Pioneering Grant Funding Strategies
When we talk about grants, we usually think about non-repayable funds, tools, physical assets or services provided by grant makers—typically governments, foundations, or trusts—to recipients such as non-profit organisations, educational institutions, businesses, or individuals. These grants are awarded based on specific criteria and come with strict guidelines on their usage.
At times, however, traditional grants are not a viable option for a funder with competing priorities. Other times, these grants may not provide adequate motivation for an enterprise to establish a long-term business strategy. Fortunately, public, private, and philanthropic funders have pioneered a number of innovative strategies in recent years, that combine different tools, to catalyze funding for purpose-driven organizations.
Recoverable Grants
Like traditional grants, recoverable grants offer an alternative, friendly source of funding to organizations that might not have access to commercial funding sources. Unlike traditional grants, which are typically non-repayable, recoverable grants are designed to be repayable under certain conditions. They therefore offer a unique blend of philanthropic support and financial sustainability, providing recipients with the capital they need while encouraging accountability and potential reinvestment of funds.
A criterion triggering repayment might be the completion of a project. Other criteria might be hitting certain revenue or profitability metrics. Generally, the terms of repayable grants tend to be flexible and tailored to the recipient’s financial situation. Additionally, the present an opportunity for recipients to build a track record of debt repayment.
Recoverable grants may or may not be fully repayable. A grant made to a social enterprise, for example, might take into account the large overhead costs and the low returns on a project, thus requiring only a percentage of the grant to be repaid. On the other hand, an arrangement could be made such that a grantor earns a return on the amount granted, akin to making an investment. This might cover certain costs born by the grantor, such as inflation, currency risk, etc. It should be noted that, depending on the jurisdiction, for-profit recipients might need to treat the grant as a forgivable loan, with the attached tax repercussions.
From an impact perspective, recoverable grants might be effective in a couple of ways. Firstly, the expectation of repayment encourages recipients to use the funds efficiently, which can lead to better project outcomes. Secondly, because the funds are recoverable, they can be reused for other initiatives, thus increasing the impact capacity of the grantor.
A current example of a recoverable grant strategy is the Commercial Acquisition Fund (CAF) launched by LA County’s Department of Economic Opportunity. The program aims to provide funding to non-profits and small business affiliates to build affordable housing for those communities most negatively impacted by the COVID-19 pandemic. It is funded with $10 million in public funds and will award recoverable grants ranging from $500,000 to $2,000,000.1
Forgivable Loans
Forgivable loans are a type of financial assistance where the borrower is not required to repay the loan if specific conditions are met. These conditions typically involve achieving particular milestones, such as job creation, completing a project, or maintaining operations in a designated area for a certain period. If the borrower meets these criteria, the loan is forgiven, effectively converting it into a grant.
Forgivable loans are commonly used by governments, foundations, and other funding organizations to incentivize behaviours or investments that benefit the public or achieve specific policy objectives. They can be an effective tool in catalyzing social impact by linking forgiveness to specific outcomes, such as CO2 emission reductions or the development of affordable housing units.
Forgivable loans provide social purpose organization with an opportunity to signal to the market that they qualify for below-market financing. It is also an opportunity to partner with mission-aligned funders, forming lasting allyships. It should be noted that, depending on the jurisdiction, for-profit recipients might need to book the forgiven loan as income and pay tax on the amount.
Forgivable loans are commonly used by foundations like the Kresge Foundation, which helped finance Propel Nonprofits, an arts and culture organization in Minneapolis, MN, United States, as a part of its Program Related Investments (PRI) initiative. Via Propel, the foundation was able to address a funding gap by supplying local community development organizations with working capital loans that were partially forgivable. The forgivable portion of the loans was contingent on the meeting of financial and reporting benchmarks. It was also mandatory for recipients to make monthly cash deposits, which would compel them to budget for and sustain a positive net margin throughout the loan term and create reserves for future needs. Propel took on the responsibility for tracking the effectiveness of the program in increasing the community organizations’ access to other sources of capital.2
Convertible Grants
A convertible grant is a type of grant that has the potential to convert into an equity investment or a loan under certain conditions. An equity option is only available to for-profit entities. Initially, the grant is provided as a non-repayable sum of money to support a project, initiative, or organization. However, if the project achieves specific milestones, such as reaching financial sustainability or securing additional funding, the grant can be converted into an equity stake or a loan that the recipient will repay.
Convertible grants are typically used in situations where funders want to provide flexible, early-stage support while retaining the option to participate in the financial upside if the project succeeds. This hybrid approach allows funders to balance their philanthropic goals with the potential for financial returns that can be reinvested in other initiatives.
Convertible grants can act as a catalyst at the early stages, helping projects scale and attract additional investment. They can support innovation by providing patient capital to test new ideas, and alleviate pressure on founders to generate returns quickly. A convertible grant can play a role similar to that of a SAFE (Simple Agreement for Future Equity) in venture capital.
As an example, the DOEN Foundation, based in the Netherlands, makes convertible grants of up to EUR 500,000 to founders and projects in the renewable energy sector worldwide. The foundation’s mission is to support entrepreneurs and initiatives working on sustainable and socially inclusive innovations to support transitions toward circular economies.3
Guarantees
A guarantee is a form of loan insurance provided by a third party (i.e. a party other than the borrower or the lender). In the event of default, the insurer/guarantor is promising to repay the loan on behalf of the borrower. The guarantee gives the borrower access to commercial funding that they may not otherwise have. On the borrower side, while covered in the event of default, there is incentive to repay the original loan as failure to do so may affect future ability to borrow. Otherwise put, repaying the loan presents the borrower with an opportunity to build a credit history, which would facilitate the acquisition of future loans.
From the perspective of the guarantor, often a philanthropic or public actor, compared to traditional grants, guarantees present an opportunity to provide wider support with available funds. There is, of course, a certain probability that the borrower will default and the guarantee will effectively transform into a grant. Guarantors might therefore opt to take a portfolio approach to diversify risk. The bottom line is that it is incumbent on the guarantor to discern the risks involved and to be comfortable with bearing the costs of default.
A funded guarantee is one that requires the insurer/guarantor to deposit the full amount, or a part of it, with the lender. This ensures that the lender will have access to all or some of the funds in the event of default. With this type of guarantee, the guarantor may charge the borrower a periodic compensation to cover inflation and/or currency risk and other costs on the amount deposited.
The more common unfunded guarantee does not require a deposit; instead it relies on the reputation of the guarantor.
An example in this category is the Annie E. Casey Foundation’s loan guarantee for the East Baltimore Revitalization Project (EBRP)4. The project was launched in 2019 with the aim of revitalizing a mostly racialized, lower-income community in Baltimore, MD, United States. The loan, facilitated by the foundation and others, allowed for the development of 40 affordable homes in the area, the introduction of community services, plans for new infrastructure projects, and economic development, including at least 300 new jobs. The support of values-aligned partners was crucial for the involvement of the community in the planing and decision-making phases of the project.
Impact on Indigenous and Muslim communities
Innovative funding methods, such as forgivable loans, convertible grants, and recoverable grants, offer significant benefits to Indigenous, Muslim and other communities that are often wary of traditional debt. These strategies provide access to essential capital without the burden and risks associated with debt repayment, which can be particularly important for communities that have historically faced economic marginalization and financial exploitation, and whose beliefs might reject the practice of charging interest. By offering funding that is either non-repayable or conditional on achieving specific outcomes, these alternatives align better with the values and financial realities of these communities, allowing them to pursue sustainable development without compromising their economic stability.
Moreover, these alternative funding models empower communities to engage in long-term planning and capacity-building. They enable the pursuit of projects that generate social, cultural, and environmental benefits without the pressure to prioritize immediate financial returns. This approach is particularly beneficial for Indigenous communities, where preserving cultural heritage, maintaining sovereignty, and protecting natural resources are often paramount. By reducing the financial risks associated with traditional loans, alternative grant funding strategies foster resilience and self-determination, helping these communities achieve their goals on their own terms.
Conclusion
Alternative grant funding strategies provide substantial benefits to both funders and the receiving organizations. For funders, these strategies offer a way to maximize impact by ensuring that funds are used effectively and, in some cases, recycled back into future projects through mechanisms like recoverable or convertible grants. This approach not only mitigates risk but also aligns the funder's financial and social objectives, allowing them to support innovative projects with the potential for sustainable returns.
For the receiving organizations, particularly those in marginalized or debt-averse communities, alternative funding strategies offer crucial access to capital without the burden of traditional debt. These flexible and conditional forms of funding empower organizations to focus on achieving their mission and long-term goals, fostering growth and resilience. By reducing financial pressure and aligning with the unique needs of these organizations, these novel financing models facilitate impactful, sustainable development that benefits both the funders and the communities they aim to support.
It should be noted that while grant funding might be awarded for the launch of a project or a business enterprise, it is not a sustainable source of long-term financing for most for-profit businesses. Therefore, grant-funded businesses looking for long-term success should plan to gradually reduce their reliance on this type of funding by developing a self-sustaining revenue model and incorporating private financing options.
Sources:
[2] https://kresge.org/wp-content/uploads/2020/06/propel_nonprofits.pdf
[3] https://www.get-invest.eu/fund/doen-foundation-convertible-grants/
[4] https://assets.aecf.org/m/resourcedoc/AECF-2010-EastBaltimoreResponsibleRedevelopment.pdf
