Having spent nearly twenty years in the nonprofit sector, I can tell you without a doubt that the field is totally undercapitalized. We all know this! People are underpaid, many facilities were "updated" in the 1970s, and in order to review the financials, you need a bottle of Pepto!
There are a couple of key reasons for this undercapitalization:
- We don't charge what we need to;
- We don't know how much our services actually cost to deliver;
- Demands continue to increase while resources either stay the same or are cut; and
- We apply for grants and contracts without having the proper resources--both human and financial.
While there is a growing movement among some foundations toward providing critical general operating support, most do not offer these kinds of coveted grants. It's good to be creative and resourceful, but some organizations "borrow" from restricted funds or pass the hat amongst their board members to fund cash flow. Even worse, many nonprofits fund operations with a 20%+ interest credit card! I'm not passing judgment; we all do what we need to do. If only funders would pay on time, or even front some funding to run operations, then our cash flow problems would be solved.
Some might say, "You should go to a bank and get a loan." My response is, "Umm... really?" Have you ever tried to access financing from a bank for a small nonprofit? Good luck. Banks are mostly established to help for profit companies, not groups like ours. Even community development financial institutions have a hard time supporting small loans. So, what are we to do?
To provide a solution, American Nonprofits recently launched the Bridge to Bridge Fund. Thanks to strong support from the Nonprofits Insurance Alliance of California (NIAC) and Santa Cruz County Bank, we are now live and making loans to Bay Area nonprofits. Our loans are intended to bridge your cash flow while you wait for contract reimbursement or your grant funds sit on someone's desk for any number of other reasons. Our loans are limited to $50,000 and have a 12-month term. Rates are as low as 6% if your nonprofit is insured by NIAC, but never higher than an 8% interest rate. And here's the kicker--our loans are unsecured, meaning there's no need for collateral or asking a board member to provide a personal guarantee.
Our process is straightforward and designed to be as streamlined as possible. We realize you have a day job and that may not include filling out loan applications. Our loan documents are in Haiku format versus War and Peace. We even provide ACH services to create efficiencies on both ends. We're also building out a risk-based algorithm to use "fin-tech" to expedite our review system. I'll share more about that in our next Blue Avocado article. Trust me, it's super cool.
We're pleased to announce that the Fund made its first loan to a great San Francisco-based organization named Place Lab. The organization's mission is to apply the spirit of innovation to empower communities to create and sustain great public spaces. They've been around for five years now and are managing nine major public space improvement projects throughout San Francisco. As is quite common, much of their funding comes from city grants that are often delayed, and often don't allow for project management time--the most expensive part of a capital improvement project. This has led to extremely "lumpy" cash flow, and much stress for Place Lab's Executive Director. Place Lab is thrilled to continue its pioneering work by helping get the Bridge to Bridge loan program up and running.
The good news is that we've secured over $1,000,00 for the Fund, so this loan is just the first of many to come. Have a peek at our website and let us know what you think, or go ahead and apply! While we're limited to San Francisco, Santa Cruz, and Contra Costa Counties in California, our goal is to expand the fund nationally. If your community needs a similar fund, please let me know and we'll see what we can do for you.
Stay tuned for more updates and new partnerships!
Executive Director, American Nonprofits
Think you're ready for a loan? Answer these questions before taking the leap.
Question 1: Do you think a loan ought to be used to fund operating deficits?
- A - Sure, why not? Money is money, isn't it? We can just plug the net loss with a loan and call it a day.
- B - Probably not the best idea, but we've done it that way before in a pinch.
- C - No! A loan is not a revenue source.
Question 2: When should you apply for a loan?
- A - When you most need money, of course!
- B - When it's convenient for you to fill out the paperwork.
- C - When you don't need it.
Question 3: Which of the following loans is designed to help with seasonal cash flow?
- A - Mortgage
- B - Line of credit
- C - Construction loan
Answer: C. A loan should not be used to cover deficits. It can help ease cash flow or finance a building, but it is not to be used to fund a structural deficit.
Answer: C. It's better to apply for a loan when you don't need it. Banks, CDFIs, and lenders sense desperation. And if you are going to apply, make sure to organize your financial materials before talking with a lender.
Answer: B. Lines of credit are designed to help nonprofits and for profit companies with seasonal cash flow. Typically you can draw down funds and pay them back at will. In most cases, you only pay interest on the amount outstanding. A mortgage is long-term debt designed to support the acquisition of a property. A construction loan is similar to a line of credit, but typically does not have the flexibility of a line. In most cases you can only draw down multiple times and repay once.
Marc Rand has focused the last twenty years on supporting the nonprofit sector through capacity building and finance. He spends his time creating new and innovative ways of supporting organizations through finance as the Executive Director of American Nonprofits. He is the former Program Director for Loans and Affordable Housing at Marin Community Foundation, one of the country's largest community foundations. Prior to being a funder, Marc served with the Peace Corps in Romania where he led a team that developed five credit unions focused on underserved population. Before his service with the Peace Corps, Marc served as a Capital Markets Analyst with First Union National Bank.