Greater Good Blog

With historic levels of federal funding available stemming from recent legislation—such as the Inflation Reduction Act (IRA), the American Rescue Plan Act (ARPA), and the Coronavirus Aid, Relief, and Economic Security (CARES) Act—nonprofits have a choice to make: to pursue or not to pursue?

These laws have created incredible opportunities for more nonprofits to access government dollars, potentially accelerating social, economic, and environmental impact nationwide. Yet these coveted grants often come in the form of reimbursement-based awards that require organizations to complete the work before invoicing the funding agency or their intermediary partners. This structure means nonprofits must foot the bill for their activities upfront.

It can take anywhere from a few months to nearly a year to get reimbursed, and delays are common. Many nonprofits don’t have sufficient cashflow or capacity to manage government grants, forcing potential recipients to weigh the possible impact these grants could generate against the challenges of strained liquidity. To manage these tradeoffs, some organizations choose to drain unrestricted funding reserves. Others consider reallocating restricted funds to cover expenses—a serious compliance risk.

To cover upfront expenses, nonprofits may seek to take out a loan, but many mainstream financial institutions are hesitant to provide lines of credit to nonprofits, as they generally lack the assets or collateral to back the loan if anything goes awry. Then there’s the cost of borrowing money. Interest paid on loans is generally not reimbursable. With high interest rates—and little expectation for them to drop significantly in the near term—non-reimbursable interest expenses represent a significant burden on the nonprofit sector.

Reimbursement-based government grants pose a particularly acute challenge for grassroots groups with smaller operating budgets and limited cash on hand, many of which are led by people of color and are the most proximate to community needs and solutions. This leads to an unacceptable equity and access issue, as many BIPOC-led and -serving groups simply can’t accept the potential windfall of government funding. This reality diminishes the potential impact of these government programs in correcting historic and present-day inequities by precluding the communities who would most benefit from these funds from accessing them.

How can donors make a difference?

Fortunately, philanthropy can fill the gap to make it easier—or, in many cases, feasible—for more nonprofits to accept government dollars. Donors can consider the following tools:

• Provide direct, unrestricted grants to all your nonprofit partners. Doing so shifts the power to them, allowing organizations to allocate resources in ways that maximize and leverage other funding opportunities. Consider asking your grantees if they are considering pursuing government contracts and inquire if you can support them in accessing those funds.
• Provide gap financing through recoverable (or repayable) grants to cover the work prior to the established reimbursement cycle. When the public award ends, funders can recover the initial grant amount with no interest paid.
• For a more creative approach, provide grants specifically to cover interest paid on loans taken out to cover upfront costs. Refer to a nonprofit’s Form-990, Part IX, line 20 to find the total interest expenses paid that year.
• Expand into program-related investments (PRIs), which could include providing free or below-market-rate loans and lines of credit to nonprofits pursuing reimbursement-based government grants. Your partners will appreciate the opportunity to pay back these loans on more favorable terms; you may even consider forgiving them entirely. This is one way to address the cashflow crunch while shifting financial burden away from the nonprofit.

What can nonprofits do?

In the absence of additional philanthropic support, there are several steps nonprofits can take to reduce the burden of entering a reimbursement-based government contract. Consider these ideas:

• Network with your board: Do you have any bankers, credit union representatives, or other professionals on the board who could help you access additional bridge financing?
• Check your donor and volunteer lists: Do you receive donations, pro-bono services, or volunteer support from any banks? Might they be willing to also support your cashflow?
• Bank with your lender: If you decide to approach traditional banks for a line of credit, make that institution your primary banking partner. They may be more inclined to make you a loan if your funds stay in their ecosystem.
• Partner with established groups: Find a larger, well-capitalized nonprofit to be the contract-owner while your organization becomes the sub-contractor.
• Explore accounts receivable financing and factoring: AR financing involves using future invoices as collateral to secure a loan or line of credit. With AR factoring, nonprofits can sell their invoices to a lender at a discount and receive an immediate cash infusion. However, this means the lender now owns the invoices and will collect payments from the invoiced party.

These steps will help, but as many nonprofits know, cashflow and interest expenses are not the only considerations when accessing new grants. Managing a greater volume of work and additional funding streams is a major undertaking, especially given the significant complexity and stringent compliance requirements of government grants. It is important for nonprofits to ensure their financial systems are robust enough to successfully manage these grants.

Positioning yourself to receive reimbursements as fast as possible is paramount, and that means submitting perfectly completed invoices. This requires financial systems that can handle the complexities of fund accounting, time tracking, and staff allocations across different grants, as well as staff skilled in the intricacies of the funder’s compliance requirements. The faster you can get reimbursed, the less you will spend on interest expenses.

Remember that mismanaging a government grant can have significant repercussions for your organization, including risks to your reputation, relationships with other donors, and your staff members’ wellbeing. We encourage nonprofits to proactively assess their current systems, processes, and staffing to confirm they are equipped to manage and deploy funds at increased scale. Fortunately, the nature of these funding opportunities usually provides enough time between when a nonprofit wins a grant and when it must begin providing services.

Nonprofits can use this time to prepare for the administrative burden that will accompany the funding. Determine how you would prefer to manage the contract, either by strengthening your internal structures and staffing or by outsourcing those responsibilities to experienced professional service firms that specialize in this work. In making this determination, consider the long-term implications of making significant investments in your internal capacity to enable what may only be a few years of funding. Will you be able to carry the extra staff and systems once the grant ends or would it make more sense to work with vendors during this period?

For guidance in assessing your internal systems and capacity, feel free to reach out. Kiwi Partners specializes in helping nonprofits make decisions that maximize their impact while minimizing administrative burden.

For donors looking to build a strategy for supporting their grantee partners that takes into account how organizations can maximize other funding streams, we offer personalized recommendations based on your circumstances. Let’s have a conversation.

 

Tivoni Devor is a director with Arabella’s Kiwi Partners division. Ryan Ulbrich is a senior director overseeing Arabella’s grantmaking consulting practice.