France’s “Low Rate Loan” Model Paves the Way for Recoverable Subsidies in the United States

(Illustration by iStock / Sasha_Ka)

A DEATH, a French microcredit organization, has granted more than 160,000 microcredits to entrepreneurs in France and beyond since its creation 25 years ago. In 2015, he raised a Associative Title (TA), a soft loan that non-profit organizations obtain through private investors. The 10 million euros ($ 11.2 million) loan was the first of its kind under new French law. It enabled ADIE (Association for the Right to Economic Initiative, or “non-profit for the right to economic empowerment”), to extend its microcredit services to 24,000 individuals in 2017, compared to 16,600 in 2014. By comparison, the organization raised 1.3 million euros ($ 1.5 million) in donations from other sources in 2017. ADIE is expected to reimburse investors over a period of 8 years at an annual interest rate of 2%. allowing the non-profit organization to grow at an affordable cost.

In the United States, nonprofits also need new sources of capital to tackle areas of the economy where traditional markets have failed. Over a three-year period over the past decade, 30 percent of US nonprofits have lost money while more than 50 percent have lost money. less than a month of cash in reserve. In addition, of the more than 200,000 associations created between 1975 and 2008, only 201 achieves annual revenues exceeding $ 50 million.

This struggle to raise funds could be helped by the implementation of something like French TAs in the United States. “Recoverable grants”, a financial tool in which non-profit organizations agree to reimburse private investors for the principal amount and possibly an interest rate, depending on their overall financial performance or that of a specific program, are a emerging patient, affordable and flexible form of capital in the United States. For example, CapShift, which helps funders and account holders make impact investments, has partnered with a leading international nonprofit to raise recoverable grants to accelerate the delivery of vital supplies like as vaccines, mosquito nets and food supplements the children need.

Like TAs, recoverable grants provide a model for bridging philanthropy (giving gifts or outright grants) and investments (recovering principal alongside potential returns or interest payments). However, they are on the other side of the spectrum: TAs, no matter how lenient the repayment terms, remain loans in the end; recoverable grants are tax deductible for donors, although many include repayment agreements as well. However, recoverable subsidies are not defined by law in the United States (the IRS mentions subsidies whose “”reimbursement is only required in certain circumstances“), donors and regulators would benefit from taking a closer look at some of the unique characteristics of French TAs.

The French model

Legally defined in 1985, TAs allow French associations – the equivalent of 501 (c) 3 non-profit organizations in the United States – to build up their long-term assets via private investors.

TAs effectively allow French nonprofit organizations, which depend primarily on public grants and government contracts for their income, to extend their source of funding beyond public or philanthropic sources. TAs were little used during their first 30 years of existence due to interest caps which deterred private investors. A law passed in 2015 relaxed the interest limit, triggering a new wave of TA.

TAs are essentially low-interest loans, or subsidized loans, but uncertainty remains about what will happen if a TA is not reimbursed; France has not created a legal precedent.

By law and design, the capital provided through TAs has many characteristics that appeal to US nonprofits struggling to raise funds. This capital is:

  • Patient: Investors expect to wait at least seven years before the principal begins to be repaid.
  • Affordable: The non-profit borrower benefits from an interest rate capped by law at a few basis points above a quarterly treasury bill interest rate.
  • Soft: The non-profit borrower decides when to start paying off the principal. To protect the investor, the borrower may have to set up repayment reserves, the amount and procedure of which are specified in each TA agreement. After seven years, if and when the reserves reach a certain amount, the lender can have legal recourse to the funds.

Other large French associations have followed ADIE. Acted, the humanitarian aid agency, raised € 6 million ($ 6.7 million) through TAs, while UCPA, the French equivalent of the YMCA, issued € 3 million ( $ 3.4 million) from AT. More recently, ALIMA, an emergency medical care provider, raised 2 million euros ($ 2.2 million) from six institutional investors to fund its expansion plan.

History of flexible capital for American nonprofits

For decades, many organizations and individuals in the United States have called for more patient and affordable capital to support nonprofit organizations. In 1969, for example, regulators legally defined program investments (PRI) for foundations to enable them to align their investment assets with their charitable purpose.

The next step in improving U.S. nonprofit funding with the recipient in mind is to engage with regulators to legally define recoverable grants and formalize their terms. Greater regulatory clarity would set a precedent, reduce legal and structuring costs, and shorten the fundraising timeline for nonprofits, thereby saving resources that could be further deployed to support program activities.

For starters, US regulators could formalize a tool offering a term of seven years or more and having a conditional repayment clause. The typical duration of traditional grant commitments is one to two years, without waiting for reimbursement. Payment over a seven-year period, while arbitrary, would allow for longer-term planning and implementation. To ensure affordability, regulators could cap interest rates at a premium above a specific floating rate linked to inflation through the consumer price index. American philanthropists and impact investors could go even further than the French model by linking returns and principal repayment to impact results rather than financial performance, which would make recoverable grants a new type of pay for success. Ultimately, all of these steps should allow nonprofits to invest in critical infrastructure, expand their programs, and develop long-term plans.

The terms and conditions of a seven-year soft loan or repayable grant favor nonprofit recipients rather than the preferences of many investors. Nonetheless, recoverable grants expand the financial toolbox of mission-oriented investors by falling between a traditional grant and an investment. We think they might be appealing for certain purposes and deserve a place on the return continuum. Recoverable grants can also make nonprofits more attractive to impact investors – individuals and organizations investing with the intention of generating positive and measurable social and environmental impact in addition to financial return. With recoverable grants, the funder can reasonably expect a tax deduction in addition to the repayment of principal and regular income from equitable interest payments.

Look ahead

At a time when the American and French governments are reduce government support for social programs and philanthropic donations are on the decline, TAs and similar funding models can help close this funding gap. There are early signs that TAs have been able to catalyze more private capital to support the balance sheets of nonprofits. In the United States, they were used in successful pay models and we are developing several at CapShift, working with leading nonprofits and donor-advised fund sponsors as providers of capital. Such tools, on both sides of the Atlantic, can be a catalyst to help nonprofits continue to meet the social and environmental needs of today and tomorrow.

Read more stories from Alexandra chamberlin.

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