What Even IS Non-Grant Capital?

For decades, philanthropy has largely operated through one type of tool: a grant.

Grants have taken different forms, of course. Some are small and flexible, some are large and restrictive. Funders provide grants to help address certain challenges that alone, would be impossible to overcome. Grants are an essential part of helping our world become a safer, more prosperous, cleaner and better place for all of us to live.

And yet, increasingly foundations, family offices, corporate foundations, impact funds and even individual donors are starting to realize that grants, alone, may not address the impact gaps of our time.

As such, these donors are starting to explore non-grant capital as an addition to their funding toolbox.

So what is non-grant capital?

Non-grant capital is philanthropic funding (ie grants) that are used in different formats and with different expectations.

• It may be funding that is provided with an expectation of payback over time (like a short-term loan).

• It may even be funding that is paid back partially, or if certain programmatic goals are met.

• It's funding that can bridge the gap for organizations that would traditionally need debt or equity, but don't want to take that type of capital on their balance sheet.

• It may come in the form of a guarantee, or may be recyclable (ie paid back funds go back into a different part of an agreed upon component of the program).

It comes with a "partnership" or "business-type" component built in, recognizing that some funding recipients need funding in different ways. Bridging funding or financing gaps, covering certain overhead costs for a period of time, buying goods or services or testing a new approach are among a few examples.

The goal of non-grant capital is not to replace grants, but to expand the philanthropic toolkit.

Why would a funder use non-grant capital?

Let's use an example to show where and why non-grant capital could be useful.

Consider a nonprofit organization that has a successful job-training or health services program in one region of the world. This organization wants to expand into another region of the world. The need is there.

The expansion cost is $250,000. A grant would absolutely help. But what would help more is $250,000 of a recoverable loan (ie a grant that is paid back) to help start up the new programs and another $150,000 of grants to build out the infrastructure before the program begins to charge its nominal fees to participants. The nominal fees will eventually be used to pay back the recoverable loan and the $150,000 grant is kept on the balance sheet as charitable.

A financial institution may be willing to help, but their terms are too risky for the nonprofit, and interest is too high.

In this case, the non-grant capital isn't simply paying for an activity. It is helping create the financial conditions necessary for that activity to happen.

One of the most important distinctions in considering non-grant capital is not whether it's an either/or compared to grants. It's really about understanding what funders' partners need in terms of capital mixes, and what type of capital is best suited to solving the problems they address.

Sometimes a grant on its own is the most useful and relevant. Other times a capital portfolio that includes payback mechanisms, fee for service, revenue share, low interest loans and more makes sense.

What about recyclability?

A traditional grant is deployed once. But for a partner that has an operating model aligned with the use of non-grant capital, using philanthropic funding for recoverable purposes allows the funder to make their funding go farther.

These funds can then support another program component OR another organization.

That does not automatically make non-grant capital "better" than grants. Taking on repayment obligations can be inappropriate or potentially harmful when an organization's economics do not support them.

The structure has to fit the recipient.

So why aren't more funders using non-grant capital alongside regular grants?

While the use of a capital mix may make sense in theory to a philanthropic donor, sometimes their processes or operations aren't set up to make a mix of funding available to partners.

This is starting to change.

Many donors are starting to look at their portfolio and ask what types of capital would allow them to continue supporting these organizations in different and creative ways. They might ask questions like:

• Which organizations will always require grants?

• Which have reliable revenue but struggle to access affordable financing?

• Which could repay some capital if given enough flexibility?

• Which could attract commercial investors if someone reduced the early-stage risk?

• Which opportunities could benefit from using several different types of capital working together?

Those questions begin to reveal where grants are essential and where another form of capital might accomplish something grants alone cannot.

The result isn't necessarily less grant-making. It is more intentional capital deployment.

If you are a donor considering non-grant capital, you might find this assessment a good place to start. And if you are an implementing organization seeking a more flexible mix of capital, encourage your funders to consider meeting you where you are, and testing out new forms of capital.

Non-grant capital may be somewhat new and untested in philanthropy, but it's certainly not going away.