Program-Related Investments vs. Traditional Grants: What You Need to Know

“Program-Related Investments are like planting a seed for social good. You’re providing the initial resources, but the project itself will grow and flourish, with a return that allows you to support yet more positive change.” – Invest Nust

Foundations are powerful drivers of social change, often funding healthcare initiatives and environmental protection efforts. Traditionally, the primary method for deploying resources has been through grants, but Program-Related Investments (PRIs) have emerged as a dynamic and strategic alternative. While grants are a mainstay, PRIs are increasingly being used to support organizations in achieving long-term financial sustainability. So, what’s the difference between the two, and which is the best choice for your foundation?

Traditional Grants: The Classic Approach

Traditional grants are a cornerstone of foundation funding. A grant is typically a direct financial contribution to a nonprofit organization or project that aligns with the foundation’s mission and values. The key feature of grants is that they are typically non-repayable.

Pros:

• Simple Process: The application and award process for grants is usually straightforward, making it easy for both foundations and nonprofits to navigate.
• Flexible Use: Grants can support a broad range of activities, including operating costs and program development, making them flexible and critical for nonprofit organizations.

Cons:

• One-Time Funding: Grants are often one-time payments, which can limit their long-term impact, especially for ongoing projects.
• Resource Constraints: Foundations with limited funds may find it challenging to provide continuous support through grants.

Program-Related Investments: A Strategic Alternative

Program-Related Investments (PRIs) are a unique approach where foundations invest in mission-aligned initiatives with the expectation of repayment, typically at a below-market interest rate. Unlike grants, PRIs aim to generate revenue that can be reinvested in other initiatives, making them a sustainable funding mechanism.

Pros:

• Sustainable Impact: As money is repaid, it can be reinvested into new projects, creating a cyclical, long-term impact.
• Attracts Additional Investment: PRIs can serve as “anchor capital,” encouraging traditional lenders and investors to support a project.
• Promotes Financial Discipline: The requirement for repayment encourages organizations to develop solid financial plans and strategies for sustainability.

Cons:

• More Complex Process: PRIs require a more detailed application and due diligence process than grants, including business plan evaluations and financial feasibility assessments.
• Eligibility Limitations: Not all organizations are equipped to repay a PRI, and those without a clear repayment plan may not qualify.

Choosing Between PRIs and Grants

The decision between a grant and a PRI depends on the goals and circumstances of both the foundation and the recipient organization. Here’s a quick guide to help you decide:

Choose a Grant If:

• You need immediate, unrestricted funding for general operations or short-term projects.
• The recipient organization has limited resources or a smaller financial footprint.
• The project has short-term timelines and doesn’t require long-term financial planning.

Choose a PRI If:

• You want to support a long-term project that has the potential for achieving self-sufficiency over time.
• Your foundation has a limited pool of funds and wants to maximize its reach by recycling investments.
• The recipient organization has a clear plan for repaying the investment.

Advanced Considerations for PRIs and Grants

Once you understand the basics of PRIs and grants, there are additional strategic factors to consider when making funding decisions:

Risk Tolerance and Due Diligence

Grants typically involve lower risk for foundations, as they are donations that don’t require repayment. PRIs, however, involve a higher level of due diligence to assess the financial viability of the recipient organization. Foundations must evaluate business plans, financial projections, and the track record of the organization to determine the likelihood of repayment.

Measuring Impact

Both grants and PRIs should be evaluated based on their impact in relation to the foundation’s mission. With PRIs, it’s important to integrate both social or environmental impact goals alongside financial repayment goals. Some foundations track the impact of a project on a daily or monthly basis, alongside corresponding repayment milestones.

Collaboration and Innovation

Foundations can get creative in structuring funding models. For instance, a foundation could combine a grant with a PRI, providing seed funding as equity or a loan to help scale up an initiative. This approach blends the benefits of both methods while promoting innovative, high-impact solutions.

Regulatory Considerations

PRIs must meet specific tax requirements, especially regarding the primary purpose of the funding. According to the IRS, PRIs must serve a charitable intent, not a financial gain. Due to the complexity of these regulations, foundations should consult tax professionals when structuring PRIs.

Finding the Right Fit

Selecting the right funding model for a project or organization is crucial. Foundations can partner with intermediaries—organizations that specialize in matching foundations with suitable PRI opportunities. These intermediaries can help assess potential recipients and assist with structuring PRIs that meet both the foundation’s goals and the recipient’s needs.

The Future of Philanthropic Funding

The philanthropic funding landscape is continuously evolving, and PRIs are likely to play an increasingly important role in helping foundations achieve long-term, sustainable social change. By strategically combining grants and PRIs, foundations can maximize their impact, supporting organizations that not only drive social good but can also sustain and grow their efforts over time.

Conclusion

The debate between grants and PRIs isn’t a simple choice—both funding mechanisms offer unique advantages depending on the specific goals and circumstances of the foundation and the recipient organization. Grants remain an essential tool for providing immediate support, while PRIs offer a more strategic, sustainable option for long-term impact. By understanding the nuances of each model and choosing the right fit for your funding strategy, foundations can make a significant difference in addressing social challenges and promoting lasting change.

As the world of philanthropy continues to evolve, a balanced approach using both grants and PRIs will be key to creating a more just, equitable, and sustainable future.