Many impact investments target a blend of financial returns and societal or environmental benefits. Across a wider portfolio, impact investments that seek above–market rate returns may work in concert with those that emphasize impact first in order to meet an investor’s overall financial and nonfinancial goals. Two related approaches on the impact-first side of the sustainable and impact strategy spectrum are recoverable grants and soft loans.
What Are Recoverable Grants and Soft Loans?
When an enterprise accepts a recoverable grant, it agrees to repay the funder if and when it meets certain thresholds for success. As the National Center for Family Philanthropy describes, a successful enterprise may repay a small percentage of a recoverable grant over time until it has repaid the original amount in full, using the rest to fuel growth. Similarly, soft loans are loans returning submarket or even no interest to the funder. Compensating for concessionary returns, both tools can help bolster the impact side of an investor’s holistic strategy.
Writing in the Stanford Social Innovation Review, CapShift’s Alexandra Chamberlin explains that a French approach known as titre associatif serves as the model for recoverable grants. Although the French version is actually a soft loan, paying 2% interest on eight-year notes, its structure appeals to patient investors who can accept a low interest rate and a flexible schedule.
Such instruments are gaining traction in the US. For example, the New York Forward Loan Fund helps small businesses, nonprofits, and small landlords who are facing COVID-19–related challenges but have had limited access to larger relief efforts. To finance the initiative, the state is offering a six-and-a-half-year recoverable grant that provides no additional return, according to CapShift‘s recent COVID-19 recoverable grants and investments report.
Similarly, Fair Food Network’s Fair Food Fund has expanded its efforts to support low-income families, local farmers, and food entrepreneurs as the pandemic’s economic impact spreads. To fund this push, it is offering a five-year soft loan paying 1.5% interest—an especially low yield considering the issue is subordinate to existing debt and only invests in riskier early-stage ventures.
Advancing Catalytic Capital
By emphasizing little more than the return of capital, recoverable grants and soft loans tread the fertile ground between traditional philanthropic gifts and market-rate impact investments.
According to Omidyar Network, both concepts are ideal for catalytic capital, as low- to no-return funds are critical to seeding early-stage innovation, especially in new and challenging market segments. In addition, such opportunities may fit well with donor-advised funds, as the potential impact does not stop with a single grant; once the funds from an initial grant are recovered, they may be directed to another recipient.
Recoverable grants and soft loans still have some work to do to claim mindshare in the sustainable and impact investing community. In addition to building awareness of the benefits, Chamberlin’s Stanford Social Innovation Review article explains that a legal definition of recoverable grants would help reduce related administrative and fundraising expenses.
While the technicalities are worked out, recoverable grants and soft loans may prove a compelling alternative to philanthropic measures, effectively complementing higher-return strategies while helping lift hard-to-fund programs off the ground.