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Why The Nonprofit Sector Can No Longer Dance Around Infrastructure Challenges

Guest post written by Kyle Zimmer, President, CEO & Co-founder of First Book. Kyle is a member of the Forbes Nonprofit Council. This article was originally published on Forbes.

Nonprofits are tackling humanity’s most complex problems — but without the fundamental infrastructure afforded our private sector counterparts.

There is an old saying about Ginger Rogers: She did everything Fred Astaire did — except backward and in high heels. I believe the same could be said about the social sector — we’re the Ginger Rogers to the private sector’s Fred Astaire.

While the social sector addresses entrenched issues, often ones that have perplexed humanity for generations, a major problem hinders that work: the basic infrastructure that bolsters the private sector is nonexistent for nonprofits. My organization has been lucky to have access to support, but after 30 years in the sector, I know we’re an exception. Challenges undercutting the field include:

Legal Issues: Although resources like LegalZoom can help with initial incorporation documents, an array of legal issues confronts nonprofits — trademark issues, tax matters, liabilities, and sponsorship filings in 50 states — but unless you can afford the hourly rates of solid legal counsel, you are usually flying blind.

Financial Matters: State and federal tax filings, payroll complexities, financial software decisions, multi-jurisdictional record-keeping, and major strategic decisions all confront nonprofit organizations. While corporations have capital that permits access to significant financial advice, social enterprises usually have no support in this critical arena.

Access To Data: While data is driving extraordinary change in the public and private sectors, the social sector has minimal access to data. Impact studies required by funders can cost hundreds of thousands of dollars, but few funders support this research.

Investment: One of the most critical failures for the social sector is the lack of access to capital. Without equity to offer and rarely having collateral that attracts investment, the social sector has virtually nothing to secure the capital needed to grow. Unfortunately, corporate social funding is often restricted to specific campaigns. Today there are meager investment options for long-term growth, operations, and reserves.

The Sector Needs Urgent Support

In 2018, Guidestar issued a report revealing that approximately half of all U.S. charities were operating with less than one month’s worth of cash reserves. Given the impact of Covid-19, one can only imagine what a similar report would reveal today. The pandemic has increased the need for social sector services while funding for nonprofits has declined. Accounting firm BDO U.S. indicated that 75% of nonprofits reported that Covid-19 negatively impacted revenues and funding.

The social sector has been trying to address the lack of infrastructure by bending existing institutions. This strategy has been ineffective. It is time to build solutions specifically for the sector. From my perspective, we have a myriad of models and ideas to draw upon that could prove instructive for the nonprofit sector:

• In her book Mutualism: Building the Next Economy from the Ground Up, Sara Horowitz presents the history of mutualism — a movement that enabled unions to build housing for their members, banks to serve their financial needs and access to health care solutions.

• The Small Business Administration (SBA) was created “to aid, counsel, assist and protect the interests of small business concerns, to preserve free competitive enterprise and to maintain and strengthen the overall economy of our nation.” While the SBA recognizes the importance of small businesses to the American economy, it’s worth noting that, despite the importance of the nonprofit sector, SBA loans are not available to nonprofits.

• The government could step in with guarantees to secure loans for the sector. Such support is not unprecedented. The federal government spends roughly $20 billion a year on subsidies for farm businesses, which include everything from direct cash payments to crop insurance.

• Another possible solution: a dedicated social sector financial institution that could establish policies and practices to address the sector’s need for operating funds. This could include mezzanine financing for expansion, as well as providing counsel on revenue-generating strategies to support nonprofit missions and financial instruments to help nonprofits scale their services.

This level of creative support could bolster extraordinary progress by the social sector on issues ranging from the Sustainable Development Goals to social justice and equity issues that have been exacerbated by the pandemic. We can no longer dance around the sector’s challenges — especially backward and in high heels. The world needs the social sector to succeed, with an infrastructure and creative support strategies comparable to those of the private sector.

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