How Do Nonprofits Repay Their Loans?
Nonprofits create critical impact in our communities and provide services – such as housing or medical care – that would otherwise be inaccessible. To deliver these services, nonprofits, like for-profit businesses, require capital. For some nonprofits, philanthropy delivers enough funds to fulfill missions. Others generate income to supplement donations and grants (think fees for medical services, or revenue from thrift stores as examples).
But nonprofits can still face a funding gap despite robust philanthropy and income generating services. This puts their missions in jeopardy or restricts their ability to grow their outreach and impact. So how do nonprofits find more capital? Like any business, they borrow.
The fact that nonprofits have loans may come as a surprise, but the landscape of nonprofit debt-financing is neither new nor small. In fact, according to the Federal Reserve, U.S. nonprofits held over $750 billion in financing as reported in the Q2 2023 Balance Sheet of Nonprofit Organizations. And because loan proceeds contribute directly to creating impact in communities, nonprofit lending can be a key part of an impact investing strategy.
Now that we know some reasons nonprofit borrow, let’s look at how they repay their loans and how impact-focused investors can transform their philanthropy into a nonprofit investment strategy.
How do nonprofits repay their loans?
Nonprofits rely on future revenue to repay their loans. In this respect, nonprofits are no different than small business borrowers. However, a nonprofit’s revenue sources – gifted (through donations and grants) and earned (through fees charged for services or through investments) – act differently than a for-profit business. Because donations and investment income are inconsistent and fluctuate, nonprofits at first glance look like riskier borrowers.
So how can a lender evaluate a nonprofit’s potential revenue stream? As with any borrower, they construct financial projections to understand what costs, revenue, debt balances and cash balances might be in future months. In evaluating a nonprofit’s financial strength, it’s important to consider:
• Committed revenue: Have grants been awarded, but the nonprofit is waiting on the funds? What donations have been formally pledged, but not yet received? These receivables can be easy to overlook but make a big impact on a nonprofit’s overall health.
• Net cashflow projections: Are capital campaign targets reasonable given past campaigns and the donor community? Are any grants likely to be renewed? History and strong qualitative factors such as the experience level of the board and the nonprofit’s leadership can help ground these assumptions.
Extending philanthropy with impact investing and nonprofits
Nonprofits and investing aren’t words that come naturally together. After all, nonprofits bring to mind charity and investments suggest profit. For impact investors, however, investing in nonprofit loans can be a key part of a double-bottom line strategy, creating both a positive financial outcome and positive change.
• Positive financial outcome: By providing the loan capital for a nonprofit, investors earn an interest rate. Upon successful repayment of the loan, investors receive back the principal they provided. This principal together with the earned interest can be upcycled into another nonprofit loan, magnifying the impact of the initial investment.
• Positive change: Nonprofits create impact every day in their communities and beyond. And unlike traditional businesses, nonprofits must reinvest all revenue back into the organization’s programs and activities.
Many impact investors already have philanthropic programs in place, supporting nonprofits through donations. Impact investors can also lend to nonprofits, offering a unique way to extend a philanthropic mission. At the loan’s conclusion, investors can forgive the loan, transforming both the principal and the interest earned into a larger donation.
Magnifying impact with LENDonate
At LENDonate, our mission is to create a new market that allows capital to flow more freely to nonprofits. By focusing on loans for creditworthy nonprofits, LENDonate
• Puts more resources in the hands of effective, visionary nonprofit leaders
• Connects impact investors with nonprofits, ultimately reducing their borrowing costs
On the LENDonate marketplace, impact investors bid on the loans of prescreened nonprofits, choosing to offer an interest rate at a LENDonate-determined ceiling rate or an investor-reduced rate. Impact investors can also give a donation or construct their bid as a combination of loan and donation.
During the life of the loan, LENDonate attributes monthly repayments back to each investor. At the conclusion of the loan, LENDonate can help recycle the funds to other causes or convert them into a donation.
The result is a win-win. Nonprofits receive funding from a wider community of supporters allowing them to grow their impact. And impact investors have access to wider range of investment opportunities that create true impact. It’s impact, magnified.
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LENDonate is All About Nonprofit Financing
LENDonate’s mission is to create a dynamic market that allows capital to flow more freely in the nonprofit sector. We harness the power of nonprofit networks – a desire to contribute to social good – onto one single platform. This platform facilitates desired philanthropic actions, from offering grants and donations to making market-rate capital accessible to qualified projects. See Borrowers FAQ for more details.
Why Nonprofits Borrow
Access to credit is essential to the success of any business, and the case is no different for nonprofits. Without affordable loan capital, nonprofits may forgo growth opportunities, operate in suboptimal real estate (or pay high rent), or consider expensive financing.
Nonprofits use borrowed funds to:
1. Make real estate purchases.
Approximately 87% of nonprofit debt is used to finance real estate, making this the most common use of a loan by nonprofits. This isn’t surprising, since most nonprofit programs are place-based and local to their communities. A good property can make a huge difference in a nonprofit’s success, and timely financing can help nonprofits compete for attractive properties.
2. Manage cash flow.
Many government grants operate as a reimbursement system, where nonprofits first perform work (and incur costs), then bill the government (or other sponsors). While these grants provide critical funding for nonprofits, the unfortunate reality is that it can take months before a nonprofit receives any funds once they have been awarded a grant. This cash flow uncertainty can be mitigated by bridge-to-grant loans.
3. Expand program services.
When a nonprofit’s program is successful, demand for their services increases. While small businesses can tap into existing programs at banks or networks of investors for growth or seed capital, the landscape of similar options is more limited for nonprofits. Working capital loans allow a nonprofit to expand their services without being financially vulnerable.
By focusing on these loans for creditworthy nonprofits, LENDonate
– Puts more resources in the hands of effective, visionary NPO leaders
– Connects with impact investors to enable NPOs to reduce borrowing costs
– Together create a funding environment that is focused on facilitating their mutual success
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LENDonate is All About Nonprofit Financing
LENDonate’s mission is to create a dynamic market that allows capital to flow more freely in the nonprofit sector. We harness the power of nonprofit networks – a desire to contribute to social good – onto one single platform. This platform facilitates desired philanthropic actions, from offering grants and donations to making market-rate capital accessible to qualified projects. See Borrowers FAQ for more details.
Like all businesses, having access to credit is essential for many NPOs to execute their missions. Without affordable loan capital, nonprofits may have to forgo growth opportunities, operate in suboptimal real estate space (or pay high rent), or consider predatory loan options.
Nonprofits today face several challenges, and nonprofit employee retention is at the top of many lists. Numerous positions from senior leadership to entry-level go unfilled even as corporations are trimming their workforce. What has changed when it comes to nonprofit employee retention? The answer may lie upstream, the sector’s largest funding partner – the government. Most government contracts work generally like this: provide services in the areas and/or in the way the government specifies, then the nonprofit can get reimbursed after the work is completed or underway. So, when the government system is also understaffed, approvals and reimbursements also get delayed.
As this Behind the Red Tape article quoted one large nonprofit CEO, “The combination of bureaucratic red tape and a refusal to increase funding for nonprofits makes it all but impossible for groups like hers to pay competitive salaries.” When “it can take the city as long as a year to actually pay the nonprofits, they have to borrow money to stay afloat, pay interest, and have difficulty recruiting and retaining staff.”
The government is trying to address nonprofit employee retention, along with general employee retention, by offering Employee Retention Tax Credits (ERTC) through the IRS which is a refundable tax credit for employers that continued to pay employees during the pandemic shutdown or had significant declines in gross receipts.
By focusing on these loans for creditworthy nonprofits, LENDonate:
Perhaps the group that is working the hardest on nonprofit employee retention is the nonprofit leadership – their management and board. One of our nonprofit borrowers, Mountain Valley Child & Family Services, has started to turn their understaffing situation around by employing some of these good practices. One of these best practices is to continuously monitor turnover rates and retention strategy success. If ongoing nonprofit employee retention challenges are not properly addressed, this sector’s value which represents 5.6% of the US GDP could trigger a domino effect that exacerbates greater societal problems when needs go unmet. Therefore, the price of doing good ought to start with funders taking care of the nonprofits so that they can provide their employees with the competitive salaries they deserve.
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LENDonate is All About Nonprofit Financing
LENDonate’s mission is to create a dynamic market that allows capital to flow more freely in the nonprofit sector. We harness the power of nonprofit networks – a desire to contribute to social good – onto one single platform. This platform facilitates desired philanthropic actions, from offering grants and donations to making market-rate capital accessible to qualified projects. See Borrowers FAQ for more details.
The Price of Doing Good – Employee Retention Best Practices
Feeling underpaid and overworked has become the norm for many employees today, especially for those who work in the nonprofit sector. While concerted efforts for wage and benefits increases are being made for these dedicated and hard-working employees, it is a steep uphill battle. For some there is much personal fulfillment and satisfaction; but is that enough? Is it meaningful enough to make a difference in someone’s life or make the world a better place? What about covering daily living expenses and having a work-life balance? What is the price of doing good?
Nonprofits today face several challenges, and nonprofit employee retention is at the top of many lists. Numerous positions from senior leadership to entry-level go unfilled even as corporations are trimming their workforce. What has changed when it comes to nonprofit employee retention? The answer may lie upstream, the sector’s largest funding partner – the government. Most government contracts work generally like this: provide services in the areas and/or in the way the government specifies, then the nonprofit can get reimbursed after the work is completed or underway. So, when the government system is also understaffed, approvals and reimbursements also get delayed.
As this Behind the Red Tape article quoted one large nonprofit CEO, “The combination of bureaucratic red tape and a refusal to increase funding for nonprofits makes it all but impossible for groups like hers to pay competitive salaries.” When “it can take the city as long as a year to actually pay the nonprofits, they have to borrow money to stay afloat, pay interest, and have difficulty recruiting and retaining staff.”
The government is trying to address nonprofit employee retention, along with general employee retention, by offering Employee Retention Tax Credits (ERTC) through the IRS which is a refundable tax credit for employers that continued to pay employees during the pandemic shutdown or had significant declines in gross receipts.
Conclusion
Perhaps the group that is working the hardest on nonprofit employee retention is the nonprofit leadership – their management and board. One of our nonprofit borrowers, Mountain Valley Child & Family Services, has started to turn their understaffing situation around by employing some of these good practices. One of these best practices is to continuously monitor turnover rates and retention strategy success. If ongoing nonprofit employee retention challenges are not properly addressed, this sector’s value which represents 5.6% of the US GDP could trigger a domino effect that exacerbates greater societal problems when needs go unmet. Therefore, the price of doing good ought to start with funders taking care of the nonprofits so that they can provide their employees with the competitive salaries they deserve.
You May Also Like
LENDonate is All About Nonprofit Financing
LENDonate’s mission is to create a dynamic market that allows capital to flow more freely in the nonprofit sector. We harness the power of nonprofit networks – a desire to contribute to social good – onto one single platform. This platform facilitates desired philanthropic actions, from offering grants and donations to making market-rate capital accessible to qualified projects. See Borrowers FAQ for more details.
