ADIE, a French microcredit organization, has extended more than 160,000 microloans to entrepreneurs in France and beyond since its founding 25 years ago. In 2015, it raised a Titre Associatif (TA), a soft loan that nonprofits get through private investors. The 10 million euro ($11.2 million) loan was the first of its kind under a new French law. It allowed ADIE (Association pour le Droit à l’Initiative Economique, or “nonprofit for the right to economic empowerment”), to expand its micro-loan services to 24,000 individuals in 2017, up from 16,600 in 2014. By comparison, the organization raised 1.3 million euros ($1.5 million) in donations from other sources in 2017. ADIE is expected to repay investors over an 8-year term at a 2 percent annual interest rate, enabling the nonprofit to scale up at an affordable cost.
Nonprofits in the United States also need new sources of capital as they step up to address areas of the economy where traditional markets have failed. Over a three-year period in the last decade, 30 percent of US nonprofits lost money while more than 50 percent had less than one month of cash in reserve. In addition, of the more than 200,000 nonprofits created between 1975 and 2008, only 201 grew to annual revenues greater than $50 million.
This struggle with raising money could be helped by implementing something like French TAs in the United States. “Recoverable grants,” a financial tool in which nonprofits agree to repay private investors the principal amount and possibly an interest rate, based on their overall financial performance or that of a specific program, are an emerging form of patient, affordable, and flexible capital in the United States. For example, CapShift, which helps donor-advised fund sponsors and account holders make impact investments, has partnered with a leading international nonprofit to raise recoverable grants as a means to accelerate the delivery of life-saving supplies like vaccines, mosquito nets, and food supplements to children in need.
Like TAs, recoverable grants provide a blueprint for bridging philanthropy (making pure gifts or grants) and investments (recovering principal alongside potential returns or interest payments). However, they sit on a different side of the spectrum: TAs, however lenient the payback terms may be, are still loans at the end of day; recoverable grants are tax deductible for donors, even though many also include agreements for repayment. Nonetheless, since recoverable grants are not legally defined in the United States (the IRS mentions grants whose “repayment is only required under certain circumstances”), funders and regulators would benefit from taking a closer look at some of the unique features of France’s TAs.
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The French Model
Legally defined in 1985, TAs enable French associations—the equivalent of 501(c)3 nonprofit organizations in the United States—to build their long-term assets via private investors.
TAs effectively allow French nonprofits, which mostly rely on public subsidies and government contracts for revenues, to expand their source of funding beyond public or philanthropic sources. TAs saw little uptake in their first 30 years of existence due to caps on interest that deterred private investors. A law passed in 2015 relaxed the interest cap, spurring a new wave of TAs.
TAs are essentially low-interest loans, or soft loans, but uncertainty remains over what happens if a TA is not repaid; France hasn't set a legal precedent.
By law and by design, capital provided through TAs has many features that are appealing to US nonprofits struggling to raise funds. Such capital is:
- Patient: Investors expect to wait at least seven years before the principal starts to get repaid.
- Affordable: The nonprofit borrower benefits from an interest rate capped by law to be some basis points over a quarterly treasury bond interest rate.
- Flexible: The nonprofit borrower decides when to begin reimbursing the principal. To protect the investor, the borrower may have to create reserves for repayment, the amount and procedure of which is spelled out in each TA agreement. After seven years, if and when the reserves reach a certain amount, the lender may have legal recourse over the funds.
Other large French nonprofits have followed ADIE. Acted, the humanitarian aid agency, raised 6 million euros ($6.7 million) via TAs, while UCPA, the French equivalent of the YMCA, issued 3 million euros ($3.4 million) worth of TAs. Most recently, ALIMA, a provider of emergency medical care, raised 2 million euros ($2.2 million) from six institutional investors to finance its expansion plan.
History of Flexible Capital for US Nonprofits
For decades, many organizations and individuals in the United States have called for more patient and affordable capital to support nonprofits. In 1969, for example, regulators legally defined program-related investments (PRI) for foundations in an effort to enable them to align their investment assets with their charitable purpose.
The next step for improving US nonprofit financing with the recipient in mind involves engaging with regulators to legally define recoverable grants and formalize their terms. More regulatory clarity would set a precedent, reduce legal and structuring costs, and shorten the fundraising timeline for nonprofits, thus saving resources that could be further deployed to support program activities.
To start, US regulators could formalize a tool that offers a term of seven years or longer and possesses a conditional reimbursement clause. The typical length of traditional grant commitments is one to two years, with no expectation of repayment. Payment over a seven-year term, though arbitrary, would enable longer term planning and implementation. To ensure affordability, regulators could cap interest rates at a premium above a specific variable rate tied to inflation via the consumer price index. US philanthropists and impact investors could go even further than the French model by tying returns and principal repayment to impact outcomes instead of financial performance, which would make recoverable grants a new kind of pay-for-success. Ultimately, all these measures should allow nonprofits to invest in critical infrastructure, expand their programs, and develop long-term plans.
The general terms of a seven-year soft loan or recoverable grant favor the nonprofit recipients rather than the preferences of many investors. Nonetheless, recoverable grants expand the financial toolkit of mission-driven investors by sitting between a traditional grant and an investment. We believe they could be attractive for certain purposes and deserve a place on the return continuum. Recoverable grants may also make nonprofits more attractive for impact investors—individuals and organizations investing with the intention to generate positive, measurable social and environmental impact alongside a financial return. With recoverable grants, the capital provider can reasonably expect a tax deduction in addition to return of principal and regular income from fair interest payments.
Looking Ahead
At a time when the both the United States and French governments are reducing government support for social programs and philanthropic giving is in decline, TAs and similar funding models can help fill this funding gap. There are early signs that TAs have been able to catalyze more private capital to support nonprofits’ balance sheets. In the US, they have been used in pay-for-success models and we are developing several at CapShift, working with leading nonprofits and donor advised fund sponsors as capital providers. Such tools, on both sides of the Atlantic, can be catalytic in helping nonprofits continue addressing today and tomorrow’s social and environmental needs.
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Read more stories by Alexandra Chamberlin.