The managers, directors, substantial contributors, and other foundation insiders (disqualified persons) are strictly prohibited from borrowing money from any private foundation they are associated with. Doing so is in direct opposition to their duty of loyalty and is a clear-cut case of self-dealing. Foundation insiders cannot use their position for private benefit, which precludes making loans from the foundation to themselves. All assets owned by a private foundation must be used for a charitable purpose benefiting the public at large.
A separate question is whether private foundation can make loans in general (not to foundation insiders). The answer to this question is yes, in general, private foundations can make loans. However, as explained above, any loans granted cannot be made to foundation insiders. If a private foundation makes a loan, it must somehow logically fit into its charitable mission.
In fact, the law explicitly allows private foundations to make certain loans that are a blend between grants and financial investments called program-related investments (PRIs). PRIs are mission-driven investments that are not subject to the same fiduciary standards for investments that private foundations normally must abide by. Loans that qualify as PRIs can take the place of grants in meeting the 5% distribution requirement.
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