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.
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