May 7, 2009 | Read Time: 4 minutes
The current economic crisis has left no one unscathed — and sadly, that is particularly true for those who are most in need.
As foundations face significantly reduced assets available to meet those needs, nonprofit groups face even greater demand for their services.
As a result, foundations across the country must meet the challenges inherent in this crisis by making significant and real changes. Just as investors in the capital markets are rethinking their investment strategies, foundations, donors, and nonprofit organizations are also at a critical reflection point.
Adding to the increasing philanthropic challenges, the next several years promise a period of “forced dislocation” of vital services from government to nonprofit organizations. But with Washington and state and local governments preoccupied with saving their economy and constituents, this shift in responsibilities will be taking place without nearly as much money as will be needed to accomplish the task. In short, nonprofit organizations will be expected to take care of important needs without getting much aid from government to accomplish their tasks. That challenge requires nonprofit groups and foundations to have enough faith in their missions to think long term, just as they are trying to survive in the short term.
For foundations, the dilemma is how to free up the extra money that nonprofit groups so urgently need today, while not eroding their ability to meet the needs of the future.
Though a small number of foundations are making use of their investment capital to make loans to nonprofit groups, the vast majority have been reluctant to adopt them. Some foundations prefer to offer charities traditional grant dollars as opposed to debt or other nontraditional forms of capital, and other grant makers perceive that they lack the skills to evaluate the risks and creditworthiness of their grantees that those investments would require.
But this crisis requires grant makers to use every current dollar available to them to help meet these very real needs.
Without that kind of action, there is not enough philanthropic capital available to meet even a fraction of the needs of the domestic population. And as the available philanthropic capital continues to significantly decrease in today’s markets, ‘nontraditional’ investment options — including loans and other so-called program-related investments — need to emerge as a philanthropic investment solution whose time has come.
Many of the perceived impediments to this kind of nontraditional capital lending are untrue, as research by FSG Social Impact Advisors has demonstrated.
For example, many foundation trustees often assume that their fiduciary duties prevent them from using the foundation’s principal to make risky or low-interest loans, yet the legal research led by FSG demonstrates that almost any investment that genuinely serves the foundation’s charitable objectives is legally permissible, even at an increased risk or a sacrifice of financial return. And in today’s investment climate, even a 2-percent return on a low-interest loan looks well above “market rate.”
Most important, loans to nonprofit groups are not nearly as risky as most grant makers assume. In examining loans made by foundations over the past 40 years, the FSG study found that 96 percent had been fully repaid with interest, after excluding three foundations deliberately seeking out risky projects that had the potential to fail.
The reality is that many nonprofit groups have reliable sources of revenue they can count on over the long term, even if their revenues have temporarily contracted at the same moment that their needs have increased. They may need money urgently today, and are probably unable to borrow it from conventional lenders in today’s credit squeeze, but their revenue will increase as the economy recovers, and they will be able to repay loans. No nonprofit organization wants to default on a loan from a foundation that supports it — the potential of the foundation’s good will is worth too much for the grantee to risk a default.
So perhaps the economic cloud over philanthropy today does have a silver lining. This may be just the right confluence of circumstances that, taken together, could finally help move foundations and nonprofit groups to start using the creative financing approaches available to them under the law. Let’s hope so.
Jim Bildner is managing director of the Center for Applied Philanthropy, and Mark Kramer is a founder and managing director of FSG Social Impact Advisors and a senior fellow at Harvard University’s John F. Kennedy School of Government.
