As Second Draw PPP Loans Dry Up, We Take a Look at PPP Forgiveness and Alternative Options

With another round of PPP funding in the books, many small businesses and nonprofits that received funds are now turning their attention to PPP forgiveness. For others who may have missed the boat on securing government funding, alternative options have become increasingly more important. Even for those organizations who benefited from first or second draw PPP loans, now could be the ideal time to seek additional funding via private lenders. Today we will examine the steps needed to obtain PPP forgiveness, as well as provide some alternative options for acquiring loans for struggling nonprofits. 

 

How Can My PPP Loan Be Fully Forgiven?

A major benefit of the PPP is streamlined and simplified loan forgiveness. The new legislation expands expenses that are eligible for forgiveness and makes applying for forgiveness even easier. The SBA gives clear guidelines on PPP loan forgiveness eligibility, including how and when to apply in order to receive full loan forgiveness. While borrowers may submit a loan forgiveness application any time before the maturity date of the loan (either two or five years from loan origination), if a borrower does not apply for loan forgiveness within 10 months after the last day of the borrower’s loan forgiveness covered period, loan payments are no longer deferred. The borrower then must begin making payments on the loan.

 

You’ve Obtained PPP Forgiveness … Now What?

ppp forgiveness launch

With your PPP loan forgiven, your payroll expense should be humming for a while. Can you leverage this opportunity to take some major steps to further your mission? Consider the following 3 actions:

 

Adhere to a Healthy Cash Policy

Have you been running “lean and mean” in past years with < 6 months of cash reserves? According to this 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. Leveraging off the PPP cash infusion, you can institute a cash reserve policy that will detail how much cash should be maintained going forward, criteria to allow cash to temporarily fall below that minimum, and how that will be replenished. 

 

Strategic Program Expansion

Is this a strategic time to expand your program offerings? To do this successfully, your organization should create a roadmap to project future revenue, including earned income and potential additional grants. With the PPP loan covering payroll expenses, consider borrowing additional funds as seed capital to invest in your expansion. LENDonate’s marketplace can help nonprofits with sound projections to source loans with favorable terms. 

 

Invest the Capital Wisely

If this is the time to invest in yourself, e.g. purchasing your own commercial real estate to house your organization, congratulations! Investing and financing in equipment and infrastructural can be a healthy way to build up the long-term success of an organization. Keep in mind that the PPP funds must be spent according to specific criteria to be forgiven, so be sure to categorize expenses properly.  The budget fully, anticipating some cost overrun, so you don’t run out of funds before the project is complete.

 

Options Beyond PPP

PPP Loans are not the only loan or funding option offered by the government. Both the CARES Act and The Consolidated Appropriations Act 2021 have allocated money to several different loan and grant programs. These include EIDL, DCFIs & MDIs, Microloans, Grants for venues and theaters, and SBA 7(a) Loans.

 

At LENDonate, we have created an entire marketplace designed to help nonprofits, lenders, investors, and philanthropists connect affordable capital with impactful projects in the non-profit sector. With flexible terms and less restrictive lending requirements, sourcing a loan through LENDonate’s extensive network can get much needed funds into the hands of nonprofit organizations that may have been left out of PPP loans for nonprofits. Funds borrowed through LENDonate do not have usage restrictions like PPP loans. They can be used to cover not only payroll, but any expense your organization may need to use the funding to cover. 

 

Borrowing through LENDonate can be a great way to supplement PPP loans for nonprofits as well. The best time to borrow and receive favorable rates and terms is when your cash reserves are stocked, and the need for additional funding is less pronounced. If you have received grants or PPP loans, and have excess working capital on hand, the timing could be optimal to borrow additional funds to complete a strategic initiative that has been on your to-do list. 

 

Conclusion

With the Second Draw PPP in full effect, now is the time to get the help your organization needs to not only stay afloat but to thrive in these uncertain times. If PPP loans gave you a new or longer cash runway, plan now when the cash position is healthy. Whether you can take advantage of the SBA’s PPP loans or not, consider LENDonate in helping with the financing you need. Visit our website to see how it works and get started on your way to a better tomorrow.

CDFIs (part 2 of 2): Investing in Communities

In this previous Insight (link), we introduced CDFIs (Community Development Financial Institutions) and their primary mission, which is to help communities that are traditionally under supported by bank loans.

Since CDFIs cultivate specialized knowledge about the communities in which they do business, they forge deep relationships with their customers and community leaders.

This translates into a willingness and commitment to spending time on individualized service and specialized programs that are often too time-consuming and costly for mainstream financial institutions to implement.  For example, some CDFIs offer non-conforming mortgages or loans while others make accounts available to customers with limited or poor credit history.

Despite their differences CDFIs and conventional financial institutions complement each other because they both share a market-based approach to serving communities.  CDFIs often work in partnership with banks to develop innovative ways to deliver loans, investments, and financial services to distressed communities.  They often jointly fund community projects, with the CDFI assuming the riskier subordinated debt.

Mainstream financial institutions also invest their own capital directly in CDFIs, receiving Community Reinvestment Act (CRA) credit and potential cash rewards under the CDFI Fund’s Bank Enterprise Award Program.  CDFIs, on the other hand, create a future market for mainstream financial institutions products and services.  They incubate businesses and people, helping them to grow and prosper.  Once these customers achieve some success, establish good credit history, and reach a substantial size, they can move forward to borrowing larger amounts of financing from conventional lending institutions.  CDFIs are trailblazers in their communities, leading the way in investing in distressed urban and rural neighborhoods and bringing people into the economic mainstream as contributors to the economy.

CDFI investing in communities

Types of CDFIs

There are 6 basic types of CDFIs. Below is a brief description of the purpose of each and how they work.  Many of these are depository CDFIs which means they can be used as a banking alternative to a traditional bank or credit union.

Community Development Banks

Community development banks are for profit institutions, with a focus on providing lending opportunities for low income and rural communities that have been historically underserved. Community members are typically part of their board of directors to help ensure the community’s needs are being met and their concerns represented to the board. Their deposits are FDIC insured.

Community Development Credit Unions

Community development credit unions (CDCUs) encourage savings accounts for members, along with ownership of assets. CDCUs, like traditional credit unions, are nonprofit financial cooperatives that are owned by members. Their difference is based on the CDFI mission, to promote savings and asset building, and provide affordable credit to low-income members and underserved communities. Their deposits are generally NCUA insured.

Community Development Loan Funds

Community development loan funds (CDLFs) are created with the intent of providing lending and finance opportunities to businesses, nonprofit organizations and even individuals residing in low-income communities. Capital is aggregated from individuals and institutional social investors at below market rates. These funds are re-lent into the community primarily to nonprofit housing and business developers in urban and rural lower-income communities. CDLFs are typically nonprofit.

Community Development Venture Capital

Community development venture capital (CDVC) funds provide financial returns to investors, but with a focus on helping small to midsize businesses in underserved communities with equity capital. They use a combination of equity and debt with equity features to help businesses create jobs, enable entrepreneurial capacity and wealth that benefit low-income people and communities.

Microenterprise Development Loan Fund

Microenterprise Development Loan Funds foster social and business development through loans and technical assistance to low-income people involved in very small businesses or those who are self-employed and are unable to access conventional credit. It is regulated by the IRS and grant makers as any other 501(c)(3) nonprofit.

Community Development Corporations

Community Development Corporations are also regulated by the IRS and grant makers, as any other 501(c )(3) nonprofit. Their focus is to revitalize neighborhoods by producing affordable housing, creating jobs, and providing social services to low-income communities.

Today, the CDFI industry has become a significant part of the financial landscape. Currently in the United States, there are over 1000 certified CDFI’s helping communities in need across the country. At LENDonate, we bridge the gap and create financial collaborations that allows capital to flow more freely in the non-profit sector. Through an extensive network of investors and non-profit organizations, including CDFIs, LENDonate seeks to develop a dynamic, expressive marketplace that connects affordable capital with impactful projects in the non-profit sector.

How To Support CDFIs?

Bank with CDFIs

By keeping some of your monies in a savings account at a bank or credit union that is officially certified by the United States Treasury as a CDFI, your money will make a direct impact on your community. Deposits at CDFIs are used to provide financial services including small business loans and mortgages to members of the community. Most CDFI deposits are insured by the FDIC or the NCUA, making it a safe place to keep your money as well as benefit communities in need.

Directly Invest in CDFIs

While most CDFIs receive funds from the government, a large portion of the money made available to borrowers comes from other banks, individual investors, corporations, and even religious organizations. As an individual, investing in a CDFI can help produce solid returns on your investment, while also directly benefiting underserved communities in need. Community development loan funds are the most common way for individuals to invest in CDFIs, at a relatively low risk.

Donating to CDFIs

As most CDFIs are nonprofit organizations, they rely on funding from as many different sources as possible to help them provide their services. For example, Housing Trust Silicon Valley says, “A donation to Housing Trust helps us continue to operate our homeless assistance grant programs, provide education and loans to first-time homebuyers and finance affordable rental homes.”

Conclusion

CDFIs have become an extremely effective and popular way for investors to support historically disadvantaged communities. By supporting CDFIs, investors and donors leverage their expertise and due diligence process while receiving a return on investment. At LENDonate we are dedicated to bridging the gap between nonprofits and their financing needs. We invest with CDFIs as a source of their loan capital. So whether you are a nonprofit looking for financing, or a CDFI looking for a partner, we invite you to visit our website and explore working together for our communities.

CDFIs (part 1 of 2): Borrowing with Greater Flexibility

Community investing involves institutions and investment products that support economically disadvantaged communities. This is made possible through community development banks, credit unions, loan funds and microfinance institutions. Closely tied to socially responsible investing, they focus on economically improving disadvantaged communities by offering banking services and small loans to fund businesses, non-profit groups, and affordable housing initiatives. A key player, Community Development Financial Institutions (CDFIs) are a major force in serving the needs of the poor and working class within urban and rural communities. In this two part series, we’ll take a look at the role of CDFIs for both lenders and borrowers.

CDFI borrowing with greater flexibility

What is a CDFI?

Community development financial institutions (CDFIs) are private financial institutions that are 100% dedicated to delivering responsible, affordable lending to help low-income, low-wealth, and other disadvantaged people and communities join the economic mainstream. The goal is to help this group of people become more financially self-sufficient and contribute more to overall economic growth through community redevelopment. CDFIs were created in 1977 as a result of the Community Reinvestment Act which was drafted because of banking and economic development inequalities throughout communities in the United States.

CDFIs can receive federal funding from the United States Department of the Treasury but may also receive funding from private sector sources such as individuals, corporations, and religious organizations. CDFIs have a focus on social responsibility and inclusion, rather than a pure profit motive and may receive support from the federal government’s CDFI Fund.

The Opportunity Finance Network (OFN) is the national association for community development financial institutions (CDFIs). It provides capital, advocacy, and capacity building to help OFN members and non-member CDFIs create impact in rural, urban, and Native communities nationwide. It provides fair, transparent financing and financial education to small businesses, community-based projects, and consumers that mainstream finance considers too risky or not profitable enough. CDFIs invest in potential and promise and support future successes; they lend where it counts.

Recently, The Treasury Department launched a $9 billion Emergency Capital Investment Program (ECIP). The ECIP is an initiative meant to funnel pandemic relief to nonwhite-owned businesses and low-income consumers through loans, grants, and forbearance from community development financial institutions (CDFIs) and minority depository institutions (MDIs). About $2 billion of the program’s funding is set aside for institutions with less than $500 million in assets, and another $2 billion is earmarked for CDFIs or MDIs with less than $2 billion.

The coronavirus pandemic has had a disparate impact on businesses along racial lines. This $9B ECIP is intended to reach these business owners of color, who have historically weak relationships with banks serving BIPOC entrepreneurs.

Today, the CDFI industry has become a significant part of the financial landscape. Currently, there are over 1000 certified CDFIs helping communities in need across the country.

LENDonate and CDFIs

At LENDonate we partnered with a CDFI called Capital Good Fund in raising loan capital for their COVID response fund. Capital Good Fund is a social change organization, with the mission to “put poverty out of business” in America. They provide small loans to families and individuals looking to break the cycle of poverty. In addition, Capital Good Fund also teaches participants financial awareness and management, as well as help them build their credit. Many of the borrowers that Capital Good Fund lends to would be deemed non-credit worthy by banks. Through their efforts, their current portfolio of at risk (120+ days past due or doubtful accounts) loans is 4.7% based on a 12/31/2019 audit.  It is expected that 32.5% of loan receivables will be collected within a year and the remaining balance over the next 6 years.  Capital Good Fund’s success highlights the positive impact that CDFIs can play in turning around the prospects of individuals and small businesses who may otherwise be left out of financial prosperity.

Why Borrow from a CDFI?

Favorable Terms

Perhaps the biggest benefit of borrowing from a CDFI is the comparably favorable terms offered, relative to a traditional bank. Particularly for borrowers from low-income communities, qualifying for a traditional bank loan can be exceedingly difficult. Poor credit, low income and other deciding factors can disqualify a borrower from a commercial bank loan before they have even applied. CDFIs on the other hand, may specifically tailor their loan terms and interest rates to those that would otherwise not qualify for loans from a commercial bank.

Additional Financial Services

Typically, the loan process is simplified and easier to understand when borrowing from a CDFI, especially for those who may not have an in-depth financial understanding. As community focused institutions, many CDFIs go beyond simply lending money to small businesses and individual borrowers. In addition, financial education, business coaching services, and technical assistance are often available to those who may be first time business owners. These services can go a long way in helping businesses stay on track and become successful.

Greater Flexibility

Another benefit to borrowing from a CDFI is that they may be able to provide a greater level of flexibility with regard to repayment of the loan than a traditional bank. Since CDFIs have a mission statement of community improvement, they often work closely with the borrower and may be able to adjust repayment terms, such as temporarily accepting interest-only payments, in order to help the business or borrower survive seasonal lulls or other hard times. In particular, during the COVID-19 pandemic, CDFIs have been a much faster and more reliable source of additional funding than commercial banks and even PPP loans. Relying on government grants or loans can mean months of sitting and waiting without access to funding. The flexibility of CDFI loans means getting funds into waiting hands quicker than traditionally possible.

Conclusion

CDFIs have become a significant part of the finance industry. Their commitment to increasing accessibility to capital for not only small businesses and nonprofits, but historically disadvantaged communities, helps make the world a better place. At LENDonate we are dedicated to bridging the gap between nonprofits and their financing needs. We partner with CDFIs and other lenders as a way to be a source of loan capital. Whether you are a nonprofit looking for financing, or a CDFI looking for a partner, we invite you to visit our website and explore working together for our communities.