{"id":26537,"date":"2019-10-28T12:30:07","date_gmt":"2019-10-28T16:30:07","guid":{"rendered":"https:\/\/test.greenmoney.com\/2025\/?p=26537"},"modified":"2020-01-03T14:34:03","modified_gmt":"2020-01-03T19:34:03","slug":"innovation-in-community-impact-investing","status":"publish","type":"post","link":"https:\/\/test.greenmoney.com\/2025\/innovation-in-community-impact-investing\/","title":{"rendered":"Innovation in Community Impact Investing"},"content":{"rendered":"
>> Back to November 2019<\/a><\/div>\n

\"CapitalAccording to US SIF: The Forum for Sustainable and Responsible Investing, Socially Responsible Investing (\u201cSRI\u201d) has reached the $12 trillion asset mark. Unfortunately, the vast majority \u2014 97 percent, to be precise \u2014 comprises investments in the traditional capital markets in which decisions are made using Environmental, Social, or Governance (\u201cESG\u201d) criteria. While I applaud people adding ESG screens to their portfolio, it is imperative that we find ways to support direct, community-level investments.<\/p>\n

Innovative nonprofits are at the forefront of driving social change, but for them to scale they must attract significantly more capital. Fortunately, at Capital Good Fund (\u201cGood Fund\u201d), a nonprofit Community Development Financial Institution that provides small-dollar consumer loans to the economically marginalized, we have been testing a solution for over three years. Before diving into the solution, it is important to state the problem:<\/p>\n

High-growth nonprofits with a revenue model face significant challenges when it comes to funding their growth: grant dollars are scarce, often come with restrictions, and are too small to allow for mid-to-long term planning. At the same time, since nonprofits are owned by the public, they cannot raise equity. This leaves a final source of growth capital \u2014 debt. Nonprofits are not legally limited in the amount of capital they borrow, but not all debt is prudent. Debt for asset purchases such as property or equipment, or to fund a loan pool, for instance, is not problematic because the liability is offset, and can be collateralized by, an asset. Debt to fund growth (such as personnel and technology) carries the significant downside of adding a liability, but not an asset, to the balance sheet. Like any business, an over-leveraged nonprofit\u2019s existence can be threatened, as donors, investors and others may become less inclined to support the organization, philanthropically or otherwise.<\/p>\n

\"Capital
Mamadou is a CGF Loan Client. Due to a lengthy immigration process, Mamadou and his family had been apart for over seven years. After everything was finally settled, Mamadou needed financial assistance to fly his wife and children from Africa to their new home in Rhode Island. Capital Good Fund’s innovative fundraising strategy provided the growth capital needed to support a loan to Mamadou and reunite him with his family. Afterward, he told us, \u201cMy experience was excellent. You are the only ones who could resolve my problem.\u201d<\/em><\/figcaption><\/figure>\n

The solution is to expand on an already common fundraising mechanism known as a Direct Public Offering (\u201cDPO\u201d). Many organizations, both for profit and nonprofit, have used DPOs to raise capital. Nonprofits in particular are well-suited for DPOs because they can use various federal exemptions, not available to for profits, that entail a lighter regulatory burden. Numerous CDFIs, including Good Fund, have used DPOs to successfully and inexpensively raise debt to fund loan pools or create other assets (buildings, vehicles, etc.). The innovation in our solution, however, is in how the DPO enables a nonprofit to borrow for \u201cgrowth capital\u201d \u2014 operating expenses that enable revenue generation over time \u2014 without the liabilities damaging the organization\u2019s balance sheet.<\/p>\n

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Here\u2019s how it works. The debt is issued, not by the nonprofit, but rather by a subsidiary organization controlled by the nonprofit. Structured this way, the liability is held on the balance sheet of the subsidiary, thereby preventing the parent nonprofit from becoming over-leveraged. To get the funds from the subsidiary to the parent, the proceeds of the investment are donated in the form of an unrestricted grant. The parent recognizes the grant as income on its profit and loss statement, increasing its net assets and therefore strengthening its balance sheet, much like an equity investment.<\/p>\n

The parent now has money to make the operating investments needed to increase earned income. But how does the parent then get the funds back to the subsidiary to pay back its investors? Remember that the subsidiary is newly created and, as of yet, does not have any activity outside of issuing debt through the DPO. The answer is that the subsidiary can provide the parent a service, such as accounting, marketing, or loan servicing, with the value of that servicing contract equal to what\u2019s due to the investors.<\/p>\n