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Forward Thinking: Why taking out a loan may benefit your nonprofit

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Take two scenarios.

A small environmental organization wants to take part in the Ontario government’s microFIT program to demonstrate the possibilities of solar power, but needs a loan to buy the equipment to make participation possible.

An artists’ organization and educational program for low-income children is hoping to move to a new artist-run centre in downtown Hamilton, but is waiting for a government grant that is delayed.

Based on these limited descriptions, it would appear as though these two nonprofits have little in common aside from the fact that at one time, they were both looking for financial support to stabilize, develop, and thrive within their communities.

In each case, traditional financing was not an option and grant opportunities were either already used, delayed, or nonexistent. And while financial challenges are nothing new for Canadian nonprofits and charities, the means by which organizations can overcome these hurdles are evolving.

In fact, both of the aforementioned organizations are on the leading edge, having taken out loans from the Community Forward Fund (CFF), an innovative fund for nonprofits and charities that recently received approval from the Ontario Securities Commission.

The skinny

The CFF makes loans and arranges financing for Canadian nonprofits and charities.

“The structure of the organization is set up as a means to fill a gap in financing where conventional lending isn’t available for this sector,” says Nora Sobolov, CEO and co-founder of the CFF.

Along with the financing side of the loans, the CFF provides an intermediary service for foundations and high net-worth individuals who want to invest and have a modest return.

On top of these main functions, the CFF provides financial capacity building and financial coaching services for charities and nonprofits – helping them think through scenarios and plan for the future.

Personalized service

Sobolov sees the nonprofit sector as one where voices calling for personalized financial assistance often go unheard, and deems conventional lenders as bodies who look solely at the bottom line, as opposed to circumstance.

The CFF met with more than 120 nonprofits and charities in the past year, and found that generally, the sector is looking for new ways to finance and provide services.

“With a wide range of business models and operating environments, coupled with changes in the current funding environment, charities and nonprofits are in need of financing partner that understands their particular financial situation,” says Sobolov.

As a nonprofit, the CFF tailors loans to clients based on their own individual circumstances, goals, and capacity.

Many nonprofits and charities may ask, “Why not hold out for a grant?”

Sobolov sees this as a valid question, though one that is dated.

“Although grants may be the favoured source of capital for charities and nonprofits, there are many situations where this option is not available. Ranging from longer lead times, requirements to pay for a project prior to receiving government funding, and a lack of funding for core operations, we are seeing a trend where organizations seek new forms of financing that cater to general growth,” says Sobolov.

Sobolov estimates that of the 161,000 nonprofits in Canada, at least 37,000 organizations would be able to use loans as part of their financing strategies.

The “gap”

“In Canada, there are not many traditional lenders out there that evaluate a nonprofit’s ability to accept loans,” says Sobolov. “Some lenders are willing to make loans to larger charities, but even the bigger fish are having trouble finding the financing they need to survive in the pond.”

Despite a minor rise in nonprofit lending in a small number of regions across Canada, such as the Vancity Credit Union in Vancouver or the Edmonton Social Enterprise Fund, Sobolov says a significant gap remains in availability of debt financing for this country’s nonprofit sector.

“There hadn’t been much going on before the change in financing that started to take place in the last five years, when I think people and organizations were saying ‘Look, we have to find ways to leverage other funds. We need funds that aren’t tied to a specific project. We need to look at our whole financing picture,’” says Sobolov. “They started to go more and more to conventional lenders to try to get a loan to accomplish a whole host of things, and found it very hard to get loans from those sources.”

Judith Maxwell, the former chair of the Economic Council of Canada, notes that over the past 30 years, funding for general operations has diminished steadily, while spending restrictions are on the rise.

“Today it is rare. Charities have compensated with more aggressive fundraising or by starting up related businesses, which help to cover indirect costs,” mused Maxwell. “But as the years went by, the restrictions on the use of cash created a financial trap.”

“Strange as it may seem, a charity could well have lots of cash in the bank to cover program costs, but still not be able to meet the payroll.”

This opinion is bolstered by the findings of a recent Ontario study, which indicated a significant demand for loans and financing in the nonprofit sector – interest from close to 50% of nonprofits and charities in Ontario in loan products, with estimated capital needs hovering around $170-million.

Sobolov has also seen a change in trends, where general financing from traditional lenders has all but disappeared.

“About two-and-a-half years ago, I had worked in the private sector, doing financing. I had worked in the credit union sector, and I have been a senior manager and CEO in the charitable sector,” recalls Sobolov.

“Frankly, I just got frustrated with different colleagues phoning me and saying ‘We’re sitting on all of these funds that are for a specific purpose, but we need general financing, and we can’t get it, and we might not make payroll next week. We’re going to have to lay people off. We’ve been around for 25 years, and we do have the money, we just can’t use it for this purpose.’ I had about five of those calls within five hours. Enough was enough.”

Looking to change the trend, Sobolov borrowed a model from the Nonprofit Finance Fund, one of dozens of community development financial institutions in the United States. The Fund has provided more than $200-million in loans to American charities and nonprofits, using private sector and Foundation funds.

What does the CFF offer?

The CFF provides a combination of revolving credit and term loans, for periods of up to five years.

Initially, the organization envisioned initial loan sizes to range from $35,000 to $250,000, but Sobolov says these numbers are consistently on the rise.

“A lot of other larger organizations are having difficulty getting loans as well, so we’ve seen applications up to $800,000, and when we get into a larger size, say up to $2-million, we’ll often work with the organization to syndicate it, so it will go to a group of credit unions, or other financial organizations, who are running loan funds and finding ways to join together.” CFF research shows that there is a market for one-year bridge loans, as well as three and five-year term loans.

Loan interest is dependent on the type of loan or guarantee.

Success stories

Tucker House, an environmental group located just east of Ottawa, was the recipient of the Community Forward Fund’s first loan.

The nonprofit ecological education centre, which offers children’s environmental summer camps and year-round programs on energy efficiency and renewable energy, enlisted the CFF’s services in September 2010, and signed a loan later that autumn.

Prior to the loan, the group had received a grant from the Ontario Trillium Foundation to install solar panels, but were still short the amount needed to purchase the equipment.

“At that point, we didn’t even consider a bank for a loan, because we knew the answer would be ‘no,’” says Kara Stonehouse, Tucker House’s executive director.

Stonehouse says her group estimated the solar panels would pay for themselves within 15, though the organization needed the capital to purchase them.

That’s when Tucker House turned to the CFF, hoping there would be an advantage to working with a group dedicated to facilitating loans strictly within the nonprofit sector.

The hunch paid off.

“The entire process was a bit easier, because there was a community feel to it,” says Stonehouse. “They have a little more time to meet, and a little more empathy with our cause.”

Now a year into the project, the solar panels have an annual yield of around $10,000, which Stonehouse says is helping Tucker House pay off its loan “quicker than we thought.”

“We’re pretty close to 100% paid,” she adds.

Hamilton Artists’ Inc. is an artist-run centre dedicated to promoting Canadian contemporary visual arts. It has served more than 10,000 people in the Hamilton area – 60% of which are low-income – since opening 35 years ago.

The Inc. needed a loan in order to complete a building project that would add to Hamilton’s downtown revitalization and support a growing local arts scene. This new space would allow the group to expand their programs and increase the opportunities artists have to earn a living from their profession.

“The Inc. had received funding from a number of sources to redevelop a new space, so they purchased a building and were renovating it,” says Annette Aquin, VP of finance and administration at the Hamilton Community Foundation. “Some of the money ended up getting caught in the government slowdown around election time, so funds weren’t being released quite as quickly as they had anticipated.”

The Inc. was stuck in a position where it was appearing as though it would have to discontinue construction of a new building until Ontario’s 2011 provincial election was through, and the organization couldn’t afford to wait.

“The Inc. came to us to see if we’d be willing to provide them with some interim financing, so we worked with the CFF to see how the financing looked for the organization,” says Aquin. “We made, basically, a short-term loan to them.”

Due to the loan provided through the partnership between the CFF and the Hamilton Community Foundation, which brought together the CFF’s approach to providing loans to nonprofits and charities with HCF’s resources and knowledge of the Hamilton community, The Inc. was able to complete the purchase of their new building, expand their operations, sell their old building, and repay their loan in full.

“They paid us off very quickly. It wasn’t a very long loan, but it allowed the organization to continue to move forward,” says Aquin. “At the time, we knew the intention was that it was really just a stop-gap for them, that they would never have been able to get through a traditional financier.”

The Inc.’s successful loan has since paved the way for a further half-dozen nonprofits in the Hamilton area to receive a loan from the CFF and HCF.

Funding a fund

The CFF is virtually self-funded.

“The Ontario Trillium Foundation gave us an initial grant for our first few years of operations and startup, but we will be on track to be self-financing through the returns from loans, through financial coaching and other consulting work that we’re doing with organizations to help them with their social financing and investing,” says Sobolov.

It’s not difficult to see how the group remains able to fund itself, as Sobolov says the CFF is surpassing a number of goals it had initially set out.

“We have more than 360 organizations and individuals in our database who have sought us out or attended one of our workshops or educational sessions. More than 36 organizations are in our pipeline for loans or financial coaching, and over 30 have sought out and received short financial reviews,” listed Sobolov. “Four foundations have already committed $7-million, and another 15 organizations in review or due diligence are looking for an intermediary to help them loan to their communities in a financially viable way.”

“We have already surpassed our first year goals and feel confident we will continue to do so to achieve our initial goal of $20-million.”

It may be the small-town charm or community feel of the group that bring nonprofits to the CFF’s door, but it’s the utter confidence the group radiates that will leave groups in the sector asking themselves, “why have we not thought of this before?”

“The default rate for charities and nonprofits who have been taking loans in Canada is one-half to one-quarter of those in the private sector,” Sobolov says. “By and large, 100% of these things pay back. That’s because organizations are used to being really conservative with their finances, so when they go into a loan, they also try to make absolutely sure that it can be covered, and we work very closely with them to make sure they will be successful.”

“The bottom line is that it is always going to benefit a nonprofit to finance in this way. We’ll make sure of it.”

Thinking about getting a loan?

Here are a few examples of why a charity or nonprofit takes a loan (from the Community Forward Fund):

  • To grow a mission-related revenue stream
  • To expand to new communities where services are needed
  • To invest in diversifying a funding base with new partners and/or corporate sponsors
  • For bridge financing for cash flow when government grants or capital campaign funds are pending
  • To temporarily smooth cash flow in order to meet day-to-day operating cash needs
  • To purchase, build or renovate a facility, including leasehold improvements
  • To upgrade or purchase materials and equipment necessary to your organization’s operation

 

Brock Smith is a radio reporter/producer and communications specialist based out of Ottawa, with a special interest in the nonprofit sector. Brock can be reached on twitter at @brocktsmith.

Photos (from top) via iStock.com. All photos used with permission.

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