Tactical Philanthropy Podcast: Clara Miller

Today’s interview is with Clara Miller. Clara is president and CEO of Nonprofit Finance Fund. NFF helps nonprofits match their passion and dedication with financial strength and sustainability. They provide impartial analysis, and flexible, frequently unsecured financing that nonprofits typically can’t get from other sources. Clara was voted one of 2006’s Power and Influence Top 50 by the Nonprofit Times. She has written and spoken extensively on nonprofit capitalization, and is the author of a number of articles on the subject.

I just got back from the Council on Foundations conference where I saw Clara speak. In this interview she explains the challenges that nonprofits face when trying to grow and how NFF is able to finance their expansion.

Expand this post using the link below to read the transcript.

[intro music]

Sean Stannard-Stockton: Hello, and welcome to the Tactical Philanthropy Podcast. I’m Sean Stannard-Stockton, author of the Tactical Philanthropy Blog, and principal and director of tactical philanthropy at Ensemble Capital.

My guest today is Clara Miller. Clara is president and CEO of Nonprofit Finance Fund. NFF helps nonprofits match their passion and dedication with financial strength and sustainability. They provide impartial analysis, and flexible, frequently unsecured financing that nonprofits typically can’t get from other sources.

Clara was voted one of 2006’s Power and Influence Top 50 by the Nonprofit Times. She has written and spoken extensively on nonprofit capitalization, and is the author of a number of articles on the subject.

Hi, Clara. Thanks so much for joining us.

Clara Miller: Hi. I’m happy to be here.

Sean: Why don’t you start off and just begin by telling us how you personally became involved in the world of nonprofit finance.

Clara: Well, it was an odyssey that began with a project, believe it or not, on energy conservation. We’d walk through buildings and give loans for energy conservation measures that would save money. The idea was that if it would save money, it could be financed by a loan.

And these were all nonprofits, all in New York. And even I, who was not an engineer, could look up at the ceiling when we were financing, say, a more efficient light fixture, and say, you know something? The ceiling around the light fixture is leaking.

And so it occurred to me that there was more to this than met the eye. There was more than just energy conservation measures, and more than just building maintenance. There was more than just access to capital.

So essentially, we went from one piece of the puzzle to a much more holistic view of what was needed. We’re now at a place where it’s a combination of all of those things, plus essentially reforming the entire nonprofit finance climate, if you will.

Sean: So what exactly does Nonprofit Finance Fund do? I think most people have the impression that nonprofits are financed almost exclusively by donations from individuals. I know that’s not true at all. So how do they get financed, and where does Nonprofit Finance Fund come in?

Clara: Well, nonprofits are hugely diverse for their numbers. Most of them are very, very tiny. Less than $50, 000 in revenue, which for a commercial enterprise is very small. But they go all the way up to being as big as Harvard University or Stanford University or a big hospital.

So they go from these giant institutions down to very tiny, essentially volunteer, Little Leagues or something like that.

Most nonprofits, or many, many nonprofits, are government contractors. They’re financed just the way a lot of for-profit corporations are, in that they undertake to provide services to people and the government under contract.

A lot of others get individual donor contributions, but most of those are larger organizations like universities and hospitals, who get the lion’s share of individual donations, if you eliminate houses of worship.

Then there’s bingo receipts and dinner dances and grants from foundations, and all of those are a piece of the puzzle. But the largest pieces of the philanthropic pie are individual donors. Fees for service is another big revenue source. And of course, within that is government contracting.

Sean: So where does Nonprofit Finance Fund come into the picture?

Clara: We are focused primarily on midsize nonprofits. We define that as organizations that have revenue between about $500,000 on the small side up to $30 million on the large side. People going up a very difficult path, going from pretty small–almost like sole proprietorships with five full-time equivalent workers–to being a much bigger scale entity.

There are all sorts of limitations and difficulties on that path. It’s difficult in the corporate world. Everybody knows that. It’s especially difficult in the nonprofit world. We focus our financing, our technical assistance, and our advice, our advocacy, on that group of organizations.

Sean: Can a nonprofit just go to any bank and get a loan? Are those your competitors? Why do they come to Nonprofit Finance Fund as opposed to a traditional lender?

Clara: Well, frequently we’re the only option they have. When we started out lending to nonprofits, very few organizations were lending to the organizations we were focusing on. Lots of banks lend to large institutes, but rarely to the organizations that we were involved with.

Now that’s opened up a lot. But they come to us because we’ll lend up to $2 million unsecured in a growth situation. And that’s a tough kind of lending, and it’s not something that banks like. Because it’s not particularly profitable, and it would probably make the regulators very uneasy.

We have a lot of bank partners who lend to us, but we’re the ones who take the credit risk on those kinds of loans.

Sean: So NFF has been in existence for over 20 years. But as we were discussing just before we started the interview, nonprofits still don’t have access to a really robust capital market.

Where do you see the nonprofit capital markets evolving from here? Are we going to have a sophisticated nonprofit capital market in the future, and if so will it be one and the same as the for-profit capital market system? Or will they forever be somehow two separate systems?

Clara: It’s a great question. I think of it as being one big capital market, in fact. The dividing line is profitability. And profitability, I mean for the sources of capital. The reason that nonprofits often can’t get access to capital, and for many nonprofits, for the big ones, there’s a wonderful capital market.

They’re doing great. They have built subsidy engines where they have 400 people who are focused on just getting individual donations. They have access to tax-exempt bonds. Many of them have endowments that are essentially large investment management businesses. So those guys have a lot of access to capital.

And then the tiny little organizations that do fabulous work, but it’s mainly volunteers or part-timers and have one event a year; they don’t really need a capital market per se. It’s in my view the ones that are the toughest are those that are midsized, and innovating, and growing.

And so what they need is access, not just to debt, but also to equity. And equity is a tough thing because everybody, imagine the most important thing about it has to do with ownership and return.

We have, NFF has, both a debt and an equity like product that we call NFF Capital Partners. And the idea there is that the important distinction is that you invest a grant in a way that behaves like equity profit. That is, it funds the deficits on the way to creating a sustainable organization that can be profitable because of the revenue sources it’s put together and the efficiencies its been able to invest in on the way up that growth path.

I think there’re lots of people experimenting, or at least some, in that space. And a lot of people interested in looking at it and thinking about it that way, which I think is very good.

And I think that there’re some organizations that probably can become profitable for-profit businesses with the right combination of market and investment. And then there’s no reason they couldn’t have equity that provides a return.

So, I think there’s a spectrum, but I think we should look at it as everybody being in the same capital market. It’s just tax status that’s different. And what tax status does is enable people to take contributions and get the benefit of tax exemption.

Sean: Tell us a little more about what it means to have equity in a nonprofit. I think that most people understand owning a share of a for-profit entity pretty cleanly, they own a percentage of its assets and a percentage of its future earnings, but what does it mean to hold equity in a nonprofit?

Clara: Well, you can’t really hold equity in a nonprofit right now because in fact the main beneficiaries of nonprofits are the people who benefit from the mission. And individuals don’t profit in the same way as they do for for-profit.

So the way we think about equity is to say what function does equity have in the enterprise? And nonprofits, this is kind of dweeby and technical, but in the nonprofit world we account for all revenue the same.

Whether it’s for a long-term equity like investment, or whether it’s a regular part of revenue that is going to come in reliably over time. And the latter is just plain revenue in the for-profit sector. And investment in building the factory of it or the business is equity in the for-profit sector. And it never goes through the income statement.

So that’s a difference in the nonprofit sector that’s not the same in the for-profit sector. And what that does is obscure the health of the enterprise. So one thing that’s very simple and it seems almost silly, is just accounting for equity properly–labeling it and saying this is building the enterprise.

My colleague George Overholser, who’s the founder of NFF Capital Partners, wrote a terrific paper that’s on our website called Building Is Not Buying. And it spells out what that difference is. And just understanding that and understanding what the rights and privileges of owning and taking care of equity versus buying from an organization and exploiting the enterprise is a huge distinction.

Most grant makers and most people in philanthropy don’t think about that. They don’t think of the enterprise level when they make their contributions or they give their grants.

Sean: So, NFF is itself a nonprofit, what’s your view on the dangers or the promises of for-profit entities entering the nonprofit capital markets? I mean you alluded that banks fund you and you move on to fund the nonprofits, but…

Clara: Oh, I think if the for-profits can do it and come into our markets, that’s something that we embrace. We think that the primary source of capital for all nonprofits is banks and always will be–they’re scaled. We have a harder time scaling because we exit a profitable market when the banks come into it.

And that’s one aspect of why we’re nonprofit and why we’re mission driven is because we’re always driving ourselves to the margin to look for a bigger challenge or the next important innovation. So banks are always going to be lending to nonprofits and have done so more and more.

There was a terrific, another article by a professor at UC Davis, who I think his name is Yurman, which was about nonprofit debt. And he pointed out that 60% of nonprofit organizations are in debt, are using debt. Sometimes in a very sophisticated way, which is similar to statistics on the for-profit side.

So, I think the debt challenge is more one of having people understand how you get well. I mean here we are on the midst of a predatory lending crisis; the same thing can happen if we view debt as something that is somehow able to replace revenue–that’s not going to work. So using debt well and making sure that organizations don’t finance assets that actually make their businesses struggle more and hurt the people, rather than help, can be a problem.

Sean: Well, Clara, this is a complex area, but thank you for sharing your expertise with us. I certainly think it’s an area that’s going to undergo tremendous growth.

Clara: Well, thanks for speaking with me.

Sean: This has been the Tactical Philanthropy Podcast; you can visit us at tacticalphilanthropy.com. For more information about Clara Miller, visit nonprofitfinancefund.org. Thanks so much for listening.