Social Impact Bonds — The Newest Funding Wave?

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Although pioneered in the United Kingdom, social impact bonds have captured the attention of U.S. philanthropists, governments and investors as a new approach to funding social programs. Several American cities have started the ball rolling here by paying certain social service providers based on their success.

Nonprofits that contract with the government and others to provide services need to get up to speed on the basic concepts behind such programs.

Social Impact Bonds

Social impact bonds require that the government agency pay the nonprofit (or an intermediary that contracts with the nonprofit) only if the outcomes are achieved. Other considerations: These programs may incur higher costs for engaging a third party to evaluate results. And the investors (not the nonprofits) are subject to the risk, because they might not earn income or receive a return on their capital.

Traditionally, government agencies extend funding to nonprofit social service providers to pay for specific activities or delivery models. But what if the nonprofit lacks the upfront money to pursue the required outcomes? Few organizations have the deep pockets necessary to fully finance programs themselves.

That’s where outside investors — including philanthropists and foundations — come in. They supply the necessary capital and operating funds by investing in “pay for performance” bonds issued by the nonprofit or its intermediary. In exchange, they’ll receive a share of the governmental payments made for successful outcome-based performance.

The Advantages

Not surprisingly, government agencies are attracted to the idea of transferring risk from taxpayers to nonprofits and private investors. But social impact bonds may provide additional benefits to government bodies and taxpayers.

For example, the bonds could help fund the type of preventive services (such as medical screenings that facilitate early intervention) that could save more government funds down the road. Social impact bonds also will, hopefully, eliminate wasteful spending on programs that don’t work but have continued to receive funds because they undergo little evaluation.

Another benefit: Traditional funding frequently comes with tight restrictions that stifle novel but as-yet-unproven approaches. Social impact bonds are believed to foster creativity.

Are You a Candidate?

Social impact bonds won’t work for every social service nonprofit. They’re still novel and the extent of a capital market for social programs is uncertain. But if your service has measurable outcomes that are highly correlated with social net benefits that could save a governmental agency meaningful amounts of money, social impact bonds could be in your future.

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Looking for assistance with fundraising options? For additional information on our nonprofit services, please contact Jon Moll, CPA at 302.225.0600 or click here to email Jon.  In a brief consultation he can assess your situation and determine the best way to proceed

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