Loans can be a vital, strategic tool for a charity. At the most basic level, donations do not always arrive before the expenses they are needed to cover. At such times, credit – in the form of a bridge loan, for example – might be the perfect tool to allow a nonprofit to survive until the particular donation or grant is received.

The simplest way to lend money to a charity is for a donor to just give the organization the needed funds – either through cash, check, or wire transfer – with the (often unwritten) understanding that the funds will be returned at an agreed upon time. As no financial institution is involved, this type of loan is given in a relatively shorter amount of time, less complicated (no/less forms), and cheaper (no/lower interest rate and associated fees).

Nevertheless, an organization or donor might not want to procure a loan this way but rather through a registered financial institution; such as a bank, credit card company, or insurance company.

When suggesting this to a director of a nonprofit, he couldn’t understand why both parties wouldn’t choose to execute the loan in the least-bureaucratic and most inexpensive option and not through a registered financial institution.

To answer this question succinctly, the nonprofit sector has gotten increasingly complex in the last ten years or so. Methods that are the quickest and/or cheapest do not always satisfy the requirements of today’s private individuals, public institutions, and governmental bodies.

Below are some additional considerations that might convince the donor and/or the nonprofit organizations to forgo the easy way of a non-registered loan in favor of recorded and issued loans at a financial institution.

From the Donor’s Perspective

1. Lack of a Clear Agreement – Often these casual loans are unwritten agreements. Even with those that are, amounts and dates tend to be blurred, confused, or simply ignored.
2. Taking Money from a Charity — No one likes to take money back from a charity. It goes against our DNA – the donors are supposed to be giving the money, not getting the money. If the organization doesn’t return the money as agreed (even if not intentional), it is just darn-right awkward for a donor to chase his favorite charity to get money back from them.
3. He Said, She Said – Because of the unofficial nature of these loans, they can, if not handled properly, turn into a gigantic mess (pardon my French). Even with written contracts it can sometimes degenerate into a game of “He said, She Said” that pits both parties against one another.
4. Temporary Becomes Permanent – Fear that the temporary gift might decide to stay a little bit longer – once a loan, now a donation. There is a feeling that once money is in the hands of a charity, it will very likely remain there forever (and let’s be honest, its not that crazy of a leap).

From the Charity’s Perspective

1. Transparency – Need I say it: transparency is essential for nonprofits. Everyone at every level of the nonprofit equation is checking to make sure that a charity has it. The “unofficial” loan rarely is hard to find in a charity’s books, if it appears at all. It’s a general rule, if the loan isn’t apparent or easy to find, the organization is lacking transparency.
2. If it Feels Like a Duck and Quacks like a Duck – it’s a Duck – Experience has shown me that organizations have a harder time treating the loan as temporary (either because of forgetfulness or premeditated ignoring) when the money is simply given outright, sitting in the organization’s account. Simply put, if it looks, feels, and smells like a donation then it will be treated like a donation – which, of course, it isn’t.

Conclusion

While the blog was inspired by a conversation I had with a nonprofit CEO, the above points are the product of years of personal observations and analysis, as well as conversations with other nonprofit-support professionals.

I would like to leave on this note: It is not WHAT the nonprofit does that arouses suspicion, mistrust, or confusion but rather HOW the charity does it.

Take a loan, borrow money, apply for a line of credit – whatever you do, just do it in a way that will inspire trust and responsibility. Doing this will satisfy all parties and encourage future financial support.

Tizku Lemitzvot,

Shuey

Things to add? Errors to correct? I look forward to hearing both (although, to be honest, I prefer the former rather than the latter).

This post is intended for informational purposes only. Please read my full disclaimer.

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.

Overview

• Checks
• Credit Card
• Line of Credit
• Loan
• Mortgage
• Bank Guarantee / Letter of Credit

Checks

• 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).

Credit Cards

• 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.

Loan

• 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.

Mortgage

• 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.

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],

Shuey