Got myself a cadillac, but I can’t afford the gasoline

The brave new world of social finance is one that fascinates me as an observer of voluntary sector trends. One of these days I’m going to blog about the evidence – or rather what seems to me to be the lack of evidence – to support the development of the field, but in the meantime I wonder if it’s worth reflecting on a story about loan finance that recently ran in the New York Times. It would seem some nonprofits have got the downpayment blues.

The tax exempt bond market in the US is big – one estimate I’ve seen values it at $430 billion, whilst an estimated 70% of US nonprofits carry some sort of debt on their balance sheet. In the article Nonprofits Paying for Gamble on Finances (which seems to have caused a bit of a stir), the NYT reports that nonprofits of all sizes had issued bonds in the good years before the recession, in turn using the money to purchase assets such as buildings or equipment. The hope was that future donations or income streams such as investment returns would repay the capital and the interest. (A detailed explanation of nonprofit bonds can be seen here, while Dennis Young’s book, Financing nonprofits: putting theory into practice, illustrates how widespread borrowing and debt are amongst US nonprofits)

But as we all now know, the recession has poked many an organisation in the ribs: in this case organisations are finding that servicing debts taken out in good times is a higher priority than providing services or advocacy. Clara Miller, CEO of the Nonprofit Finance Fund, is quoted as saying “Debt is the fourth horseman of the nonprofit apocalypse. Add it to the failure of governments to fulfill contracts, declining donated revenues and a surge in demand for nonprofit services, and suddenly a lot of nonprofits are faced with some very hard choices.”

Strong stuff. But could this happen in the UK? In some respects it’s difficult to tell given the paucity of sector-wide data on loan finance. Our research team estimated that in 2001 the sector was carrying approximately £1.8 billion in loan finance on its balance sheet, much of which was mortgage debt. Hardly insignificant, but research from the UK I think suggests that trustees are more risk-averse than their american counterparts, certaintly when it comes to attitudes to loan finance. Its interesting to see one US blogger on the arts thinks our risk-averse governance might be needed a bit more in the US.

But back to the US. Andrew Taylor, a blogger who writes about arts organisations, observed in a recent article that “a nonprofit is charged with exploring any resource it can bring to bear — ever balanced against the risk of using that resource” And he finished with a great analogy that pretty much sums up loan finance: “A circular saw is a potentially deadly device, but it’s an essential tool for building big things. We can’t stop using the saw. But we can certainly learn to use it with more humility, focus, and intent.”