Many nonprofits across the country struggle with financial viability, according to a recent report based on data provided by GuideStar. The majority have less than one month of operating reserves, and 30% face potential liquidity issues. Nonprofits in the education and health and human services sectors, typically reliant on government contracts and fee-for-service-revenue, operate with much tighter margins and are especially vulnerable to liquidity challenges.
Rather than shy away from these nonprofits, funders can play a special role in stabilizing their infrastructure.
The report offers several suggestions including additional support for overhead, more flexible funding, and policy changes for government funders. But it misses one critical way funders can help these organizations: program-related investments (PRIs). PRIs are essentially a loan or investment that counts toward a foundation’s 5% distribution requirement. Rather than funds permanently leaving the foundation’s corpus, the funds go out, do good, and come back to be used again.
Many funders are already providing general operating support grants (79% of foundation respondents in our 2018 Foundation Operations and Management Report), but only 11% of funders reported making loans to grantees in the form of PRIs.
Cash Flow Loans at the Knott Foundation
The Marion I. & Henry J. Knott Foundation in Baltimore has skillfully used PRIs to support its community. In the early 2000s, the Knott Foundation’s executive director and board saw a need among their grantees for a source of low-interest, short-term cash to help make ends meet while they waited on delayed receivables. In 2003, after two years of research and work behind the scenes, the Knott Foundation introduced its cash flow loan program modeled on a similar program hosted by the Meyer Foundation in Washington, DC.
Through this program, the Knott Foundation provides loans at a lower cost and with a quicker turnaround time than typical lenders. They make loans between $10,000 and $30,000 from a revolving pool of $100,000—some 42 loans for over $800,000 since the program began in 2003. Even more impressive, the Knott Foundation has a 100% repayment rate.
For the few organizations that couldn’t repay their loans within the six-month repayment term (only 12%), the Knott Foundation worked with them to develop a mutually agreed upon repayment plan to ensure both organizations could remain in a financially healthy situation. The Knott Foundation’s Executive Director Kelly Medinger told Exponent Philanthropy, “The loan program allows us to set aside a small percentage of our assets to provide a service that really benefits our grantees. It allows $100,000 to go much further than if we just used that money for traditional grants.”
Loan Funds at Work: Two Examples
One of the Knott Foundation’s grantees works to provide transitional and temporary housing to homeless individuals in Baltimore City. When Baltimore City’s grant payment to the organization was delayed, the nonprofit applied for a cash flow loan to help meet its payroll needs. After receiving its grant from Baltimore City, the organization was able to repay the loan fully and went on to receive another grant from the Knott Foundation to help with a capital campaign. Medinger emphasized, “We make sure our grantees know that using our loan program doesn’t put a black mark on their record. Grantees can apply for loans, and that will never hurt them in future grant applications.”
Not all of the Knott Foundation’s loans are used to cover late or delayed grant payments. Another Knott Foundation grantee working in community development used the cash flow loan program to help it purchase a house in an underdeveloped neighborhood. With funds from the cash flow loan program and a grant from another foundation, the organization was able to purchase the home, refurbish it, and sell it to a low-income city resident at a lower price than traditional developers.
PRIs and cash flow loan programs aren’t just tools for large foundations. Funders of all sizes can use these tools to create a big impact in their communities and help nonprofits navigate difficult financial situations. All it takes is some creativity, due diligence, and the willingness to take on a little bit of risk.
To learn more about the Knott Foundation’s loan program, check out its blog. See also the Exponent Philanthropy publication Leveraging Your Assets With Loans and Other Program-Related Investments.
Content manager Brendan McCormick works with Exponent Philanthropy’s Content Services team to develop resources and programs for members, focusing on investments and community foundations. Prior to joining Exponent Philanthropy, Brendan worked as the grants and awards coordinator at the National Trust for Historic Preservation; program coordinator for outreach, instruction, and communication at University of Maryland’s College Park Scholars Public Leadership Program; and as a fellow at the Greater Washington Community Foundation.