A lot of nonprofit organizations borrow money, but don’t forget – you have to pay it back! You’re just postponing the day of reckoning. You also have to be careful what you’re doing it for.
A recent survey conducted by the Nonprofit Finance Fund underscores the financial pressures faced by many nonprofits, and reports that diversification of funding sources – including debt – is a top priority.
Schools often use debt funding; you’re basically leveraging your endowment. State-funded Health and Educational Facilities Authorities are good sources of financing for capital projects. And, that’s a valid use of debt funding.
Approximately 47% of survey respondents use loans or lines of credit. How they use them shows a dangerous tendency toward relying on debt for operational expenses, however. (See table below) It’s perhaps not surprising, though, when 28% reported a deficit, and 55% have less than three months’ cash on hand.
Source: 2014 State of the Nonprofit Sector Survey Results, Nonprofit Finance Fund, April 2014
The financial challenges facing nonprofits are very real, but are not an excuse for not being realistic and even tough about your economic model. Building up a big infrastructure and program proliferation are common mistakes. Lacking financial expertise or simply not paying attention are two others.
Worst of all is playing the game of fiscal brinksmanship – running right to the edge, and crying for help from loyal supporters. What if that loan comes due, and you don’t have the money to pay up? That presents an interesting conundrum for trustees, who would be embarrassed by a default.
In fairness to nonprofit staff, they report difficulty having an open dialogue with funders about financial needs. Still, the onus is on leadership to develop an economic model – including partnerships and appropriate funding sources – that fits your mission and context, and making it transparent to all.