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Social impact bonds can fund nonprofit social services and offer other benefits

June 14, 2017

Social impact bonds provide a relatively new method of funding social programs. Several U.S. cities already pay some not-for-profit social service providers through such programs. Might your organization benefit?

In a nutshell

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 — may come in. They supply the necessary capital and operating funds by investing in social impact or “pay for performance” bonds issued by the nonprofit or its intermediary. In exchange, they’ll receive a share of the government payments made for successful outcome-based performance.

The advantages

Investors generally assume the risk of social impact bonds because there’s a chance they won’t earn income or receive a return on their capital. Not surprisingly, government agencies are attracted to the idea of transferring risk away from taxpayers. But social impact bonds may provide additional benefits.

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

What’s more, traditional funding frequently comes with tight restrictions that stifle novel but as-yet-unproven approaches. Social impact bonds are believed to foster creativity.

Still novel and uncertain

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 nonprofit has measurable outcomes that are highly correlated with social net benefits, social impact bonds could be in your future. Contact us for more information.