Discussing debt in philanthropy

Philanthropy, the act of giving to those in need, has been a cornerstone of human society for centuries.

In recent years, the use of debt in philanthropy has become a more widely discussed option and organisations such as the White Box Enterprises and Advisory, a for-purpose advisory organisation, are pushing the boundaries of how to utilise debt for job creation. 

One argument in favour of using debt in philanthropy is that it allows organisations to make a bigger impact than they would be able to otherwise. When a philanthropic organisation takes on debt, it can use the money to fund large-scale projects that may be too costly to fund through donations alone. For example, a charity that provides housing for people experiencing homelessness may use debt to purchase a large property that can accommodate many more people than they would be able to with their current resources. This can result in a significant increase in the number of people the organisation can help. 

Another argument for using debt in philanthropy is that it can provide a stable funding source. Many charitable organisations rely on donations, which can fluctuate greatly from year to year. By taking on debt, these organisations can ensure that they have a certain amount of funding each year, regardless of whether donations are up or down. This can help them to plan and execute long-term projects with greater confidence. 

Despite these potential benefits, there are also risks associated with using debt in philanthropy. One of the biggest risks is that the organisation may become over-leveraged and unable to repay its debt. This can result in the organisation having to be wound up, which would be a significant setback for their charitable mission.  

One way philanthropy in Australia has tackled this barrier is to allow philanthropists to loan charities funds on the provision that if the loan cannot be repaid, the loan can be converted into a tax-deductible gift. 

Provisions in the guidelines for charitable ancillary foundations provide for this option. 

However, this type of financial support must be managed carefully so that if the organisation cannot repay their debt, it doesn’t damage their reputation and make it more difficult to secure future funding. 

In addition to these risks, there are also ethical considerations associated with using debt in philanthropy. Some argue that taking on debt to fund charitable causes is essentially borrowing money from future donors, who may not be aware that their donations will be used to repay debt rather than directly fund charitable programs. 

Despite these risks and ethical concerns, as our charitable organisations become more sophisticated in their strategies to deliver their programs to a growing cohort of people in need, there are examples of philanthropic organisations that have successfully used debt to fund their mission here and overseas. 

For example, here in Australia, Save the Children’s has established an Impact Investment Fund to raise funding from investors and provide loans and equity investments to help grow startups and social enterprises that improve the lives of underserved children and families. 

Supported by Save the Children Global Ventures and leveraging Save the Children’s global network of programs and partners, the Fund helps social entrepreneurs and enterprises working on the social problems aligned with Save the Children’s mission to scale. 

In the US, the Robin Hood Foundation, a New York-based charity that fights poverty, has used debt to fund its operations since its inception in 1988. The organisation takes on debt in the form of low-interest loans, which they then use to fund their programs. By using debt in this way, the organisation has expanded its reach and significantly impacted poverty in New York City. 

Another example of a philanthropic organisation that has used debt effectively is the Global Fund to Fight AIDS, Tuberculosis and Malaria. This organisation raises funds through donations and government contributions, which they use to make low-interest loans to countries fighting these diseases. By using debt in this way, the Global Fund has provided a stable source of funding to these countries, which can help to ensure that they have the resources they need to combat these diseases. 

The use of debt in philanthropy is an interesting topic with potential benefits and drawbacks. While using debt can allow organisations to make a bigger impact and provide a stable funding source, the risk, as with all debt, requires sound due diligence, budgets, financial projections, and management. 

Debt, when used wisely, can create great wealth, and the benefit of that wealth through philanthropic contributions is worth exploring. 

To learn more, talk to Tabitha Lovett of the Harris Family Foundation for ideas on how to get more involved in philanthropy and charitable giving.