a project that didn’t get results.