Andy Posner

Special to the Philanthropy Journal

By Andy Posner, Founder and CEO of Capital Good Fund

More than 1.5 million nonprofits were registered with the IRS in 2015, according to the National Center for Charitable Statistics. For most, the barrier to fulfilling their mission comes down to one thing: funding.  Consider that 81 percent of nonprofit leaders say access to capital is their greatest challenge, according to Kathleen Kelly Janus, author of Social Startup Success.

The vast majority of nonprofits raise money entirely through philanthropy. But given that there are 1.5 million nonprofits competing for just $350 billion in charitable giving, organizations must devote tremendous resources to fundraising; for instance, according to double the donation, for every thousand fundraising emails sent to subscribers, nonprofits raised an average of just $42 dollars. Moreover, fundraising is a zero-sum game: one organization’s approved grant request means another’s is denied.

Borrowing is an option, but it can be a risky one. Nonprofits are not limited in the amount they can borrow, but not all debt is prudent. Debt for asset purchases such as property or equipment is not problematic because the liability is offset by an asset. (Think of a mortgage on a home: as long as the home is worth more than the mortgage balance, you are financially healthy.) Debt to fund growth, like personnel and technology, carries the significant downside of adding a liability, but not an asset, to the balance sheet. (Think of taking out a student loan; though it is an investment in your future, in the near-term you risk becoming “under-water”—having more liabilities than assets.) Like any business, an over-leveraged nonprofit’s existence can be threatened, as donors, investors, and others may become less inclined to support the organization. If anything, nonprofits are often expected to be more financially sound than for-profits. 

Founded in 2009 as a nonprofit U.S. Treasury-certified Community Development Financial Institution, Capital Good Fund provides equitable small-dollar personal loans to low-income families across the country. By 2016 we had financed $2 million in loans; seeking to scale our impact, we determined that we would need $20 million in new funding to meet our goal of covering all our operating expenses through interest income by 2024. We knew there was no way we would raise that sum through grants alone; we had to find a different approach.

It is easier to get people to invest than donate. Recent trends show an increasing number of donors are willing to accept a lower rate of return in exchange for impact. According to the U.S. SIF Foundation, socially responsible investing grew 38 percent between 2016 and 2018, reaching 12 trillion in assets invested across a variety of impact strategies. The question is how to tap into that $12 trillion market. Few nonprofits have come up with a way to do so, in part because we are not allowed to issue shares to investors and, as we have seen, debt for operating growth is risky, if not imprudent.

Our solution is to expand on an existing mechanism known as a Direct Public Offering, or DPO, which nonprofits have used for asset purchases such as real estate. The innovation is in how the DPO enables us to borrow for “growth capital”—operating expenses that enable revenue generation over time—without causing the aforementioned financial weakness. We created a nonprofit subsidiary, Social Capital Fund. We have borrowed $3.5 million from impact investors—individuals, family offices, foundations, etc. The $3.5 million is donated to Capital Good Fund, the parent, which uses the funds to grow.

As Capital Good Fund generates revenue from interest on the loans it issues, it pays a fee to Social Capital Fund to manage its loan portfolio. Social Capital Fund then uses this fee income to pay back the investors over time. Investors earn up to 8.5 percent, while saving vulnerable families hundreds to thousands of dollars in interest and fees, enabling them to build credit, and helping to tackle a $200 billion predatory financial services industry. It’s an obvious win-win.

Our model can be set up for less than $50,000 (most of the cost comes from legal fees) and solves a fundamental challenge faced by the sector. It does require that organizations find investors who are creative, patient, and care about impact, but unlike philanthropy, social investing is not a zero-sum game, and the pool of potential capital massive: $12 trillion (and growing) versus $350 billion.

This first-of-its-kind approach can transform how charitable organizations with a revenue model raise the funds they need to fulfill their missions. Since 2016, Capital Good Fund’s loan volume has grown 500 percent; assets have increased 650 percent; staff has doubled; and we’ve expanded to four  new states. Absent the DPO, none of this would have been possible.

Andy Posner is the Founder and CEO of Capital Good Fund, a Rhode Island-based nonprofit aimed at ending poverty by providing equitable loans to low income people to meet a number of financial challenges without having to turn to predatory lenders.