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Two team members from LifeWorks in the United States stand in front of COVID-19 donation boxes supported through impact investing.

Impact Investing During COVID-19: A Flexible Funding Approach

Guest Author: Neeraj Aggarwal

As part of the foundation’s COVID-19 response in the U.S., we committed to deploying capital through flexible funding models suited to the needs of each of our partner organizations. Crisis response calls upon all organization types — nonprofit, for-profit, or government — to leverage their expertise and resources to assist people in need. Using flexible funding broadens the range of organizations we can work with and enables such partners to take appropriate risks in responding to the crisis.

Since March 2020, we have committed $11 million in flexible funding in the U.S. spanning debt, equity, and career impact bonds. These investments are expected to impact 40,000 families from low-income communities and have already helped provide them with 11 million units of Protective Personal Equipment (PPE).

Here are three flexible funding models that we have used to date and lessons learned from those approaches.

No. 1: Working Capital Loans for Social Enterprises

To The Market (TTM), an ethical supply chain company, primarily served brands, retailers, and corporations prior to the pandemic. Seeing the need for PPE for frontline health workers, TTM leveraged its syndicated supply chain to source PPE for hospital systems serving low-income families across the U.S. Within a month, TTM sourced millions of much-needed masks and isolation gowns while creating and sustaining jobs for makers that were out of work.

As TTM started to receive more orders, it ran into a working capital issue: TTM had to pay its suppliers up front but would only receive payment from its hospital system customers 45-60 days later. As a start-up company facing a spike in working capital needs, TTM looked for creative ways to bridge this working capital gap. Without sufficient working capital, TTM was at risk of not being able to accept and fulfill additional orders from hospital systems at a time of desperate need.

To help, the foundation provided a seven-month, $750,000 loan to TTM. This enabled the company to source millions of units of PPE valued at over $3.6 million.

No. 2: Working Capital Loans for Nonprofits

In ongoing dialogue with our nonprofit partners, we saw funding challenges increasing as the pandemic wore on. In some cases, our partners had already secured government contracts, but the payment was delayed. In the meantime, these partners were still incurring costs. Without securing funding, they would have to potentially pause or discontinue impactful programs.

The foundation stepped in to provide partner loans. These loans paid the full amount of the government contract up front and could be repaid by the partner once they received the payment from the government contract. For LifeWorks, the partner loan is helping to keep its Rapid Re-Housing program for foster care youth on track; for American YouthWorks, the partner loan is supporting youth employment and certification attainment as part of its Texas Conservation Corp program.

No. 3: Growth Capital for Companies Serving Low-Income Families

While many businesses struggled with the uncertainty created by the pandemic, Edquity saw an incredible opportunity. Edquity works with colleges to disburse emergency financial aid to students, relieving colleges of this operation and distributing aid to students up to 93% more quickly. The federal stimulus package (CARES) released in April 2020 appropriated $6 billion for colleges to distribute as emergency aid. With many colleges already stretched, the need for Edquity’s services increased significantly. To service this higher demand, Edquity required growth capital to hire more team members and build out its technology.

The foundation contributed $1.1 million as part of Edquity’s fundraise. This timely infusion enabled Edquity to process 25,000 applications within six months and put it on track to service its increasing pipeline of colleges.

Lessons Learned

The pandemic has created unexpected challenges for the communities we serve and opportunities for our entrepreneurial partners to broaden and deepen their impact. Below are three learnings based on our experimentation with these partners.

  • The right funding can enable for-profit companies to address pressing needs. By virtue of the type of funding they raise, for-profit entities often lack the mandate to pivot or adapt their product / service to address the needs of low-income communities. We need more creative financial structures to enable for-profit companies like To the Market to respond to pressing needs.
  • Nonprofits and social enterprises often face hurdles commencing government contracts due to lack of cash reserves. Government contracts are often paid on a reimbursement basis or several months after the organization incurs expenses. We need more low-cost working capital loans to bridge organizations to committed government revenue.
  • Federal stimulus funds often face hurdles reaching individuals or households. Despite legislative appropriation of fiscal stimulus to support low-income individuals or households, such funds can be caught up in administrative bureaucracy for months. We need more products and services like Edquity that can lighten the load for agencies charged with disbursing these funds.

As we continue to work with partners helping communities face the fallout of the pandemic, these learnings will guide our efforts to provide flexible funding where it is needed most. In a time when organizations across the world need to stay nimble and adaptable to address ever-evolving challenges, we are empowering those we can to make the greatest impact possible. My hope is that we will emerge from this crisis stronger than before and can use our learnings to advance impact investing in new ways.

This is the first in a three-part series on flexible funding models used to support our partners during the COVID-19 pandemic. Stay tuned for the series’ next Insight, which focuses on how low-cost financing is needed to stabilize the small business / microenterprise ecosystem in Texas.