As elected officials focus on ways to close the deficit, they are making decisions that are likely to make the cash crunch for nonprofits even tighter than they already are.
That’s why many grant makers are looking for new ways to lend organizations money or arrange for new pools of funds that charities can borrow from. If these efforts are successful, they will shift the landscape for nonprofit capital and create new opportunities.
Nonprofits use debt for many purposes: to purchase equipment, buildings, and other assets; to cover money owed by the government; or smooth uneven cash flow from ticket sales or fund-raising events.
Without access to debt, many nonprofits would have to stop paying staff members, eliminate programs, and even close operations. However, while nonprofits rely on debt, in the past two or three years, credit markets have tightened. Some nonprofits that had access to lines of credit are no longer allowed to borrow as much, and sometimes cannot get any credit at all.
So more capital is needed to fill the nonprofit credit gap. But what many organizations need is access not just to debt but to flexible debt. In the past, “flexible” was often a euphemism for patient (long-term) capital or low interest. In today’s market, it frequently means capital that can tolerate some risk.
Why do nonprofits need this flexible capital?
At the same time that credit has tightened, nonprofits, particularly small and midsize nonprofits, have become more fragile. Their revenue is less predictable, demand for their services is rising, and staying in a strong financial balance has become more challenging. They are stretched thin. So an organization that looked like a relatively good credit risk two years ago is now looking less creditworthy.
To be sure, some organizations have become so fragile that they shouldn’t borrow funds, but others that look risky may just need flexibility to deal with unusual financial pressures.
Some grant makers recognize that they can be helpful. An official of one small fund recently told me that the foundation realized it had to be willing to lend money—at the risk of taking small losses—to be responsive to the needs of nonprofits working on the causes that are important to the foundation.
To do otherwise, it felt, was to fail the nonprofits that depended on it for help and to be too conservative with its own assets. No one wants to lose principal, but if grant makers want to help nonprofits that can’t gain access to traditional credit, in today’s market, it will require taking some risk.
Foundations can accomplish this task in two ways. The first is to lend capital directly to nonprofits or to intermediary organizations that help a wide range of nonprofits manage debt.
To make a difference, a foundation needs to take more factors into consideration than do for-profit banks and other financial institutions to decide whom it can lend to; otherwise it will not be making a real difference.
The second way to help nonprofits is to offer to be a “backstop” on debt offered by a commercial or private lender who might otherwise shy away from a loan because it seems too risky.
For example, foundations can guarantee loans, create reserves to help make up for any losses a lender takes on a loan, or agree to take the first loss in event of a default. These tools allow the grant maker to share some of the risk that otherwise would be borne entirely by the lender. They offer tremendous leverage and can go a long way in giving nonprofits access to flexible capital.
Grant makers that are willing to absorb a little more risk can help nonprofits get through tough times by easing them over the hurdle of scarce capital.