Much of our work here at NFF focuses
on easing nonprofits’ access to capital--both in sufficient quantities and the
right kinds--for dealing with short- and long-term needs. Loans can be used to help
meet such needs, but there are important distinctions between loans and other
types of capital. What will a loan mean for your organization? How will you meet the terms of the loan once
you’ve received one? With these
questions in mind, NFF Associate Dana Britto assembled five introductory blog
posts each providing a helpful tip that you should consider before applying for a loan. (All five tips will be available here)
We are
sometimes approached by organizations inquiring about loans who simply ask for
“as much as you can give me.” This is almost
never the best way to apply for a loan. It’s
appropriate--and even encouraged!--to inquire about the types and sizes of
loans a lender provides, but if you can’t tell your potential lender what
amount and type of financing you will need, a lender may think you don’t have a
firm handle on your organization’s finances or that you are in dire need of
cash that you will most likely have a hard time repaying. Your request should always be informed by a
specific need and based on an assessment of your financials, including your balance
sheet, income statement, annual budgets and monthly cash flow projections. When you request financing for a specific project,
be sure to assess the costs to complete the project and the costs to fully
maintain the project in the long term.
Use this type
of assessment to help determine what loan products are most appropriate. Don’t
be afraid to ask your lender what type of loan products they offer and how the
terms differ for each.
For example a
line
of credit may be most appropriate for organizations seeking a resource
that can be drawn and repaid at various points throughout the year to help
manage cash flow shortages. A bridge
loan may be more appropriate for an organization that requires a certain
amount to be disbursed in full up front to fund certain expenses as they await
the receipt of a confirmed contract or grant.
It is helpful
to at least have an idea of what pricing (aka interest), fees,
and terms
would most benefit your organization and then see how these compare to what
lenders generally offer in your geography.
For example, when considering amortization--the process of paying
off a loan over time--it is helpful to have an understanding of what your
organization can afford in terms of monthly payments and how much time it would
take to pay off the loan given the size of these payments.
It is also
helpful to understand what a lender may require in terms of covenants, which are essentially conditions
stipulated by the lender that must be met to guarantee continued access to loan
capital. For example, some lenders may
require organizations to maintain a certain amount of cash or receivables
throughout the term of the loan. Lenders
can also implement financial reporting covenants that require organizations to
regularly submit updated internal and audited financial statements. It is also important to understand what a
lender may require with regards to collateral:
assets that are pledged to the lender that could potentially be handed over if
terms of the loan are violated.
Again don’t
be shy about asking your lender to clarify terms of their financing and the
potential consequences of these terms. If
your lender isn’t willing to answer these questions and also does not seem
interested in better understanding your business model and programs, definitely
do not hesitate to find one that does.
We’re making it
easier than ever to inquire about whether a loan from NFF is right for your
organization. Please review the lending guidelines
at our new loan inquiry form!
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