Grants can be critical to help a nonprofit’s mission. Yet for innovative, growth-oriented nonprofits, it can be challenging to raise adequate funds to meet the organization’s objectives through traditional fundraising alone. Alternatives, like taking on debt can often saddle nonprofits with burdensome liabilities which come with potential risk of default or at interest rates that can limit impact potential.
49% of all nonprofit revenue comes from fees for service, which can include things like the gym memberships issued by a local Y chapter, or debt servicing fees and interest received by a local nonprofit Community Development Finance Institution. For these nonprofits, and even mission-aligned for profits, recoverable grants, grants that can return capital back to donors, may prove critical to help scale their impact, while keeping donors engaged throughout the life of the grant.
Nonprofits and mission aligned for-profits often early in their exploration of recoverable grants often ask us how to get started. After supporting donors in over 100 recoverable grants, we at CapShift encourage nonprofits to consider these steps when starting to raise recoverable grant capital:
#1: Clarify your recovery model
- Bridge funding: Recoverable grants can cover short-term funding gaps for nonprofits that already have revenue streams. Most often, this anticipated revenue may be in the form of pledges from large, institutional funders, or purchase orders in place. For example, one organization uses recoverable grant funds before other funding comes through, enabling the organization to act immediately to provide essential humanitarian services. Funds are then repaid to donors when funding from larger institutions arrives.
- Scaling nonprofit growth: Recoverable grants can be used as capital to invest in an organization’s operations and capacity building. One example of this is a nonprofit focused on funding efforts to conserve forestland and prevent wildfires. They used recoverable grant capital to bolster their team and operational capacity, ultimately enabling them to scale one of their offerings and use the revenue from that offering to recover the grant capital.
- Supporting catalytic innovation: Recoverable grant capital can enable an organization to take risks that may have the potential for transformational impact. One organization uses recoverable grant capital to support early-stage climate technologies that could possibly achieve gigaton-level emissions reduction. These kinds of investments are good fits for recoverable grants because they go beyond the risk suitable for conventional venture capital but could have transformative impact on our climate and society if they are successful.
#2: Set the terms
There is no ‘right answer’ or magic bullet for the optimal recoverable grant term or structure. Terms should be set to maximize your organization’s impact potential. However, when approaching a wide donor audience, particularly those who may be more used to traditional forms of grantmaking, consider the following:
- Term length: Donors may be more familiar with term lengths of 5 years or shorter. Longer terms may still be compelling for the most patient donors, but think about whether a 5-year, or shorter-term length can work with a donor’s comfort level and still be additive to your organization.
- Timing of recovery payments: If your model allows it, offering recovery payments throughout the grant period via quarterly or annual recovery payments can be beneficial. It is a great way to provide regular touchpoints to donors throughout the life of the grant and instill confidence in your nonprofit’s operations.
- Fees: Fees are less common with traditional grantmaking. If fees are required to sustain your recoverable grant program, consider whether they may be taken from any grant principal or additional upside a donor may be receiving. Also think about whether fees are incurred up front or upon recovery of the grant.
- Minimums: Keep minimums accessible to donors, while considering an amount that makes sense for your organization. Many nonprofits that CapShift works with offer recoverable grants starting at $25,000 up to $100,000.
Regardless of terms, all compelling recoverable grants clearly articulate how funds will be used to create differential impact and can demonstrate how funds will be tracked and monitored over time.
I’m not a nonprofit, can I still benefit from recoverable grants?
Recoverable grants are the easiest to execute when the receiving entity is a U.S.-domiciled public charity. If you are a non-US domiciled 501(c)(3) or highly mission-aligned for-profit organization, taking on recoverable grant capital can be more complex.
Some donors may be willing to conduct expenditure responsibility on an organization that is not a U.S. public charity, but for most organizations, selecting a U.S. public charity to be a nonprofit intermediary may be the clearest path forward to accept recoverable grant funds.
At CapShift, we have found nonprofit intermediary relationships work best between organizations that share a mission or organizational alignment. Commonly, this may be a parent 501(c)(3) entity supporting a wholly owned LLC structure. Alternatively, some innovative nonprofits may find programmatic alignment with for-profit entities and choose to support them by accepting a recoverable grant and then making a strategic investment.
Ensuring you have the proper legal entity to receive grant funds is an essential first step in setting up a recoverable grant offering.
Not all organizations can accept recoverable grants, and not all types of projects align well with the use cases for this philanthropic tool. If you are a nonprofit or mission aligned for profit considering recoverable grants, understand how the tool can fit within the context of your existing funding model and asset size. Starting with one or two close, supportive donors willing to pilot recoverable grants on a small scale can be a great way to test the waters. If you have a donor who may be interested in supporting you with a recoverable grant and you would like CapShift’s help, please reach out with the details of your opportunity to firstname.lastname@example.org.
The information does not, and is not intended to, constitute legal or tax advice; instead, all information is for general informational purposes only. Any entity considering recoverable grant options should consult with an experienced legal and/or tax expert.