Looking To Secure Nonprofit Financing?
For any business, securing financing can be a challenge, but for nonprofit organizations it can be especially grueling. Whether you are an established mission-driven organization or are relatively new and have a burgeoning idea to help strengthen your local community, lenders who do not specialize in lending to nonprofits may have a tougher time aligning your business model with their underwriting requirements.
Here are a few things you need to know about securing nonprofit financing that will be helpful during the loan application process and into the repayment period: use of funds, sources of repayment, documents and collateral, and contingencies.
Use of Funds: How Much To Borrow
Just like people, nonprofits and their boards have varying degrees of comfort with debt. Hence, the “right amount” to borrow is usually a dollar range rather than a specific number. Overly ambitious borrowing could impair your future success, while perpetual, inadequate funding could lead to chronic program underperformance and donor attrition.
The key to success in striking a good balance is to start with sensible financial projections that are grounded in reality. A good set of financial projections should help you have sufficient cash reserves to rely on when revenue and expenses are temporarily out of sync. It can also help you anticipate financing needs in terms of how much and for how long. One of the best loan applications we’ve seen at LENDonate was by a nonprofit CFO who was able to articulate his loan request this way: we want a loan of $X because we anticipate a cash shortfall in 7 months and project to have sufficient funds to pay off the loan in 17 months from our collection of account receivables. We would like to request a 3 year loan, just in case, if there are no prepayment penalties.
It is important to find the sweet spot so that you don’t ask for too little. Asking for less than you need can leave you in a dangerous place: having the debt but not being able to reach the project goal and forecasted revenue stream. How much money you request should be sufficient to cover all project expenses and be affordable for your nonprofit organization.
Sources of Repayment: Their Certainty and Timing Matter a Lot!
When it comes time to apply for a loan, your lender is going to want to know how you intend to pay it back. Typical sources of repayment acceptable by traditional lenders are earned revenue, accounts receivables, and some well documented and reliable grant receivables. When naming accounts receivables as a source of repayment, be sure to have an updated schedule ready that shows the names of clients, size of receivables, and when payments are expected. Having these details will help the lender feel confident in your plan to repay the loan.
If the receivables are grants and not based on “earned revenue”, it can be more challenging because not all lenders accept them. Since grantors don’t “owe” the money the same way a client owes a payment, it can appear less certain to the lender that you can count on those funds to arrive. A strong history with your grantor can really help sway a lender in your favor. After careful consideration, LENDonate successfully gave a loan to Z Space Studio recently, based on grant receivables.
Documents: Your Past, Present, and Future
To perform underwriting, lenders will ask to see historical financial reports, current cash position, and a financial projection of the future. The more complete these documents are, the stronger the application.
Underwriters compare your historical financials with your projections to assess how much loan you can afford. If your revenue and expense assumptions are inline with the past, then you probably will get just a few clarifying questions. If you are projecting hypergrowth, or doing something your organization has not done before, be prepared to answer many more questions, including “have you fully budgeted staffing to run the new program?”. Having documents showing signed client contracts or rent roll from the building you are trying to buy, for example, are good documents to have ready to bolster your case.
As we mentioned previously, much like including a well-crafted cover letter with a resume, you need to highlight your organization’s strengths. A casual review by a busy underwriter may overlook an offsetting cost, not knowing that a new expense will replace the old, for example.
Contingencies: the Sweet Smell of Cash Reserves
Without sufficient cash reserves, an unanticipated expense could throw the organization into disarray. While certain expenses can be trimmed, loan payments are not discretionary and therefore, it is crucial that cash reserves are available to avoid loan default. According to a recent article from the National Council of Nonprofits, less than 25% of nonprofits have more than six months of cash reserves on hand. With a solid cash reserves policy in place, your organization will be better able to withstand the unexpected.
Conclusion
Nonprofit financing does not need to be stressful. Do your homework and put your best foot forward so that lenders will fight for your business. During loan repayment, watch cash flow closely and keep your lender informed so there are no surprises. At LENDonate, we are dedicated to helping nonprofits find the financing they need through our one of a kind platform. If you are in need of nonprofit financing, let LENDonate be your thought partner and support your loan need!
