Nonprofit Accounting Basics

Looking at the Nonprofit Financing Puzzle!

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If you’re like most nonprofit leaders, you may have considered or even taken steps towards evaluating financing alternatives for your nonprofit organization.

This article shares some best practices for your consideration concerning what type of financing needs may exist.

In most cases, it starts with a conversation with your board or finance committee in an effort to sort out a particular objective, or in providing solutions to recent financial challenges. Some of this discussion starts with reviewing your organization’s budget or strategic plan. You can learn more about these topics on the Nonprofit Accounting Basics website.

After you have uncovered a course of action, you will need to determine your organization’s financing needs, such as:

  • commercial and leasehold improvements,
  • construction loans,
  • lines of credit, and
  • certain types of tax-exempt financing.

A bank that actively serves in the nonprofit community can assist you and your board with guidance to help meet the needs of your organization.

The next step is to engage in selecting the right banker. Seek out one who works in the local nonprofit community, and is willing to take the time to meet with you and your board to better understand your organization’s mission, and thereby can assist with suggesting meaningful solutions.

As you go through this process, be prepared to answer tough questions. In today’s economic conditions, bankers are hearing some nonprofits and associations are having financial difficulties, losing donors or members, for example. A bank that’s really engaged in its community will take the time to thoroughly understand a nonprofit client’s needs and circumstances.

Once you have selected a banker and applied for a loan, the potential to qualify for a loan is much better when the revenue trends are going in the right direction. That being said, the banker needs to understand when there are negatives or challenges, what changes are being implemented to resolve negative changes, and what are the mitigating circumstances or corrective actions being taken.

So what will your banker be looking for?

The five C’s of credit are:

  • Character – The organization’s willingness and determination to meet the loan obligation.
  • Capacity – The organization’s ability to generate enough excess cash to satisfy all obligations.
  • Capital – The amount of reserves the organization has in the event of a problem.
  • Conditions – The external variables including the state of the economy--potential changes in interest rates, changes in the organization’s focus, or the national and political environment.
  • Collateral – The asset or assets pledged to secure a loan.

For a nonprofit commercial client, the bank will look at several additional areas: governance, accounting, and financial fitness. Important factors are:

In addition, the bank looks at the historical financial strength of the organization and particularly membership trends and/or other funding sources and their consistency.

Clearly, there are many factors for banks and nonprofit leaders to consider in order to determine if bank financing is the right approach. Having the right partner as your banker will make a big difference in guiding you through the nonprofit financing puzzle.