Insight

Nonprofits can borrow, but finding a lender may be tough

Borrowing isn’t just for businesses. Many not-for-profits borrow money for major capital purchases, new program funding and even to manage current cash flow. But if you’re hoping to borrow, it’s important to understand that there are likely to be obstacles ahead, including finding a lender that offers reasonable rates.
Common hurdles
Maybe you’ve already determined that your nonprofit needs a loan and can handle the risks of borrowing. Before making the case to lenders, ensure you have a realistic repayment plan, current financial statements, collateral to secure the loan, a proven history of prudent financial management and your board’s support.
The odds of qualifying for a loan are better if you’ve already established a relationship (such as having a business checking account) with the lender. Your reason for applying also plays a big part in the decision. Seeking money to make a major purchase or to stabilize cash flow with a line of credit is more likely to be successful than applying for a loan to start a new program.
Even if you succeed in getting a loan, lender covenants may prevent you from borrowing for other purposes until your existing debt is paid off. This can limit strategic flexibility.
Nonbank sources
While plenty of banks are willing to make term loans or lines of credit available to nonprofits, your organization may not want, or be able, to pay the interest rates attached to them. Fortunately, there are other options, including:
Community foundations. Short-term loans may be available from local nonprofit foundations or funds, such as the Fund for the City of New York or the Chicago Community Trust, or from national groups such as the Nonprofits Assistance Fund. Generally, these organizations charge low interest rates — and, in some cases, no interest at all.
Board members. There are no legal obstacles to borrowing from a board member, but these loans merit caution. To avoid IRS scrutiny, the board member must charge interest at or below market rate, the entire board (absent the lender) must vote to approve the loan, and you must report the loan on your Form 990.
Government bonds. Because these bonds’ income isn’t subject to federal income tax, your nonprofit may be able to borrow at a lower-than-market interest rate. However, fees associated with structuring and issuing the bond could offset interest-rate advantages.
Good rationale
You may think your organization has a good rationale for borrowing, but that doesn’t mean lenders — or your supporters — will agree. If a large portion of your budget is tied up in debt repayment, that can affect how the public, including prospective donors, perceives your organization. Contact us for help weighing this critical decision and finding a lender.
© 2019

Related Insights

Accountable plans: A smarter way for nonprofits to reimburse expenses | accountant in baltimore md | Weyrich, Cronin & Sorra

Non-Profits

Accountable plans: A smarter way for nonprofits to reimburse expenses

Accountable plans remain the most tax-efficient way for nonprofits to reimburse employee business expenses. When properly structured and implemented,…
Fine-tune your tax withholding after filing your return | estate planning CPA in Cecil County MD | Weyrich, Cronin & Sorra

Tax Prep, Planning & Strategy

Fine-tune your tax withholding after filing your return

Many taxpayers discover at filing time that their tax payments during the year didn’t align with their actual liability — either too much…
Unlock tax-free gains with QSB stock | tax accountant in bel air md | Weyrich, Cronin & Sorra

Management Advisory Services & Business Consulting

Unlock tax-free gains with QSB stock

If you run your business as a C corporation, you may be eligible for a potentially significant tax break for qualified small business (QSB)…

Connect with us

Use the form below to send us an email. WCS responds directly to all inquiries and general questions within 24 hours of posting.

This contact form is deactivated because you refused to accept Google reCaptcha service which is necessary to validate any messages sent by the form.