Geographic expansion. Customer retention. Service line repositioning. Diversification. These are all typical “strategies” of health and human service organizations. All demand some amount (or a lot) of innovation – and innovation takes capital. The question for many organizations – where to find that capital?
That was the focus of the session, Need Capital? A Non-Profit’s Guide To Financing New Services, featuring James Stewart, Chief Administrative Officer, Grafton Integrated Health Network, & Advisory Board Member, OPEN MINDS; Robert Kreider, President and CEO of Devereux Behavioral Health; and Amy Gallagher, PSY.D, Vice President of Whole Health, LLC at the 2016 OPEN MINDS Strategy and Innovation Institute.
First, some definitions. As Jamie explained in the session, there is a difference between cash and capital. Cash is used for the purchase of goods and services for an immediate purpose. Capital is more about the long-term. It includes cash, but also assets (such as investments and stocks) that could be deployed for future development. For-profit organizations typically get capital for expansion and innovation from the equity market – they sell equity in the organization for a share of ownership. But, non-profit organizations don’t have that option. So what are the options for non-profits? Our panel had a robust discussion of the alternatives.
Loans – Loans come in many forms and from different sources, all of which need to be investigated to determine the best option. Small business loans are a government-guaranteed source of capital (for those who have a tolerance for paperwork and bureaucracy). Lines of credit, typically from banks, can also be a source of capital that can be tapped at the borrower’s discretion. Mr. Kreider’s overall advice when thinking about talking to banks or a foundation about a loan is to “think like a banker” – meaning come prepared with a value proposition, a business model, and a clear financial plan. Your goal is to convince the decision maker that your organization is a good investment.
Grants – Many non-profits are familiar with grants from corporations, foundations, and governments as a financing option. They are often a good option for start-up capital when you are beginning a new program (see Moving Telehealth Beyond Grants) or looking for funding for a specific consumer need (see Are Health Plans The Future Of Social Service Funding?). There are two issues to keep in mind when it comes to grants as funding sources. One, don’t reply on most grants as a long-term, sustainable source of funding. You need a plan for what you will do when the grant ends. Two, not all grants are a fit with your organization. Don’t waste time and resources applying for grants where you are uncertain about the return-on-investment (ROI).
Social Impact Bonds (SIB) – The SIB model involves private investors making a loan to a provider organization to start and manage a specific program. A government agency then agrees to contract with that provider organization for the specific program – with a stipulation that payment will be made only if the organization meets agreed-upon performance requirements. This model has the potential to be a high-risk venture, so you must ensure that you are prepared to collect and report data on performance and deliver on the required metrics (see Have Social Impact Bonds Had An Impact?).
Partnership – Forming partnerships, joint ventures, or affiliations with financially strong organizations can open up new financing possibilities. Consolidations offer the opportunity to rebrand, the opportunity for service line diversification, the ability to spread the costs of enhanced infrastructure across a larger organization, and the ability to build redundancies in the leadership team (see Is $400 Million The Number?).
Real Estate Investment Trust (REITs) – REITs allow investors to pool funding to buy property and collect dividends, essentially becoming a “pass through” organization with some tax benefits. Though REITS are typically utilized in for-profit ventures, this tactic is increasingly being used by non-profits. For example, an organization could sell group home facilities as a REIT, so that the building is sold, but then lease it back for group home purposes (see Nonprofits Pull In Investors To Tackle Housing Affordability and Nonprofit Firms Form REIT).
Sale/Leaseback – Under a leasing strategy, an organization can sell their existing assets to a qualified leasing partner, and then lease it back from them. This is most common with real estate assets, but it could also include things like information systems, or vehicles. This offers organizations some flexibility and stability (see Underleveraged? Working Assets As A Capital Strategy).
For-profit subsidiary – New service lines don’t always fit with your organization’s culture and can be better managed as a spin-off or subsidiary. This model can allow organizations to access investment capital (like for-profit organizations) to launch new service lines, take on different risks, and expand their capacity in new areas (see The Profitable Side of Nonprofits – Part II: Different Legal Structures).
Benefit corporations – Benefit corporations (B Corp) are a relatively new option that may appeal to non-profits. Currently available in 30 states and the District of Columbia, B Corp are a type of for-profit entity that makes mission, as well as profit, part of the company’s legally defined goals. This would enable you to keep some of the benefits of forming a for-profit subsidiary, while still considering your organization’s mission (see New ‘Benefit Corporations’ Could Be a Good Fit for Health Care Companies).
Whatever the path, the process of getting financing involves building a business case with a business plan – and understanding the path to profitability of your proposal and how “investors” will get their money back with a return. (For more, see Creating a New Venture: Best Practices in Building a Business Plan, A Case Study Featuring Meridian Services Corporation and Creating A Business Plan For Telehealth: Where To Start When The Grants Run Out.)
For more on launching new service lines, join us at The 2016 OPEN MINDS California Management Best Practices Institute on August 24 in San Diego, for the session, “Diversifying Your Revenue Streams: How To Successfully Launch A New Service Line.”