Social Finance for Nonprofits: Why You Should Care
In an article written for The Philanthropist, Nora Sobolov, President and CEO of the Community Forward Fund, provides insight into alternative financing options for nonprofits. In Why you should care: how charities, nonprofits, and foundations can benefit from social finance, she discusses a number of ways to secure flexible funding that can help bridge the gaps between grant funding and project-based funding.
In addition to highlighting various avenues for support, the article encourages nonprofits to rethink how they view loans, revenue-generation, assets, and entrepreneurship.
Stability, Sobolov says, requires thinking beyond immediate needs. Building on the wisdom of George M. Overholser, Founder and managing director of the Nonprofit Finance Fund (NFF), she points to a greater need for detail and redirection within the fiscal centre of a charity. “(Building) requires growth capital and close stewardship,” Overholser says. “It requires a patient process of trial and error. More often than not, it requires major shifts in strategic direction. Also, it is an episodic thing – once an enterprise is built, the builders can go on to other projects.”
While acknowledging that charities often have their hands full providing full-time services and addressing immediate needs, Sobolov argues that finding the time and resources to build stronger financial departments is fundamental to the stability and growth of an organization. “It echoes the old mantra that low-income women should save money to improve their future,” she says. “When you’re choosing between paying the rent or buying food, planning for the future seems a little ludicrous.”
But several programs have developed to enable low-income individuals to improve their financial situation. So why, she asks, can’t charities and nonprofit organizations do the same?
Some have been reluctant to take on debt; others lack knowledge of where to look and how to use funds other than grants or donations. But in the numerous cases where loans have been taken out – consider the $215 million loaned to non profits by the NFF over the past 30 years - default rates have been extremely low.
Loans are a great option to build or bridge, says Sobolov. They have been successfully used to help organizations diversify their funding base through new partners and corporate sponsors, expand into new communities, and build new lines of business that provide revenue streams. They’ve provided capital to buy buildings and new equipment, finance construction, and helped to even out cash flow and bridge the gaps between pending grants. But they don’t meet every need. In addition to debt financing, Sobolov suggests that nonprofits should consider revenue-generating products or fee-for-service contracts to fill in a fiscal portfolio.
A great example of this strategy can be seen in Ontario, where organizations have taken advantage of the Ontario government program to buy power back into the energy grid, using it as a method to finance the purchase of solar panels. Other organizations have found markets for services or products such as developing and selling election materials overseas, developing and holding workshops, or selling directories. The possibilities for revenue-generation are endless, but non-profits are in need of support in developing these strategies and programs.
“Many groups and organizations are working on ways to support social enterprise or social purpose business development. It is important that these processes and programs are accessible to charities and nonprofits that may want to develop revenue generation but do not self-identify as social enterprise,” says Sobolov. “It is important to recognize what needs to be done to help charities and nonprofits learn about and take advantage of alternative funding options. Sector organizations are often confused about what is available and, in many cases, feel that it is not available to them.”
New intermediaries have sprung up to connect organizations to a network of investors and donors, and to work on a milestone-based plan, rather than the traditional project-based funding. The Community Forward Fund is one example, acting as a loan and financing fund for charitable and nonprofit organizations, as well as offering advisory services. “Charities and nonprofits, as well as potential funders, need to be partners in the development of these intermediaries and services to make sure that they are of value and will work for and with them to address the range of financing and support needs,” she says.
Regular “financial fitness” and advisory services are essential. Having an external advisor to monitoring your organization’s financial health, and seeking advice from purely financial institutions can help flag problems or create a more dynamic solution to a problem that may not be fully understood or acknowledged.
Sobolov notes that the nonprofit sector has been subject to persistently biased portrayals that make charities out to be inadequate and badly run. An important keystone in the success of an organization, she asserts, is to tell your story proudly and change the perception that capital that goes into charity-based projects is used ineffectively. “In order to attract capital for mission-based and not just project-based work,” she says, “organizations must start to talk about what the sector does well, make the case for stable and decently paid management and infrastructure, and build an atmosphere of confidence and trust.”
We are constantly hearing about new innovations in the sector, especially around social finance. But the charitable and nonprofit sector is diverse, and there is no one magic bullet that will solve all problems. “I think it is time to realize that to thrive we need a number of approaches that speak to this diversity and offer options to the sector in times of need. It is also time to think of innovation differently,” she says.
“Yes, we need the big ideas, the creative cycle. But in the world of social finance, it’s time to act. If we do not, the level of cynicism will continue to rise.”
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