Obtaining government funding seems to be every nonprofit’s goal, at least in Israel. I have heard countless lecturers, founders, and foundation representatives preach the Darwinian virtues of incorporating government grants into an Israeli charity’s fundraising strategy; after all, the nonprofit is servicing the Israeli public. It is to the Government’s benefit – if not its outright duty – to ensure that this charity’s program continues to exist
Not bad on paper. In practice, however, these Israeli government grants can sometimes be more trouble than they are worth.
For the purpose of this post, as a banker I would like to restrict my focus on the budgetary challenges associated with these grants. Specifically, the two disadvantages that arise because grant monies are dispersed only after expenses are incurred.
1. Cash Flow Problems
Simply put, grants can be released before expenses have been incurred or after expenses have been incurred. Unfortunately for recipients of Israeli government grants, the Government releases grants anywhere from three to nine months after a project has been started (and as long as the appropriate paperwork has been filled out). Many times, the needed funds arrive after the organization has already started to dip into its own cash reserves.
As you can imagine, this can have a negative impact on an organization’s cash flow.
While sometimes nonprofits can float expenses and re-prioritize suppliers, many expenditures, like salaries for example, must be paid immediately. In other words, nonprofit organizations are forced to spend money that they do not have.
These charities are then forced to turn to donors, banks, foundations or suppliers to help them during these tough times, exhausting tremendous resources and favors in the process.
This is, of course, assuming that the organization can find this help.
2. Increased Cost
If the charity is successful in procuring either a line of credit or a bridge loan, increased fees are sure to follow. And the fees are not negligible – even with benefits and discounts. Generally, they include a processing fee and interest fees; additional costs that could have been avoided if the grant had arrived before the program started and not after.
Thus, not only is the Israeli government causing organization’s to waste resources, it is causing these charities to waste hard-earn money, as well.
And the more you receive from the Government, the more credit is needed.
Two Short Examples
Example #1: A nonprofit I was speaking to has a 500,000 NIS budget, totally provided through a government contract. The CEO told me that he occasionally requires a 65,000 NIS line of credit to float him until his next grant payment from the Israeli government. The line of credit stands at 13% of the yearly budget, a percentage that does not sit well with banks and is hard to explain to potential donors. To secure the line of credit, the CEO has put his personal account/money as collateral.
Example #2: Another nonprofit I met with will soon be signing a contract with the government that will increase their yearly operating budget from 10 million NIS to 15 million NIS. In order to absorb the government grants into its cash flow and fundraising strategy, the organization is looking to increase its standing credit at the banks from 300 thousand NIS to 500 or 600 thousand NIS. Assuming the organization can procure a credit line of this size, it can easily cost it upwards 8,000 NIS a year, even as much as 20,000 NIS. .
As mentioned at the beginning of the post, there are other factors to consider that I am not addressing.
From a budgeting perspective, these two consequences raise red-flags and serious doubts about the overall benefits of grants from the Israeli government.
With that said, government aid can be an important part of an organization’s fundraising strategy – particularly for those organizations that have the cash reserves to weather the money’s inherent delayed arrival.
Know of any stories that prove or disprove? We could all benefit from hearing them.
Disclaimer: This blog houses my personal opinions and is for informational purposes only – not advice. As charity laws can be quite complex, please refer all questions to qualified and licensed professionals. Read the full disclaimer.