How NOT to Loan Money to a Nonprofit Organization

Loans can be a vital, strategic tool for a charity. At the most basic level, donations do not always arrive before the expenses they are needed to cover. At such times, credit – in the form of a bridge loan, for example – might be the perfect tool to allow a nonprofit to survive until the particular donation or grant is received.

The simplest way to lend money to a charity is for a donor to just give the organization the needed funds – either through cash, check, or wire transfer – with the (often unwritten) understanding that the funds will be returned at an agreed upon time. As no financial institution is involved, this type of loan is given in a relatively shorter amount of time, less complicated (no/less forms), and cheaper (no/lower interest rate and associated fees).

Nevertheless, an organization or donor might not want to procure a loan this way but rather through a registered financial institution; such as a bank, credit card company, or insurance company.

When suggesting this to a director of a nonprofit, he couldn’t understand why both parties wouldn’t choose to execute the loan in the least-bureaucratic and most inexpensive option and not through a registered financial institution.

To answer this question succinctly, the nonprofit sector has gotten increasingly complex in the last ten years or so. Methods that are the quickest and/or cheapest do not always satisfy the requirements of today’s private individuals, public institutions, and governmental bodies.

Below are some additional considerations that might convince the donor and/or the nonprofit organizations to forgo the easy way of a non-registered loan in favor of recorded and issued loans at a financial institution.

From the Donor’s Perspective

  1. Lack of a Clear Agreement — Often these casual loans are unwritten agreements. Even with those that are, amounts and dates tend to be blurred, confused, or simply ignored.
  2. Taking Money from a Charity — No one likes to take money back from a charity. It goes against our DNA – the donors are supposed to be giving the money, not getting the money. If the organization doesn’t return the money as agreed (even if not intentional), it is just darn-right awkward for a donor to chase his favorite charity to get money back from them.
  3. He Said, She Said — Because of the unofficial nature of these loans, they can, if not handled properly, turn into a gigantic mess (pardon my French). Even with written contracts it can sometimes degenerate into a game of “He said, She Said” that pits both parties against one another.
  4. Temporary Becomes Permanent — Fear that the temporary gift might decide to stay a little bit longer – once a loan, now a donation. There is a feeling that once money is in the hands of a charity, it will very likely remain there forever (and let’s be honest, its not that crazy of a leap).

From the Charity’s Perspective

  1. Transparency — Need I say it: transparency is essential for nonprofits. Everyone at every level of the nonprofit equation is checking to make sure that a charity has it. The “unofficial” loan rarely is hard to find in a charity’s books, if it appears at all. It’s a general rule, if the loan isn’t apparent or easy to find, the organization is lacking transparency.
  2. If it Feels Like a Duck and Quacks like a Duck – it’s a Duck — Experience has shown me that organizations have a harder time treating the loan as temporary (either because of forgetfulness or premeditated ignoring) when the money is simply given outright, sitting in the organization’s account. Simply put, if it looks, feels, and smells like a donation then it will be treated like a donation – which, of course, it isn’t.

Conclusion

While the blog was inspired by a conversation I had with a nonprofit CEO, the above points are the product of years of personal observations and analysis, as well as conversations with other nonprofit-support professionals.

I would like to leave on this note: It is not WHAT the nonprofit does that arouses suspicion, mistrust, or confusion but rather HOW the charity does it.

Take a loan, borrow money, apply for a line of credit – whatever you do, just do it in a way that will inspire trust and responsibility. Doing this will satisfy all parties and encourage future financial support.

Tizku Lemitzvot,

Shuey

Things to add? Errors to correct? I look forward to hearing both (although, to be honest, I prefer the former rather than the latter).

This post is intended for informational purposes only. Please read my full disclaimer.

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