The world of nonprofit financing and fundraising is quickly changing. No longer are grants the only option for a 501(c)3 looking to raise capital; in the last few years, a myriad of alternative funding models have emerged. It can be hard to understand the mechanisms underlying each model, so we’ve broken it down for you.

Impact Investing

What is impact investing?

Investing in companies, organizations, and funds with the intention to generate social and environmental impact alongside a financial return.

Who makes impact investments?

•      Fund Managers
•      Development finance institutions
•      Diversified financial institutions/banks
•      Private foundations
•      Pension funds and insurance companies
•      Family Offices
•      Individual investors
•      NGOs
•      Religious institutions

Who receives impact investments?

Because impact investments require a financial return, they are mainly used in the nonprofit world for nonprofits that have a robust earned income strategy, especially microfinance.

Program-Related Investments (PRIs)

What is a PRI?

An investment made by foundations to support charitable activities that involve the potential return of capital within an established time frame.

PRIs include financing methods commonly associated with banks or other private investors, such as loans, loan guarantees, linked deposits, and even equity investments in charitable organizations or in commercial ventures for charitable purposes.

Who makes PRIs?

What separates PRIs from impact investing is the fact that PRIs are made by foundations specifically. Foundations commonly make PRIs as a supplement to their existing grant programs when the circumstances of the request suggest an alternative form of financing, when the borrower has the potential for generating income to repay a loan, and as a last resort when an organization — in most cases a charitable nonprofit but occasionally a commercial venture — has been unable to secure financing from traditional sources.

Who receives PRIs?

PRIs are often made to organizations with an established relationship with the grantmaker. While a large portion of PRI dollars support affordable housing and community development, they also have funded capital projects ranging from preserving historic buildings and repairing churches to providing emergency loans to social service agencies and protecting and preserving open space and wildlife habitats.

Pay-For-Success / Pay-For-Performance / Outcomes-Based Funding (PFS)

What are PFS contracts?

PFS (also known as Pay-For-Performance or Outcomes-Based Funding) is a broad umbrella term for any contract that pays based on outcomes instead of outputs. For example, contractors would be paid for reducing chronic homelessness, not for providing X beds in a shelter.

Who pays using PFS?

Governments, foundations, or other private entities such as hospitals and insurance companies (for social services) use PFS.

Who receives PFS dollars?

PFS/SIBs work best in funding preventative or early intervention programs, particularly those with measurable outcomes and high levels of empirical evidence. To date, PFS agreements have focused predominantly on early childhood education and recidivism. Additional projects focused on child welfare, mental health, housing, maternal/child health, and chronic disease management are developing across the country.

These areas share a common denominator in that, if the outcomes sought are achieved (e.g., if recidivism is reduced), future expenditures (e.g., re-incarceration) can be avoided and cost savings can be generated. In the transactions to date, these arrangements have been designed to generate outcomes within five to seven years.

Social Impact Bonds (SIBs)

What is a SIB?

Governments decide what problems they want to address and then enter a contractual agreement with an intermediary (or bond-issuing organization) that is responsible for raising capital from independent investors including banks, foundations, and individuals, and for hiring and managing nonprofit service providers.

If the project achieves its stated objectives, the government repays the investors with returns based on the savings the government accrues as a result of the program’s success. (Taxpayers also receive a portion of the budget gains in the form of freed-up public resources, though the investors may need to be fully paid first.) A neutral evaluator, agreed on by both parties, is hired to measure the outcomes and resolve any disputes that arise. 

Who lends using SIBs?

The government is always the primary actor, as the goal of a SIB is to create government cost savings. The investors can be foundations, individuals, banks, corporations, or any other entity with capital

Who receives funds from SIBs?

Organizations that work domestically and provide a service of interest to the government are most likely to receive a SIB. Organizations also must have measurable outcomes.

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Because the field of alternative funding is relatively new, terms are often used interchangeably, making it challenging to understand the nuances of each funding model. We hope this quick guide is helpful as you consider pursuing alternative funding for your own organization.

Have you used any of these models to gain funding for your organization or have you granted funds using any of these models? Share your experiences with us in the comments!

Sources: 

• What You Need to Know about Impact Investing | The GIIN
• What is a Program-Related Investment? | GrantSpace
• Paying Attention to “Pay for Performance” | Nonprofits Assistance Fund
• Frequently Asked Questions: Pay For Success/Social Impact Bonds | Nonprofit Finance Fund
• Social Impact Bonds | Harvard Magazine
• What are Social Impact Bonds? | Center for American Progress