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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)
Sometimes we’re approached by organizations who have suffered years of large consecutive operating deficits thinking that a loan will help resolve this issue. What these organizations fail to remember is that a loan is not a source of revenue and should not be treated as such. Loans represent capital that is expected to be repaid in full plus interest and fees. While a loan can provide necessary cash flow to support operations and cover upfront project costs, it ultimately cannot reduce year-end deficits or provide a permanent boost to your liquidity if your organization is unable to consistently bring in sufficient operating revenues to cover expenses each year. For these reasons, debt is not the best option for organizations in severe financial distress.
Obtaining a loan only increases the need to achieve operating surpluses. They’ll be necessary to cover both standard operating expenses in addition to debt service payments! Demonstrating and implementing some type of contingency planning can make lenders more confident in your ability to achieve year-end operating surpluses. Ideally, your organization should budget for these contingencies, which could include revenue losses or reductions, unanticipated expenses, or project cost overruns specifically with regards to large construction or renovation projects. When applying for any loan, be prepared to explain how you will mitigate these contingencies, whether it is through expense cuts or securing alternate reliable revenue sources. This gives lenders confidence in your ability to adjust and course correct, a very necessary skill in this very unpredictable economic environment.
Please note that showing deficits in your financials does not necessarily mean that you don’t qualify for a loan. Just be prepared to discuss the circumstances of the deficits, what specifically is being done within the organization to prevent future ones, and what progress has been made towards improving operating results.
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!
|Borrowing, borrowing-tips, capital, financial services, LendingTips, Loans|