Persuading lenders to make a loan or extend a line of credit to a new business with a social mission is a hard sell. Even socially minded financiers have trouble taking on that kind of risk alone.
The Lemelson Foundation, in Portland, Ore., hopes to change that. It has started a financing program, First Loss Capital, to help promising businesses that manufacture products designed to help very poor people or improve the environment gain access to loans and other capital and establish a credit history.
Carrying on the legacy of its founder, Jerome Lemelson, a prolific inventor who held more than 600 patents, the foundation promotes invention as an engine for economic development and social change.
As a result, many of the businesses and nonprofit groups that Lemelson supports make products rather than provide services, which presents a financing problem, says Patrick Maloney, a senior program officer at the foundation.
“A lot of our grantees are moving lanterns or water-purification systems or irrigation-diversion screens, so what they face is a real gap in financing between when they manufacture the product to when they actually get paid for it,” he says.
Traditional companies often use loans or lines of credit to cover their costs during that gap, but many times commercial lenders won’t lend to start-up businesses or to nonprofit organizations, says Mr. Maloney.
Social-investment funds, like the Calvert Social Investment Foundation and RSF Social Finance, pool money from investors, which is then lent to nonprofit organizations and for-profit companies that also have a social mission to build houses, fight poverty, provide renewable energy, or other charitable purpose. Investments with the funds earn a modest interest.
Those funds have strict lending criteria that often preclude lending to a start-up business.
The ‘First Hit’
Through First Loss Capital, the Lemelson Foundation seeks to reduce the risk to a social-investment fund by lending the fund part of the money that it will, in turn, loan to the social enterprise. The deal is made with the understanding that Lemelson will absorb losses on the loan, up to the amount it lends to the fund. Lemelson has not set any specific spending limits or goals for the program, and says it hopes social-investment funds will suggest beneficiaries that might be worth supporting.
“We will make sure that our capital will take the first hit,” says Mr. Maloney.
One of the first beneficiaries of the program is D.light Design, a company in India that manufactures low-cost LED lights to replace expensive and unhealthy kerosene lanterns for people in rural areas who don’t have electricity.
The Lemelson Foundation is now working on a deal to invest $500,000 over five years with the Calvert Social Investment Foundation. Initially, the Calvert foundation plans to extend a $200,000 line of credit to D.light, which it hopes to increase as the company grows and begins to turn a profit.
The lighting company’s work is a good fit with the Calvert foundation’s efforts to alleviate poverty, says Lisa Hall, the foundation’s chief lending officer. Access to light, she says, is important for allowing people to study and continue their education.
But, says Ms. Hall, because the company was founded just three years ago and is early in its development, it wouldn’t have qualified under the Calvert foundation’s lending criteria without the “capital cushion” provided by Lemelson.
In time, however, she believes that D.light will get to the point where the Calvert foundation will be able to invest in the company without the guarantee provided by Lemelson’s capital.
“At that point, we would be very excited to take the Lemelson investment and target it to another transaction,” says Ms. Hall.
First Loss Capital draws on the strengths of both the Lemelson Foundation and social-investment funds, says Mr. Maloney.
“They’re taking advantage of our ability to take on risk,” says Mr. Maloney. “We’re taking advantage of the fact that they’re great lenders. They understand the business of lending in a way that we as a foundation don’t.”
Innovations is a new column that focuses on pioneering efforts by nonprofit organizations to solve social problems. If you have an idea we should consider for the column, send it to editor@philanthropy.com.