Non-Profit Line of Credit: How To Choose a Credit Line
If you’re seeking out a line of credit, you may be surprised to learn that there are a lot of options available to improve cash flow. For most people and firms with relatively good credit (and even those without), there is no shortage of lenders willing to extend credit. Of course, these options are more limited when you’re a nonprofit due to your structure. But even nonprofits have a couple of choices when it comes to taking out a line of credit and Financing Solutions is one of the largest lenders to Nonprofits.
So, what should you look for when choosing a credit line for non-profit organizations? Continue reading below to find out!
Interest Rate With Commercial or Local Banks
The first and arguably the most important characteristic of a credit line that you should examine closely is the interest rate when it comes to a commercial or local bank. That’s hardly a surprise to anyone who’s dealt with lending and borrowing before. But just in case you’re unfamiliar with how interest rates and monthly payments work and how they’re calculated, we’ll describe those things briefly here.
An interest rate is the proportion of the outstanding balance you are required to pay to the bank for the benefit of the credit. In other words, it’s the percentage of the outstanding balance of the nonprofit loan you need to pay each year in exchange for keeping the credit line open.
Interest rates are fundamentally a measure of risk. The greater the risk that you won’t pay back your balance, the higher your interest rate will be. Riskiness is calculated primarily based on your credit score and collaterial which measures a number of different things about your borrowing history and indebtedness.
There are some common ways of reducing the risk to the lender and thereby reducing your interest rate if dealing with a bank. We’ll discuss those in the following sections.
Security with a commercial or Local bank
Some credit lines are secured. In their terms and conditions, these lines of credit include a penalty for failure to pay the outstanding balance or interest according to the terms of the line. Namely, the lender is entitled to take possession of a piece of property belonging to the borrower
The piece of property pledged as security is often a home or other type of real estate. In fact, these secured credit lines are so common in personal finance that they have a name: Home Equity Line of Credit or HELOC.
The property pledged can also be personal property, like cars, jewelry, etc. But that’s less common.
A secured credit line typically offers a lower interest rate because the risk to lenders is reduced. After all, if you don’t pay back the bank, they can simply seize your property and they’re no worse off financially than before they extended the credit.
Some people are uncomfortable with secured lines of credit because of the risk it poses to their property. For that reason, many turn to guarantors, which we describe in the following section.
Guarantor with A Commercial or Local Bank
A guarantor is sometimes called a “co-signer”. This is someone who pledges to cover the loan if the borrower defaults. Usually, the guarantor has better credit or more assets than the borrower. Lenders frequently request guarantors for borrowers with no credit history, poor credit history, or few assets.
The presence of a guarantor typically reduces the interest rate, although by how much depends on the financial characteristics of the guarantor. So, for example, if the guarantor is wealthy with an immaculate credit history, the interest rate of the line can be reduced substantially. If the guarantor is only moderately more better off than the borrower with similar personal credit, the interest rate will not come down as much.
Both borrowers and guarantors need to realize that the risk involved in loans to nonprofits is not eliminated with this arrangement. It’s simply shifted from the borrower to the guarantor. Guarantors should always seek independent legal and financial advice before entering into the contract.
Many credit lines are a form of what is known as “callable debt.” Callable debt is a form of debt in which the lender can, at any time, demand full repayment from the borrower of the entire outstanding balance. Borrowers should always be aware of this possibility.
Now, in reality, it is rare for lenders to call debt on a line of credit for a number of reasons. First, lenders make more money when the balance is outstanding for longer because of additional interest payments. Second, it is not in the lender’s interest to force the borrower into bankruptcy (in the event of an inability to pay) since that risks the lender’s ability to receive the full balance of the line.
Nevertheless, borrowers should be aware of this possibility and guard against it.
Choosing a Credit Line
Now that you know some of the major features of common credit lines with a typical bank, how do you go about choosing one? Well, in a perfect world, you’d pick a credit line with a low-interest rate, no security, no guarantor requirements, and no ability by the lender to call the debt.
Alas, we do not live in a perfect world. For many borrowers, such a credit line is not available. Instead, they’ll have to compromise and simply choose from among the best options that are available to them.
When you’re looking for a line of credit keep the following in mind:
- Look for a lender that will approve you
- Search out the lowest interest rate or fees available
- Use secured lines to reduce your rate if you’re comfortable with that arrangement
- Rely on guarantors to reduce your rate if you have one available
- Beware of callable debt and try to keep enough cash to pay the debt in the event the lender wants the entire balance
Choose Financing Solutions
Financing Solutions offers ideal financing options for non-profits which cost nothing to set up and nothing until used making it a great cash backup plan. Our credit lines are unsecured, do not require guarantors, and have some of the lowest fees in the industry. If you’re interested in increasing your nonprofit’s financial flexibility today, give us a call at 862.207.4118 or send us an email! We’d love to talk to you. Or, better yet, fill out our online application. It only takes a moment to see if you’re approved!