Non-Profit Line of Credit: Why Banks Turn You Down
So you’ve gone to one bank and credit union after another looking for a line of credit for your nonprofit and they’ve all turned you down. You don’t understand why. Your financials are in great shape. Your board is responsible and qualified. Your management is top-notch. Plus, you’ve been around for forever and a day.
The truth is that it probably isn’t your fault. Banks and credit unions are extremely hesitant to extend lines of credit or loans to nonprofits for a number of reasons. Keep reading to find out why and what you can do about it.
For non-profits, most banks require significant amounts of collateral before they consider granting a credit line. For them, the perceived risk is simply too high to do anything else. To make matters worse, non-profits are likely not able to use their accounts receivable as collateral to obtain a line of credit. This makes them unlike for-profit businesses that can use those accounts to guarantee a loan or credit line.
Banks and credit unions almost always also require a personal guarantee before they consider giving a line of credit to a non-profit. A personal guarantee requires that you, in your personal capacity, agree to pay off the credit line in the event that the non-profit defaults.
It’s a significant amount of risk for a person to take on on behalf of a non-profit. Many people are uncomfortable taking on this responsibility for a variety of understandable reasons. Plus, if one’s personal credit isn’t fantastic, a personal guarantee might not go very far to convince a bank or credit union to extend the credit line anyway.
The truth of the matter is that many financial institutions don’t extend credit to non-profit organizations for one reason: habit. In other words, they won’t extend credit to your non-profit because they’ve have never done it in the past.
The habit of many banks and credit unions not to lend money or extend credit to nonprofits results in a significant knowledge gap on the part of the lender. Because they never deal with non-profits, they don’t know what to look for to distinguish between risky and safe loans and lines of credit.
For example, many banks and financial institutions may not understand the role your non-profit plays in your community, the demand for your services, the solidity of your financials, the soundness of your management, or the experience of your board. The bank or credit union also may not understand that all of these aforementioned factors actually reduce the risk of default to an acceptable level.
At the end of the day, if a bank or credit union is used to lending only to for-profit firms, it’s extremely unlikely that a non-profit can convince them to extend a line of credit to them. These lending institutions are simply not equipped to properly analyze and assess the likelihood of default by a specific non-profit and will therefore not even consider extending credit.
The Nature of the Business
Many banks and credit unions are scared away from non-profit lines of credit simply because of the nature of a non-profit’s business. While for-profit firms are in the business of making money and exist solely for that purpose, non-profits often have much broader and less defined goals. Frequently, they’re in the business of giving money away as opposed to making it.
This can cause banks, credit unions, and other lenders to think twice about providing lines of credit to non-profits.
The Optics of Collection
Finally, many banks and credit unions are hesitant to extend non-profit lines of credit because of the optics of collection. In other words, no bank wants to be seen engaging in an adversarial fight for a charity’s assets, even when they’re lawfully entitled to those assets. An example may serve to illustrate our point.
Say Bank A extends a line of credit to a well-known community non-profit organization. The organization runs up $25,000 of debt and refuses to pay. The bank is then in a position where it must choose to either eat the loss and write off the debt as a bad loan or engage in a nasty and public collection effort with a well-known and beloved community organization. If they do the former, they’re out $25,000. If they do the latter, they may very well significantly damage their reputation in the community.
When looking at it this way, the good reputation of American non-profits is a mixed blessing. On the one hand, your nonprofit’s reputation is what allows you to collect money from the community. On the other, a good reputation may be preventing financial institutions from extending credit.
You may be wondering, with all of the reasons banks and credit unions have not to extend credit to my non-profit, do I have any chance of obtaining financing at all? Luckily, you do. Some organizations have specific expertise in extending credit lines to non-profits.
Financing Solutions is one of these organizations. It is the leading provider of credit lines to non-profits with annual revenues between $200,000 and $5,000,000. With the expertise and knowledge required to provide individualized consideration to non-profits around the country, Financing Solutions understands that a firm doesn’t need to seek profit to be financially sound. We know that many nonprofits are as stable and trustworthy as any other business.
We also understand that life throws a lot of curveballs and you may need some flexibility when your revenues are lower than expected or your expenses are higher than expected. Our low-cost business lines of credit are perfect for small- and medium-sized nonprofits that want to ensure they make necessary payments even if the timing of their income isn’t perfect.
Our credit line application allows you to access a quote in just a few minutes or you can give us a call at 862.207.4118 and let us know what you’re looking for. We’d love to chat with you.