Boann, feds commit to loan guarantee for social finance intermediaries

Editor’s note: Thrive Impact Fund, of which Kristi Fairholm Mader is a managing director, has previously provided financing to Future of Good. Read our editorial standards here. 

A proposed national loan guarantee pool for small and medium-sized social finance intermediaries (SFIs) will be backed with capital from Boann and the Government of Canada.

The Impact Guarantee program aims to “aggregate guarantees from governments, foundations, corporations and institutions,” in order to spread risk across multiple guarantors. 

It is intended for SFIs managing between $1 million and $30 million, said Kristi Fairholm Mader, managing director of Thrive Impact Fund and co-lead of the Impact Guarantee. 

The loan guarantee, it is hoped, will allow small and medium-sized SFIs to mitigate risk should borrowers default on loan payments. 

“By de-risking investment opportunities, community lenders will be able to channel more private capital into communities that need it most,” read an announcement from May 28. 

The number of small SFIs is growing, Fairholm Mader has observed, and many are lending to organizations and entrepreneurs that might face barriers in accessing capital through traditional routes due to perceptions of increased risk.  

“We work a lot with non-profits and charities. It’s still very hard for non-profits and charities to get loans. They’re seen as risky because of a lack of collateral [and] because they have volunteer boards,” she said. 

However, if a small SFI incurs losses, it can have a significant impact on its longevity, Fairholm Mader said. 

The Impact Guarantee will be structured to allow for the sharing of losses between SFIs, a first-loss reserve fund, and a guarantee pool. Guarantors, such as foundations, governments, corporations and other large institutions, would be expected to commit in million-dollar increments until the pooled guarantee reaches $50 million. Guarantors must commit for five-to seven-year terms, and would only have to trigger a cash transfer in the event of a loss claim by an SFI.

The Fair Finance Fund, which is focused on Ontario’s food and farming sectors, said that an Impact Guarantee would mean “added security for [their] lending, more confidence for [their] investors, and the ability to finance even more resilient local food and farm enterprises across Ontario.”

Developing a new loan guarantee in Canada

The initiative to develop a dedicated loan guarantee pool for Canada’s social finance lenders has been co-led over several months by Fairholm Mader and Julia Grady, founder of 10C Shared Space, a community hub for the social purpose sector in Guelph. Over that time, they have co-designed the structure of the proposed Impact Guarantee with both SFIs and potential guarantors. 

Canadian industry is no stranger to the loan guarantee structure, with guarantees available to entrepreneurs for commercial loans and agricultural businesses for cash advances. 

For example, the Federal Indigenous Loan Guarantee Program, managed through the Canada Development Investment Corporation, helps Indigenous communities access commercial financing. 

Last month, Boann spent  $617,000 to help develop the Impact Guarantee, committing another $2.5 million as first-loss capital through the Government of Canada’s Social Finance Fund. 

In its written pre-budget submission to the federal government, the Impact Guarantee team has recommended that the Government of Canada itself become a guarantor in the program with a $50 million commitment, alongside those from foundations, corporations and other institutions. 

“By joining at this stage, the Government of Canada can meet its mandate to spend less on government operations while unlocking investment in parts of the economy that have been excluded from capital markets […],” they wrote. 

“It will ensure social finance dollars reach the highest-impact but most underserved parts of the sector – where traditional financing cannot or will not go.”

Fairholm Mader recognized that loan guarantees for the social finance sector exist elsewhere in the world, from the Community Investment Guarantee Pool in the U.S. to Australia’s Social Enterprise Development and Investment Funds, which ran between 2010 and 2016. 

At present, the Impact Guarantee team is focused on continuing engagement with potential guarantors, creating the structure of the program, and developing the underwriting, application and assessment processes for interested SFIs.

Analysis: Read Diane Berard’s deeper dive into SFIs here.