Marketplace lending has hit the nonprofit sector. LENDonate provides a new way to get funded for the important work they do and turn investors into heroes.
Vivienne Hsu is founder and CEO of LENDonate. Her vision to create a new ecosystem for nonprofit finances was formed through her 20 years experience in investment and portfolio management. At Charles Schwab, she oversaw active investments involving billions of dollars.
“About five years ago, I left Charles Schwab to do full-time marketing for a local nonprofit helping women start and sustain businesses,” Hsu said. “I saw that in the nonprofit sector there are structural issues that are difficult. It is much harder to run with a long planning ability. In for-profit, the revenue is predictable. In nonprofit, one year could have seven-figure donations and the next year have nothing. There needed to be a way to contribute to helping nonprofit management be more predictable.”
Part of the challenge in the nonprofit sector is the fact that so many organizations are small, with limited resources and volunteer staff.
The Vast Majority of Nonprofits are Small, Grassroots Organizations
“For example,” Hsu said, “a school presenting a fundraiser wanted to move from one property to another, which would have cost a lot. A bank arranged to finance half of it as a loan so the school only had to raise half the money. They were counting on a few layers, grants, to finance the other 50% of the cost. I thought it would be great if the people who are supporting them could create some mezzanine debt to help purchase the building and finance the project with investors being paid back when the grant money arrived. But nobody was offering this.”
The validation was there, so, in September 2015, Hsu quit her job to start LENDonate.
“We are self-financed and boot-strapped,” she said. “At the end of last year, we had our first round to raise capital. We just closed a round a couple of weeks ago and are interviewing for about a dozen employees. Everybody’s a contractor.”
LENDonate’s first loan was for $50,000. It’s second was for $75,000
“We want to see good support,” Hsu said. “This is an enormous market and close to half of the sector’s revenue is derived from earned income when most people may assume a heavier reliance on grants and donations.”
LENDonate likes to see diversified revenue sources for borrowers. Portfolios should have components of a healthy earned income and consistent private & public grant/donation support.
“We don’t want to give to people who can’t pay back,” Hsu said. “We are expanding access, but also getting a better rate.”
Nonprofits are not always in the best place financially, but in Hsu’s view, they have something that other entities don’t have: Passionate support groups.
“We can help them successfully finance,” Hsu said. “We help them crowdsource collateral among their own leadership, but their nonprofit board has fiduciary responsibility.”
Hsu shared an example where a nonprofit organization had a history of annual fundraising dinners that had been successful in bringing big donations.
“This year, they were looking at a fantastic guest list with hundreds of people,” Hsu said. “But they needed to put a deposit out to various vendors. That can stress nonprofit cash flow. We helped them borrow $50,000 for that purpose with leadership using their brokerage account as collateral.”
That arrangement took the nonprofit from high-risk to fully-securitized by liquid assets. They borrowed at 2.9% interest rate per annum with only six month’s interest. The lending capital for LENDonate comes from several types of investors. The first type seeks to support the organization while getting some income. The second type says, “I like what they do and want to make an impact with a return on investment” while the third type sees the risk return trade off is on-point.
“We won’t put out a high risk at 2.9%,” Hsu said. “For example, Kiva does a 0% interest rate.”
The reason LENDonate works is because there is a slice towards ROI and a slice towards philanthropy. Philanthropy is much smaller than ROI. Among the pie-seeking return, however the core investment (low risk) is a higher percentage. High risk gets the smaller slice.
“We are targeting institutions who support nonprofits and introducing a new tool for them to use,” Hsu said. “We are tapping into the marketplace lending stack that isn’t much tapped into: Low risk/low return expectations. In Prosper and Lending Club, even A-rated loans are unsecured. In this case, our loans are secured. We intend to push out various types of securities, and the quality of each of the collateral and interest rates are based on that. At first, we chose 3%. Some vendors chose to reduce their interest, which brought the weighted average to 2.9%. The second will be at 4%.”
LENDonate provided the time dimension. A $5,000 loan to a particular organization that a potential donor is unsure of can become a loan instead. In three months, if the lender’s situation clears up, they can push a button on the platform to convert the loan to a donation. They can convert one payment, multiple payments, or the entire balance. It allows people to overcome road blocks to donations.
Asked about the tech side of LENDonate, Hsu said, “We hired a specialist technology company — White Label Crowdfunding — to build it because it is not typical. We have 3,500 development hours behind it, and they also provided industry insight.”
Because of LENDonate, investors can support their favorite nonprofit and get more than a hero feeling in return.
Written with Nicki Jacoby.