It is logical to assume that if a bank wants to appeal to the nonprofit community then it has to understand the nonprofit organization’s way of thinking (that’s where I come in). The opposite should also be true. If a charitable institution wants to appeal to a bank then it must understand the bank’s way of thinking. This is especially the case when using or applying for credit from a bank.
In the past two months alone, four organizations have turned to me trying to understand why their bank was acting a certain way when it came to credit. A few examples:
- One organization had a large line of credit in one account that was guaranteed by cash in a different account. As far as the nonprofit was concerned, this wasn’t credit and should, thus, not be charged any accrued interest fees.
- Another organization didn’t understand why its Israeli bank felt uncomfortable giving a temporary line of credit against a foreign currency check deposited in its account. After all, the bank had the “cash.”
- A charity was upset that a bank didn’t want to approve a mortgage backed by the property that was being purchasing. The institution was convinced that its request was backed by solid collateral.
I wanted to take the opportunity over the next few blogs to review how a bank looks at certain types of credit and what steps an organization can take to make itself more appealing to a bank. First, let’s start with the basics and review the various types of credit available.
- Credit Card
- Line of Credit
- Bank Guarantee / Letter of Credit
- Checks are promises. Checks are trust. Let us be absolutely clear, checks are not cash.
- Checks can be rejected, bounced, or not honored. Cash can be immediately used, or if you prefer, stored in a mattress or placed in a medium to large size swimming pool.
- In Israel, checks can be bounced for lack of funds only on the day after the check is deposited.
- In America, checks can be rejected up to a half a year or a year later. I have seen cases where a US dollar check cleared and the client used the money only to have the US bank call and bounce the check a month later.
- Banks do not want to put themselves in a position where they or their client will have already used the funds of the check, only to find that the check bounced a few days or weeks later (as seen above).
- Expect to wait at least two days for Israeli checks to clear.
- Foreign currency checks are cleared either through the bank (expect at least 7 business days) or through collection (anywhere from two weeks to two months).
- A credit card in Israel are different that in the States and other places.
- In Israel, the cards are quasi-debit cards (with only one exception that I know): Debit cards, because the card is created and guaranteed through a bank (see below); Quasi because the payments do not come immediately out of an account, but rather only once a month.
- Credit cards are guaranteed by the bank. In other words, whether or not a client has money in his or her account, the bank is forced to by the bill.
- Credit card bills must be paid IN FULL on their due date.
- Because banks assume full responsibility of a card, the credit line will always be against some sort of security/collateral. Collateral can include expected salary (personal accounts), existing mortgage, or cash.
Line of Credit
- As of a few years ago, the Bank of Israel decreed that no account can have a line of credit without prior approval and request of the client. In short, the client has to sign more forms than before.
- Depending on the bank, this may hamper its ability to release credit on the same day or to cover a minus in the account that was incurred the previous day.
- One does not need to use a line of credit. It is an optional loan, so to speak.
- Banks differ in their fees for establishing a credit line. Some fees are not even based on whether the line is used. Fees can include interest (if line is used) and/or a credit issuance fee (amalat haktza’at ashrei). Speak to your bank to get all the fine print.
- Like credit cards, lines of credit are traditionally issued against expected salary (personal accounts), existing mortgage, or cash.
- Loans and lines of credit serve the same purpose.
- Loans generally come with a filing or processing fee (pitichat tik). The name can vary, depending on the bank. This fee may or may not be a percentage of the loan (check this out).
- Check with the bank about early repayment fees. Some banks have, others don’t. Prices and conditions vary.
- Loans are traditionally issued against contracts (business/nonprofit accounts), cash, guarantors, stock, property or cash.
- Mortgages are essentially loans, issued only against property.
- Unlike, general collateral, in mortgages, the property is intrinsically linked to the loan. The property cannot be used as security for any other dealings between a client and the bank. This can only be changed with the bank’s and client’s approval and , of course, subsequent additional paperwork.
- A bank guarantees or letter of credit is a “promise” issued from the bank to a third party guaranteeing payments should a certain set of conditions be met.
- This is considered credit even though money has not changed hands because the bank has already “promised” to pay.
- Once a guarantee is issued, the bank’s responsibility to pay the letter is to the third party, and out of the hands of the bank and the client.
- This kind of credit cannot be canceled without the third party’s consent.
This is only the tip of the iceberg. I will be dealing with various nuances and applications in future posts.
Tizku LeMitzvot [May you continue to merit doing good deeds],