Leah Fremouw points out that for many businesses and large corporations, the use of debt to grow is considered a good thing.

Fremouw, who is the president and CEO of Bridging Virginia, wants to bring that thinking to the nonprofit world with the Richmond Community Investment Initiative, which helps 501(c)3 nonprofit organizations seeking funding through debt financing.

Bridging Virginia currently has signed commitment letters from the three participating philanthropic organizations with a 10-year commitment period: Richmond Memorial Health Foundation, Robins Foundation and the Community Foundation for a greater Richmond.  

Bridging Virginia, which aims to support minority businesses and nonprofits, is looking to increase awareness and educate nonprofits on utilizing debt as a tool, which Sara Santa Cruz, the group’s director of capital innovation, said can be “really foreign to them.”

Fremouw tells concerned nonprofits that debt financing signals “a moment of maturity” for them, because they are able to afford it. 

“Debt is a very strategic tool for businesses and entities to use,” she said. “Unfortunately, nonprofits don't use debt because we're kind of told not to or we think it's a bad sign that we now have to borrow money when we're used to raising money from donors and grants, but, you know, you ask a for-profit business, and it's a great moment when they can borrow money instead of bootstrapping.” 

One big question that comes with lending to nonprofits is who to sue for repayment if a loan goes bad, since the organizations typically don’t have an owning entity. 

That’s where Bridging Virginia steps in. As a Community Development Financial Institution lender, Fremouw said the organization is “built to kind of figure that stuff out.” 

She emphasized that their new initiative is not a donation or grant program, but rather the loan guarantees kick in only in the event of a loss. Cruz added that the pooled capital is not meant for emergencies, but rather to support existing programs and encourage future growth.

“The idea is that if, for some reason, you know, all the grants went away, and they had no money to pay off (the loan), this guarantee would come in and settle the debt, so they are whole, and they don't owe us any money,” Fremouw explained. “Therefore, no collections process would be triggered. The nonprofit would kind of be cleared of the debt, and then the capital would be put back into Bridging Virginia's lending activity and could be recycled to another nonprofit.”

To be approved, organizations must prove they can afford the debt and demonstrate how the loan would help them grow their work. The loan period varies, but can go up to six years, after which a borrower can reapply, assuming they’re in good standing. 

She added that the loan guarantee is not a dollar-for-dollar match; it’s 20 cents on the dollar.  

“If we give a loan for $100,000, only $20,000 of that loan would be backed with this guarantee,” she said. “So, $300,000 of a guarantee pool actually can facilitate $1.5 million in lending.”

The whole process, from application to loan awarding, averages in the range of 60 to 90 days, according to Cruz. 

The organization held an overview webinar in mid-June that had over 30 attendees, including current borrowers, interested nonprofits and guarantors. Cruz estimated that 90% of attendees were nonprofits and that they had received several inquiries as of early July. 

Fremouw believes that the nuances of nonprofit funding are often overlooked due to perceived simplicity for their business and financial models. 

“We think it’s just simply, you raise money, and you do good work,” she said. “We do, but how we use money is super, super complicated in a lot of ways for most nonprofits.”

What if the expected cash flow changes?

Cruz acknowledged that it’s not unusual for nonprofits’ cash flow to fall below what was anticipated. 

“In most situations, our relationships with our borrowers is one that they feel comfortable calling us and telling us when things aren’t looking great, so that we can be proactive instead of reactive,” she said. “There are things that we can do on our end, working with our borrowers to modify.”

These include working with borrowers to modify a loan or creating a payment holiday if more immediate relief is needed.

Cruz noted that the organization tries to be “high-touch” with their clients in order to prevent potential loan restructuring. 

In action

Fremouw said conversations about how foundations can do things differently financially, outside of grants, have been going on for the past two years, but the final push came earlier this year. 

A local nonprofit – whose name Fremouw requested be withheld for confidentiality reasons – had been approved for a federal grant that ultimately ended up getting delayed. By then, the organization had already hired additional staff and program supplies, so they were left scrambling to find money so they wouldn’t have to lay off their new hires or run the risk of not making payroll. Fremouw said Bridging Virginia provided the working capital and found a guarantor for the loan, and the nonprofit was able to return to normal operations with the loan and when the grant eventually came in. 

Contact Intern Haidyn Brockelman at hbrockelman@richmonder.org. The Robins Foundation is a Richmonder donor but was not allowed to influence or review this story.