Case
Study

The Brooklyn Community Bail Fund (BCBF), now known as Envision Freedom Fund, was established in 2012 to free people who were in jail solely for their inability to pay bail and to advocate for the abolition of wealth-based detention. BCBF began paying bail to free defendants arrested for misdemeanors in April 2015, a few months before serendipity brought it together with SeaChange.

BCBF had not initially considered taking on debt given it was a startup with a novice executive director operating without any hard assets and with a limited operating history in a new and controversial area. At the same time, BCBF's lack of access to capital was limiting its impact and people were languishing in detention who could have been released, given additional funding. In addition to the individual impact, more funding and more individuals freed would increase BCBF’s ability to press forward on its principal advocacy goals, as it and other bail-paying peers were quickly becoming too large to ignore.

Given this, BCBF and SeaChange began to explore whether a loan could be structured on mutually acceptable terms. After some trial and error, SeaChange and BCBF agreed on a structure:

BCBF could “recycle” bail payments that returned to it for three years, after which the loan would be repaid from bail payments as and when they were received.

The loan would be non-recourse other than a 20-percent “first-loss” position (funded up front), which would allow NYPRI to get all its money back so long as at least 80 percent of those released from detention attended their later court dates. (This protected both parties against the uncertainty of the repayments.)

A NYPRI representative would join BCBF’s finance committee as an observer.

Both SeaChange and BCBF were a little nervous about the observer position because neither had done that before and there were potential conflicts.

Using the loan proceeds, BCBF was able to free 5,000 people from pretrial detention, becoming the largest bail fund in the country, which allowed it to play a larger role in the movement to abolish the cash bail system in New York. The loan also brought other investors to the table and was the template used when BCBF began paying immigration bonds to free individuals held in ICE (US Immigration and Customs Enforcement) detention. Some of the relationships gained through the loan also led to additional grant support. The SeaChange representative on the finance committee did not create any conflicts and brought a useful, outside perspective to organizational discussions over the years.

Lessons Learned

PRIs are not necessarily a suitable fit to address every nonprofit problem or need. In the vast majority of cases, nonprofits need grants more than anything else. When they do need loans, conventional lenders can usually provide them. However, the NYPRI-BCBF experience shows there are moments when flexible, impact-first loans can be transformative.

When exploring these opportunities, it is important for nonprofits to keep a few rules in mind:

(Almost) never seek a loan in lieu of a grant. If given the choice between a grant or a loan of the same size, always take the grant. While existing supporters are the most likely lenders, only ask them to consider a loan if it would be in addition to a grant or if it would be in a significantly larger amount. SeaChange’s nonscientific rule of thumb is to take a loan if it is five times larger than the grant would be. For foundations that are not already supporters, cannibalization is less of a worry. In fact, some foundations may find it easier to start a new relationship with a nonprofit through a “get to know you” loan rather than a grant.

Never borrow to cover operating deficits. Closing a deficit is not easy, but borrowing usually makes things worse. The only exception is if the restructuring plan includes the sale of an asset—usually real estate—that the nonprofit wants to borrow against until the sale goes through.

Never accept a loan without knowing how to repay it. A nonprofit should only borrow if they have an identified source of repayment (like the return of the bail/bond paid). This could be money due on a government contract, a committed refinancing when a project reaches a milestone, the proceeds from an asset sale, a committed gift or grant, or earned income in which the organization is highly confident. Leadership must be honest with the lender about the risks associated with the timing or amount of the repayment sources. It also pays to have a plan “Plan B” prepared in case things don’t work out.

Work constructively with the potential lender to find mutually agreeable terms. While failing to deliver on a grant is not ideal, defaulting on a loan is far worse. It can cause stress for the organization and its team, create contractual problems with donors and vendors, lead to a qualified audit, discourage donors, and make board members anxious. A secured lender can even seize the nonprofit’s assets. However, if the lender is a foundation seeking to make a PRI, their primary motivation is to advance the nonprofit’s mission. While they do want to get their money back, they should not want to set the borrower up for failure. The borrower and lender should work together to find terms that address the needs of both parties, including realistic contingencies. Things to consider include built-in extensions for project delays, partial guarantees from board members or other stakeholders, performance-based repayment schedules, flexible reporting requirements, and other forms of risk sharing.

Articulate how the loan will advance the nonprofit’s mission. Demonstrate how the organization will use the loan and the impact it will have. If the money is being used to make a long-term investment—a building, technology, etc.—calculate the lifetime impact. Also consider whether the funding will encourage, support, or make available other funders. The ability of flexible, risk-tolerant capital to entice others usually goes under the heading of “leverage.” For example, if a $1 million PRI loan allows $9 million in more conventional financing to become available to pursue a $10 million project the PRI gets “9 to 1” leverage.

Treat the PRI Lender Fairly. PRI is a limited resource and should not be employed in situations where a conventional lender would have been willing to make a loan on the same or similar terms. If the nonprofit is speaking to a PRI lender and conventional lenders in parallel, they should let the PRI lender know. If they end up borrowing from the conventional lender, they’ll have protected a relationship that they might need in the future.