A Quick Look at an Innovative Funding Lifeline to Small-to-Midsize Arts Organizations

A recent study from the University of Maryland's DeVos Institute of Arts posited that foundations should consider withholding funding to small, resource-challenged arts organizations and instead focus on larger ones that will have the greatest impact.

The argument speaks to a cruel reality. Foundations often don't want to give money to small-to-midsize arts organizations that are struggling and don't have sustainable operating models. 

But what if the foundation got its money back? Perhaps they would they be more inclined to take a chance on a cash-strapped, small-to-midsize organization, who, despite lacking optimal financial management, nonetheless offers compelling programming?

That encouraging alternative lies at the heart of the Andrew W. Mellon Foundation's Revolving Loan Fund. Administered by the Nonprofit Finance Fund (NFF), the $1.1 million fund provides zero-interest loans to Mellon's small and mid-sized arts and cultural heritage organizations, helping them bridge funding gaps, face cash-flow challenges, and implement new strategies. Repaid loans then fund loans to other groups in need.

Since the fund's inception in 2009, it has allotted more than $3.8 million to 27 arts grantees across the country. Mellon announced a new agreement with the NFF that extends the fund through 2020.

This isn't the only fund out there making loans to arts organizations. Another such effort is the Arts Loan Fund, a collaborative program of the members of Northern California Grantmakers, which makes loans both to Bay Area arts organizations and to individual artists in the region. The MacArthur Foundation also bankrolls an Arts and Culture Loan Fund, which makes loans to small arts organizations that are grantees of the foundation or its key partners, mainly in the Chicago area. The New York Foundation for the Arts also has a Revolving Loan Program

It should come as no surprise to find Mellon in this space. As loyal IP readers know, the foundation has a strong track record in supporting programs that, on the surface, don't look like sure-fire money-making blockbusters (and we mean that in the most endearing way possible). 

Further, the loan fund underscores how foundations increasingly are thinking outside the box in terms of coming up with ways to keep small-to-midsize nonprofits in business. After all, what are the alternatives? To let small organizations wither on the vine and consolidate funding in the hands of larger ones?

In the aforementioned DeVos study, the study's authors proposed a "third way" to keep struggling arts groups alive—more robust partnerships whereby large groups support smaller ones in a kind of symbiotic relationship. Ultimately, Mellon's support for the NFF suggests yet another option—allotting funding to smaller organizations with the assurance it will be repaid. Because many arts organizations do have revenue streams—e.g., from membership, ticket sales, and merchandising—they are a more logical lendee than nonprofits that are entirely dependent on grants and donations.

Needless to say, this is all part of a larger story about how financial innovation has been surging in the philanthrosphere, with more foundations exploring ways to harness more of their capital to advance their mission, beyond the small sliver that typically goes to grantmaking. We've tracked the spread of impact investing across multiple areas—especially housing, energy, and education—but hadn't paid much until now to what new models might mean for arts organizations. Mellon's Revolving Loan Fund is notable in this regard.

"This is a powerful example of how financial innovation can extend the impact of philanthropic dollars," says managing director of Nonprofit Finance Fund, Norah McVeigh. "Grants aren't the only way that foundations can support nonprofits. There is tremendous need for flexible money that nonprofits use to invest in ways that promote both short- and long-term financial health."