The first question borrowers ask us, regardless of their tax structure, is: why? Why go after impact-based financing instead of grants, donations, or conventional capital?
Here are four ways impact-based financing can fuel your venture’s social mission:
- Changing Landscape: Social change is undercapitalized in the United States. Charitable giving has stayed stagnant at 7% of GDP for the last four decades. Plus, much of this capital sits in donor-advised funds, reserves, and endowments—not circulating out into the community to do good. By contrast, the pool of impact investing capital is growing fast. Estimates project that impact investments will surpass donations within the next ten years. Why not get into the funding pie that’s getting bigger?
- Sustainability: While few grantmakers make multi-year grants, most impact investments tend to be more “patient” forms of capital. Social ventures often pay back loans over 3–7 years, allowing early-stage companies to get through their growing pains. Awesome investors will work with you to match the terms of their repayment to your projected cash flow needs.
- Control: Equity investments require business leaders to give up some ownership and control over the future of their companies in exchange for cash now. Restricted grants sometimes limit nonprofits from spending money in innovative ways. New models of impact investment build collaborative partnerships between investors and social ventures.
- Filling Financial Gaps: Finding a grant, bank loan, or traditional investment to fill a gap in a project budget is no easy feat. They often want the whole project or none of the project. Impact investors—especially Mission Driven Finance—love a bargain deal though. We like to find investment opportunities where our modest capital closes the gap from other funders and helps a project move forward.
We always counsel nonprofit borrowers: if you can get all the free money (donations) you need for your project, in the timeline you need it, do that! But impact-based financing can help good programs and powerful small businesses get over a hurdle to a more financially sustainable operation faster.
