Though foundations typically are defined in terms of their grantmaking, grants are just one of many tools foundations use to lend a hand to cash-strapped nonprofits.
The main vehicle for financial help other than grants is the “program-related investment,” or PRI.
Usually in the form of a low-interest loan, program-related investments allow nonprofits to fill gaps left by grants and private donations.
Foundations made $310.5 million in program-related investments to nonprofits in 2006, says Steven Lawrence, senior director of research at the Foundation Center.
“Program-related investments are loans, loan guarantees and other forms of investments that foundations use to further their charitable missions,” Lawrence says.
PRIs were born in 1969 with the passage of the Tax Reform Act.
The Ford Foundation, which spearheaded the use of PRIs, had committed a total of $400 million for social investments by 2007, Lawrence says.
The amount of PRIs varies widely based on the size of the foundation and the needs of the borrower, and can be anywhere between $250,000 and $5 million, says Gar Kelley, vice president of the mid-Atlantic region at the Nonprofit Finance Fund.
Since the majority of PRIs come from endowments’ principal, Kelley says, relatively few foundations make these types of investments.
“A very large investment that’s potentially tied up for several years could be disadvantageous to foundations,” he says.
And Lawrence says making PRIs requires a certain amount of financial expertise.
“You’re not only evaluating a nonprofit’s ability to build a new building, for example, but also their ability to pay back a certain amount,” he says.
Not for everyone
Not all foundations, or nonprofits, are cut out for program-related investments, Lawrence says.
Since PRIs require a lot more due diligence than grants, foundations should make sure they have financially-savvy people on their payrolls before making an investment, he says.
“When a foundation is making a grant, they’re certainly looking at the finances of an organization” to make sure it is financially sound, he says, “But an organization breaking even is something quite different from an organization being able to repay an amount.”
For this reason, certain nonprofits are better-suited recipients of PRIs than others, he says.
Nonprofits that focus on housing and economic development usually have greater potential to pay back a loan.
“If you’re funding the social sciences or health care, there’s not really potential for a tremendous return,” Lawrence says.
Any nonprofit interested in seeking a PRI should do careful research on the foundation first, Kelley says.
“Find some symmetry in mission,” he says. “There has to be some common understanding that this is the work the foundation is interested in.”
But research shouldn’t stop at the foundation, Kelley says.
“There’s some self-discovery that needs to take place,” he says. “Organizations need to take a very firm look at different operating scenarios and do some contingency planning.”
Before submitting a proposal, he says, nonprofits should ask themselves several serious questions, including how much cash they have on-hand, which of their programs are most profitable and whether the investment would support mission.
The plus side
Program-related investments have benefits for foundations and nonprofits alike, Lawrence says.
Since the investment usually comes in the form of a loan, foundations eventually get their money back to invest elsewhere.
“The key advantage of a program-related investment is that a foundation has the potential to recycle its dollars for exponential benefit,” Lawrence says. “Once those funds are repaid, you can use that money once again for another charitable project.”
Nonprofits also benefit from the interest rate on PRIs, a rate that typically is much lower than those offered by market-rate purveyors, Lawrence says.
And the loans provided by foundations are fairly low-pressure, he says.
“If a circumstance arises where a nonprofit can’t repay a loan, the foundation usually converts it into a grant,” Lawrence says.
After all, he says, the foundation’s goal is not to make a return on investment, but to ensure that its mission gets the support it needs.
Other types of PRIs
Though the majority of program-related investments are low-interest loans, foundations can invest funds in other ways, Lawrence says.
Other types of PRIs include “link deposits” and bridge loans.
A foundation makes a link deposit when it invests money with a bank, which in turn lends money to a nonprofit that aligns with the foundation’s mission.
These types of transactions have several advantages, Lawrence says.
“The bank would be better able to assess a nonprofit’s creditworthiness and manage the loan,” he says.
And for nonprofits suffering from cash-flow problems, rather than a general lack of cash, bridge loans may be the best bet, Kelley says.
Bridge loans are designed to sustain nonprofits that are trying to make do until the next wave of funding.
“You know the revenue is there, you just haven’t received it,” Kelley says.
Though they typically have a higher interest rate than PRIs, “we’re in a great interest-rate environment,” he says. “If you’re an organization that has good credit, a healthy balance sheet and reliable revenue streams, you’re in a good place right now.”
Though PRIs can breathe life into floundering nonprofits, there are also non-monetary ways foundations can pitch in during the economic crisis, Lawrence says.
“Foundations engage in providing direct charitable activities,” Lawrence says. “They do things like convene conferences, provide technical assistance and training to grantees, and serve on advisory boards.”