Can Recoverable Grants Be Used to Address Racial Inequity in Funding?

Early in his career, James Wahls was interested in learning about how capital flowed into communities—especially communities of color. This interest sprung out of his own experience navigating being a Black social entrepreneur in Detroit. To combat the bias he saw within the philanthropic industry, Wahls intentionally sought to use his work experiences to better understand how to uplift communities of color.

While working as a fellow on the W.K. Kellogg Foundation’s impact investment team, Wahls created investment structures to help entrepreneurs of color. This work led him down a path toward using philanthropic tools and other mechanisms to attempt to drive capital to small business nonprofits, particularly those led by communities of color.

Proponents of recoverable grants…contend that [they] help advance racial equity because when the money is returned, it is recycled to further fund other organizations. 

Now the founder and managing director of the Baltimore-based Revolve Fund, he attempts to use his resources to help organizations led by people of color access capital.

Using Recoverable Grants to Advance Racial Equity

Launched in 2021, Revolve Fund describes itself as a philanthropic initiative that “provides patient, interest-free capital to increase capital access for Black/African-American, Latinx, Native American, and other people of color (POC)-led businesses, nonprofit organizations, financial intermediaries, and venture funds.”

The initiative uses a funding strategy known as recoverable grants. Recoverable grants are grants that are meant to be repaid, in part or in whole, to the funders once a grantee reaches predetermined milestones. If these milestones are never reached, the recoverable grant transforms into a regular grant and does not need to be paid back.

“We’re hopefully increasing and improving their balance sheet, so when they do get other capital, they have more assets on their balance sheet versus more debt.”

Wahls—and other proponents of recoverable grants—contend that recoverable grants help advance racial equity because when the money is returned, it is recycled to further fund other organizations.

Revolve has a stated goal of “funding with an equity lens.” In an interview with NPQ, Wahls noted that he believes recoverable grants benefit people of color and marginalized groups in three different ways:

1. 1. They get capital to entrepreneurs of color that might be harder for them to attain otherwise
   2. They offer flexibility. Wahls says that because the recoverable grant model is not reliant on repayment from the grantee, it allows for the development of flexible terms: “We can take the time to understand the revenue models to ensure that our capital is not extractive.”
   3. Recoverable grants also allow funders to work more directly with the organizations and take a holistic approach to helping them meet their goals

Wahls also sees this funding model as a way for grantees to gain credibility and ultimately attract other funders: “Because there’s an element of repayment, it provides evidence to other market investors that this is actually a recurring revenue model—that if they can show repayment on a recoverable grant, that’s an opportunity that if we provide a loan or equity capital, there’s a higher probability of repaying it versus if I just give you a grant and there’s no expectation.”

He notes that, as much as possible, the recoverable grant is designed in a way that it’s an asset to the grantee and not a liability.

“We’re hopefully increasing and improving their balance sheet, so when they do get other capital, they have more assets on their balance sheet versus more debt. That’s something that we can definitely do as a recoverable grant that you can’t do if you’re providing a loan or some other debt product,” he said.

Skepticism around Recoverable Grants

Wahls is aware that many entrepreneurs of color have experienced financial trauma while working with banks and other financial institutions. Through Revolve Fund, he intentionally tries to offer a safe space.

“Why does the money get paid back to the donor who already got a tax deduction and is supposed to give the money away?”

“Some of our grantees have gone through the extended process and then be[en] rejected or have had a lot of questions about their personal finances come out,” Wahls says. “We try not to do that through our due diligence process, but at the same time give you an exposure to some of the questions that you may receive as you move up the capital spectrum to try to get debt equity capital moving forward.”

Unsurprisingly, there is some skepticism around grants that have to be paid back.

In an interview with NPQ, Chuck Collins, the director of the Program on Inequality and the Common Good at the Institute for Policy Studies—a progressive think tank based in Washington, DC—expressed a mixed view of the funding model. “Like any philanthropy, there are examples of the money being deployed well and to address real problems,” he said.

But he questioned the idea of the funds being recycled back to the donor organization: “It’s going to do good things and hopefully it’ll address racial equity issues, but why does the money get paid back to the donor who already got a tax deduction and is supposed to give the money away? It’s less about the recipient group and more about the system where the donors retain control over money over and over again.”

Still, Wahls believes that recoverable grants are a viable funding model. “I would argue that the recovery grant model for Revolve still offers the most flexibility,” he said.

Wahls noted that since Revolve Fund was founded, the initiative has raised $2.17 million, and grantees have reported that the initiative has contributed to over $11 million in increased capital assets. “For me, that’s a huge win,” he said.