Know When and How to Use Loans

Loans are often an overlooked source of "cash" for nonprofits. Many executive directors and boards of directors find it hard to accept the concept of a nonprofit paying interest and it's not unusual for them to assume that funders will have a negative reaction seeing debt on the nonprofit's balance sheet. But, remember, loans can be an excellent tool when used as part of a carefully planned financial strategy. You just have to know when it makes sense to borrow and when it's right for your organization.

Some of the reasons for borrowing money and the types of loans include:

• Purchase or construct a building - If your nonprofit organization is purchasing or constructing a building, a short-term interest-only construction loan that is replaced by a longer term mortgage loan is commonplace. Repayment of these loans can come from a variety of sources - normal cash flow, fundraising, rents paid by tenants or a combination of all.
• Facility improvements - If you already own a building and are planning to make improvements, it may make sense to finance the improvements rather than paying for them out of available reserves. Your decision should be based on whether your organization's cash flow can absorb the monthly payments associated with a loan and whether it makes sense to save your reserves for a "rainy day".
• An equipment purchase - Your organization may be thinking about buying some new equipment and may not have the available cash to pay for it or, if you do, the cash is needed to pay for other expenses. If that is the case, again, your ability to repay the loan from your cash flow should be the key consideration for taking out a loan - or you may have to delay the equipment purchase until you can afford it.
• Working capital - If your organization finds itself short of cash for a variety of reasons, a working capital loan or a line-of-credit may be the answer for you. Working capital loans are usually short-term and repaid within 12 months. Lines-of-credit are typically extended and reviewed annually; the balance on the line ebbs and flows with the nonprofit's monthly cash cycle. Determining how much cash an organization needs to make it through a cash shortfall requires the organization know their monthly cash flow - income and expenses.

If you need help in determining whether a loan is right for your organization, don't hesitate to give us a call at 866/687-1468.