Running a nonprofit is a balancing act for leaders and staff. The Great Recession led to a huge spike in the demand for services that continues to linger. Sadly, many of the people requesting services were once donors and others who found gaping holes in their once secure middle class lives.
The Recession also led to ballooning deficits for many state and local governments due to pension costs and unrealistic revenue expectations. Many eliminated funding for essential programs and services. Grants that were not eliminated turned into contracts requiring nonprofits to provide services and wait for reimbursement. As the Recession continued, the delay in reimbursements grew forcing many nonprofits to float the government, (if they could) or close their doors.
Although the recession has ended, the reimbursement delay continues. The “lucky” nonprofits are those that provide services to children that are wards of the state. Since states are required to provide these services, these reimbursements are prioritized.
The only way for many nonprofits to make ends meet is to open a line of credit to fund salaries and other costs until reimbursements come. But banks require that line of credit to be secured by an asset, and most nonprofits don’t own the space they operate in. Before the recession, nonprofits could secure their line of credit with government invoices but now they are the reason the nonprofit needs the line of credit. What other options are there?
Smart nonprofits open a line of credit when they don’t need to, knowing that they might need one later. Leaders thinking about opening a line of credit should talk to some of the organization’s most loyal donors, foundations or individuals, and ask them to pledge a multi year gift. Many banks will use this pledge as security for the line.
Another option is to ask board members to place their own funds in a combined Certificate of Deposit (CD) at the organization’s bank. The CD secures the line, but remains the property of the donors. Giving to this CD becomes one of the obligations of being a board member. Since the funds are not a donation, board members should be required to make an actual donation as well. One advantage of this option is now board members have skin in the game and often become more involved in financial and fundraising goals.
As part of this obligation, all interest received from the CD should be donated to the nonprofit. These interest payments are donations from the CD owners. They should be transferred to a second CD or account specified for large purchases or non daily expenses. This account becomes the organization’s asset.
Once board members’ terms ends, leaders should ask the leaving members to donate all or part of their portion. If the board members agree, the nonprofit should transfer these funds to the second account or CD as well.
Since many leaders will be unable to make a large gift in addition to the required contribution to the CD, fellow leaders should ask them to make a monthly gift. These gifts also strengthen a nonprofit’s balance sheet. We will discuss monthly giving programs in our next post.