Organizations that make up the vast and growing nonprofit sector borrow lessons from the business plans of their for-profit counterparts as they seek to achieve social missions and attain financial sustainability. These dual objectives may seem contradictory, and nonprofits have long been described as the bleeding hearts of the economy, ignoring the benefits of large profits or any profits at all, in order to help less fortunate communities.

However, some grant-making organizations are now experimenting with financial mechanisms such as loans and equity investments that require nonprofits or social enterprises to pay back funds through returns. This practice, referred to as "impact investing," requires these organizations to generate revenue. Yes, they are making a profit in doing so, without overlooking the motive behind establishing tax exemption for nonprofits.

Chuck Bean, the executive director of a nonprofit organization in Washington County, U.S., said: "I would say that the entire nonprofit sector goes beyond the charitable framework which, while supporting the idea, sees potential obstacles. When nonprofits engage their funders, they need to describe it as an investment not only because it has a charitable dimension, but because there is a social return on investment."

Financial Impact

Accion International is a nonprofit that makes equity investments through profits from its venture lab, which was created in April to allocate $10 million to donors in developing countries to help the poor access financial services.

Paul Briloff, the fund’s managing director, said that this tactic has come with some controversy and noted that the decision to invest in profits rather than other nonprofits does not reflect a judgment that one model is more effective than another.

Briloff added, "We invest fully because we believe in the social mission of these companies, and we think this is the most effective way to grow these initiatives and expand outreach to these underserved populations."

So far, this has proven effective, he noted that the $10 million that Briloff Investments gave has indeed been generated from previous investments in social-minded companies that continued to reap the fruits of success.

Some organizations are taking a similar approach to nonprofits using loans, as the Calvert Foundation, based in Bethesda, made its first loans to nonprofits and community groups seeking to raise capital in 1995, often providing lower interest rates or longer repayment terms or other more favorable conditions than any private bank.

Lisa Hall, the head of the group, stated that the group’s funding comes partially from a community investment note that individuals and companies can buy as an investment bond, meaning that nonprofits must scrutinize deals to find those that ensure tangible returns.

Hall added, "In the early days of the Calvert Foundation, we used to criticize our 'best fruits' represented in the deals, my answer to that is yes, that is the important point. Hall stated, "We invest in deals that we know generate money."

She further stated, "This is one of the challenges we face in our work on impact investing, to ensure that you are investing in things that have a sound and clear revenue model and where there is a solid track record."

Calvert typically invests in groups with evidence of good operational performance, having at least $5 million in total assets and experience repaying debt capital, along with some other criteria. However, skeptics see that the focus on financial return makes some organizations, perhaps for purely social reasons, ineligible for impact investment because the communities they serve may not have the purchasing power to generate profits.

Bean, who fears that impact investing may not be available to all organizations, said, "In my opinion, [impact investing] means that the user typically has some ability to pay for the service, otherwise I am not sure where their scalability comes from."

He added, "I am not sure if impact investing can solve the chronic homelessness problem or could be employed to address youth issues such as reducing criminal behavior."

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