3 Assessments When Considering Providing Collateral for a Nonprofit Loan

“No! Don’t do it!” is the most common response to the question “should I guarantee someone else’s loan?” The nonprofit that you support needs a loan to support their activities, whether it is to grow, bridge to an asset purchase, or invest in a program that will benefit the work that they do. Unfortunately, they need some help to qualify for this loan, and they have asked for your help. You want to help and even consider putting up some of your personal assets to make this happen. But you are not sure.

Board members or major donors are sometimes asked to provide needed collateral for the nonprofit loan – we will call them sponsors. These sponsors often wonder if they should do it. Today we will pose 3 questions that you should ask yourself when considering providing personal assets as collateral for a nonprofit loan.

Can I Afford the Amount of Collateral?

Occasionally we read about someone leaving a disproportionate tip at a restaurant and our faith in humanity is restored. We do not raise a red flag because the assumption is the tipper can afford it. So, the first assessment in providing nonprofit collateral is affordability, can I afford the amount of collateral that is needed? You should consider the following questions:

1. Is the nonprofit collateral amount pledged that the sponsor is financially comfortable with donating if the loan is unable to be paid back?
2. If so, it then begs the question “why not simply make a donation?”. 

For one, providing a nonprofit collateral for a loan as contingency encourages the organization to achieve financial stability and self-sufficiency. Stepping up only if the organization is unable to pay the loan back could also be the intended outcome of the generous sponsor. 

Another valid reason for a sponsor to use personal assets as nonprofit collateral is to delay selling an investment for several reasons, including timing of a donation deduction. For example, LENDonate accepts certain assets as collateral. As long as the nonprofit organization maintains good standing with the loan, sponsors do not need to sell the securities they put up as collateral. Many lenders will hesitate in taking 3rd party collateral because it could cause complications with the 3rd party resisting should the collateral need to be liquidated. LENDonate looks at the relationship of the sponsor to the nonprofit and values the shared goals in the social good that supports the sponsor’s willingness to pledge.

Would I Want to Donate to This Nonprofit?

Grandparents love watching their grandchildren grow up, and the idea of helping them buy their first car or house delight many. After all, they plan to pass on their wealth to their grandchildren, so being a co-signer on their mortgage may make sense, for example. Similar to the nonprofit situation, the second assessment is gifting intentions and planning.

Providing a nonprofit personal assets to collateralize their loan can also be a strategic investment for the sponsor. Those best in a position to pledge capital and assets to help a nonprofit can also help in areas beyond immediate donations. Sponsors for nonprofit organizations often commit long term to helping the organization financially. It often opens the door to a deeper involvement in the strategic direction of the organization. The right sponsor’s real-world experience, business acumen or other involvement can potentially be path altering for a nonprofit. For example, one of LENDonate’s loan sponsors recently helped negotiate and close the deal on a real estate purchase by the nonprofit. In addition to providing personal assets as collateral to support the loan, he transformed from being a sponsor to a major donor as was his original intention. So, by strategically forming an alliance with a nonprofit whose mission aligns with your personal values, a sponsor can help an organization reach another level they might not be able to reach otherwise. Symbiotically, this action helped the sponsor reach a new height in personal philanthropy.

Is the Nonprofit’s Mission Aligned with My Life Mission?

Consider the life of Santa. He tirelessly works year-round with his team to create enough presents for children around the world and delivers them on Christmas Eve. The idea that someone, fiction or not, has dedicated his life to a cause is often celebrated. Their work brings joy to others and to themselves. So, the third assessment is mission alignment.

The biggest reason that a potential sponsor would take the risk of providing a nonprofit personal collateral towards a loan is because of a strong personal belief in that nonprofit’s mission. For many nonprofit sponsors, using their personal assets to help make a positive difference in their community and the world at large is a life mission. LENDonate has created a marketplace that brings together investors and philanthropists to nonprofits that share similar goals and objectives. Different nonprofits have a diverse set of goals, for example spearheading green initiatives like renewable energy or creating affordable housing alternatives. In addition, these nonprofits can be led by women, minorities, and other under-represented groups. Socially conscious individuals and organizations can create meaningful impact that can change the world when they partner and sponsor nonprofits that perform work that advances these same purposes. 

Conclusion

Sponsoring a nonprofit organization by offering personal assets to support a loan does not need to feel like a fool’s errand. With a strategic mindset for the right cause, and a measured risk, sponsors for nonprofit loans can see a dramatic return on social impact in education, housing, equity, and justice, and much more. The first step towards success is for the sponsor and nonprofit to have an open conversation about needs and wants. Consider including advisors, e.g., wealth advisors or philanthropic consultants, to help answer the 3 assessment questions. With a clear objective, a full understanding of possible outcomes, and formal structure, a sponsor can leave a legacy that inspires generations to come.