For companies committed to charitable giving, philanthropic grants have long been the most common tool used to fund organizations that do good. But grants are not ideal for all types of organizations focused on addressing social issues, particularly for certain types of for-profit social ventures and revenue-generating nonprofits. To help those organizations achieve impact at scale, some corporations are now providing social impact loans in addition to grants.
A social impact loan provides growth capital to ventures that are delivering financially and operationally sustainable solutions to social or environmental challenges. How do these loans differ from grants? We’ve identified four key differences between social impact loans and grants that highlight why more corporations should consider joining the movement of companies that are loaning philanthropic dollars to for-purpose organizations that are creating positive change.
1. A social impact loan will be repaid. A grant will not.
The most obvious difference is perhaps the most important. When a corporation gives a grant to an organization, that capital will go out and never come back. A social impact loan, which is made to an organization that has a financially and operationally sustainable model, will be repaid to the lender.
Good Returns secures a financial guarantee for all cycled capital so companies know their principal will be returned. Because cycled capital always returns, the corporate lender will be able to reuse that capital for another cycle, fulfill a philanthropic grant pledge, or reinvest it back into the business. For example, at the end of a cycle, the lending company can create twice the impact with the same dollars by donating it in the form of a grant to a different nonprofit. In this way, granting and social impact lending can work together to create increased impact for communities without increasing corporate giving budgets.
As mentioned before, giving in the form of a social impact loan can enable a corporate giver to do good with resources they were never able to use before. We are currently launching a new cycle with funds from the corpus of a corporate foundation that are designated for investment as opposed to granting. Because cycled funds are guaranteed to be returned, the corporate foundation was able to use those resources for social impact loans to further the mission of the organization and create positive social impact.
2. Loan funds and grant funds are tracked differently.
Social impact loans are booked as loans rather than booked as grants. Funds that are cycled through Good Returns sit on the balance sheet as an asset, marked as loan receivables. Meanwhile, grants go on the corporation’s income statement as an expense.
An impact loan retains significant value for the corporation and its shareholders. Money that is loaned to a social impact venture remains an asset to the company, whereas a grant has to produce enhanced value for the corporation through the direct expense of the outgoing capital (minus any received tax benefit). In other words, the value generated by the grant for the corporation through the social return needs to overcome the amount of the grant itself.
3. Social impact loans are re-cyclable.
Because impact loans are repaid, they are able to be recycled year after year, creating new impact through new organizations. Grants are a nonrenewable resource, as those charitable dollars can only be given once. In the case of a social impact loan, the venture that gets the capital is able to increase their impact while maintaining financially sustainability, enabling them to repay the loan.
When their initial investment is repaid, the corporate lender can loan that same capital to another social impact organization. They can choose to re-cycle those same funds to another organization through Good Returns. Re-cycling allows companies to use the same funds to create impact again and again and again.
4. Social impact loans grow sustainable solutions to social challenges.
Social ventures are typically founded by innovative entrepreneurs and intrapreneurs who seek to maximize social impact (i.e. help greater numbers of people) using business-based approaches that will ensure their solutions are sustainable for the long term.
Social impact loans are generally only useful for organizations that have financially and operationally sustainable impact models - meaning they don’t require significant donations to maintain their operations. The loan capital is meant to grow models that can scale and create more impact and revenue rather than function as “bridge” capital between grants or donations.
At Good Returns, we only provide capital to organizations that have a sustainable revenue model through the sale of a product or service. Each impact organization that Good Returns selects for cycling must pass through our due diligence process before they receive any capital to ensure they can absorb the capital and utilize it in an effective, impact-focused way. Funding these ventures through social impact loans means corporations are providing growth capital to organizations that are creating positive change that can be maintained and replicated over the long term. This focus on long-term outcomes means that the impact generated through the Good Returns model can have a ripple effect throughout entire communities.
Grants and Social Impact Loans are Two Tools in the Same Toolbox
Both grants and social impact loans are valuable tools that corporations can use to accomplish their philanthropic goals, but grants are not the right tool in every case. Many worthy organizations that provide crucial social services will always require grants, sponsorship, and other types of traditional donations in order to keep operating. But for sustainable ventures that are delivering innovative solutions to individuals and communities in need, social impact loans can be a much better fit for their growth capital needs than grants (or commercial loans). The bottom line is that social impact loans are an excellent supplement to grants and other traditional forms of charitable giving.
Good Returns helps our corporate clients diversify their giving practices and do more good with less risk and less cost. Contact us to learn more.