This month we'll be highlighting the core questions thriving nonprofit leaders use to assure their organizations are able to continue to serve the community. And, we'll be sharing how to answer these leading questions and the resulting impact.
The First Steps to Getting Bank Funding for My Nonprofit
There are times when your organization will have strategic reasons to tap into the debt marketplace. The best time to start thinking about this is well before you actually need any funding.
Whether you are seeking an operating line of credit, a bridge loan for a construction project, or permanent financing to complete your capital stack, it is important to begin by asking yourself and your team a series of critical questions.
In this post, we're looking into the 5 critical questions you should answer internally before you talk to a bank and how to get those answers so you can wisely position your nonprofit for future successes.
- What is the organizational tolerance for debt?
- What does our cash flow look like?
- What is our collateral worth?
- What does the broader credit market look like?
- What terms and conditions would we be most comfortable with?
What is the organizational tolerance for debt at your nonprofit?
Work through the answer to this question in an intentional way with your staff and volunteers. Develop a set of guidelines or guiding principles that consider local and national economic factors, the risk tolerance of leadership, past organizational performance, and future expectations. Creating this well in advance gives the staff the freedom to negotiate with lenders within the boundaries of the guidelines and gives volunteers comfort those potential agreements are well thought out and prescreened against the guidelines.
What does your organization's cash flow look like?
Lenders may love your mission and welcome the opportunity to help you expand and serve more people, but you shouldn't forget they run businesses. And those businesses seek a return on their capital.
A lender's primary concern is that your payments will be made on time, and in full. And of course, your operating cash flow is how you make those payments. We believe that an organization has the best chance of sustainability if no more the 50% of your margin is allocated to debt service. You can learn your margin by calculating your net income before depreciation, debt service and any allocation of reserves. If you understand your cash flow you can plan your wins.
What is my nonprofit's collateral worth?
Lenders should also know that there are assets to back up the debt in a worst-case scenario.
Understanding the value of your assets can keep you from being overcollateralized. Consider getting a broker opinion of value on your facilities to help you plan. If the lender needs an appraisal, understand what loan-to-value ratio they are looking for and ask that the specific list of encumbered properties be held open until the appraisals are complete.
What does the broader credit market look like?
There's valuable insight behind this question. Luckily many of the answers can be found within your network. Here are a few important questions to help you get a better scope of the credit market for nonprofits:
- Are rates rising or falling?
- Which banks are entering or exiting the non-profit space?
- Are loan underwriters tilting toward cash flow or collateral in their analysis?
You can find the answers to these and other questions by talking to board members about their recent experiences. You can also make general inquiries of your local banks from time to time and talk to your peers in the nonprofit space.
What terms and conditions would you and your team be most comfortable with?
We usually think of interest rate, amortization period and loan term when discussing financing. But there are many other pieces to consider.
Minimum liquidity and debt service coverage are two covenants the bank is going to insist on. Understand the calculation and make sure it is reasonable for your organization. The lender is likely to seek other affirmative and negative covenants. Review them and negotiate where you can. Decide whether you prefer a fixed or variable rate. Make sure you understand whether collateral is going to be secured with liens or if you can agree not to pledge those assets against other liabilities.
Getting a Better Grasp on Your Finances?
Asking these financial management questions before you need to access debt will give your board and staff the confidence to make wise decisions for your organization. Need help answering these questions? DBD can help!