For nonprofits, it can be hard to find a balance between serving clients and managing finances. Fluctuating revenues make it difficult to stay on top of expenses. And raising funds is more challenging than ever.
Securing the right type of financing can be a smart solution. The key is to know what lenders are looking for in order to make a financial commitment.
Not-for-Profit (NFP) Organizations operate under IRC Section 501(c)(3) of the Tax Code. According to Guide Star, the United States has over 1.8 million registered tax-exempt organizations. The U.S. nonprofit institutions industry has combined revenues of over $120 billion. (First Research) Organizations receive nonprofit status because their primary purpose is religious, charitable, scientific and educational in nature. Their purpose must be to serve the public good versus private interest.
What lenders want to know
Typically, lenders look for the following when reviewing a financing request for nonprofit organizations:
- History and Mission of the organization and Geographic service area
- Management Team and Board of Directors: The lender assesses the composition of the board including its size, expertise, concentration and composition. A diversified background of board members are often key for community support and contributions.
- Funding Sources: Revenue sources can include contributions, gifts, grants, program services and membership dues and investment income. Revenues can vary substantially from year to year depending on the success of their fund-raising efforts. The lender must be able to understand where the funds come from, and whether they are restricted which will affect their use.
- Financial Information: Lenders typically request the following-
- Minimum of 3 year financial statements and Form 990’s for last 3 years
- Most recent Interim Financials
- Current budget and most recent accounts receivables and account payable agings
- Authorized borrowing resolutions
- Financing Request: Lenders must be able to match loan repayment to the expected sources of cash. For example, current assets comprising of primarily accounts receivable are financed via a working capital line of credit. Fixed assets such as equipment are financed through term debt. Real Estate loans for acquisition and improvements have longer amortizations (up to 20 years) and based on the useful life of the asset. Organizations can also opt for a business credit card/purchasing card for authorized users to assist with cash flow fluctuations
Where to start
Webster’s Specialty Lending division has an experienced team of bankers dedicated to serving to nonprofits. We understand your unique financial challenges and will work with you and your board to address your concerns.
Learn more about Webster’s nonprofit lending services.
Guide Star (www.guidestar.org)
Form 990 financial statements for nonprofit organizations
National Council of Nonprofits (https://www.councilofnonprofits.org)
Society for Nonprofit Organizations (www.snpo.org)
Resources and Publications