In Israel, more than in most countries, foreign currency is an integral part of every facet of the country’s daily economic enterprises – private, business, and public sectors, alike.

A recent released study showed that 53% of financial support to Israeli charities came from abroad. Thus, making foreign exchange exchange fees, rates, and processing times of the utmost importance to Israeli charities.

(N.B. While this post is most relevant for charities operating in Israel, its underlying principles are true regardless of location.)

WHY USE A MONEY CHANGER?

Cost

When using traditional financial institutions to process foreign currency, fees tend to be higher. This impression holds both for foreign currency transfers (wires) and checks — this is of course, assuming that many individuals and charities aren’t using banks that specialize in foreign currency (i.e. bankers unlike me).

The belief — and not necessarily correct — is that money changers offer better exchange rates, as well. Again, this is not always the case (see previous parentheses).

Speed

Turnaround is always an important factor when receiving money from abroad. One, because of exposure to currency fluctuation. Two, because of cash flow.

While money changers may have a shorter turnaround than banks vis-a-vis transfers, they definitely have a shorter turnaround than banks vis-a-vis foreign currency checks. (Though, everything comes at a price.)

Wow, seems pretty good. Why in the world shouldn’t a nonprofit organization use a money changer!?

After all, doesn’t the charity have an obligation to its constituents to make sure that the money it raises arrives at its destination as quickly and as cheaply as possible?

NO.

The mission of the charity is to show its donors and relevant governmental agencies transparency, control, and accountability for ever cent, agurah, peso, and shilling raised.

With respect to this charge, money changers are a danger to proper book keeping and the transparency everyone is demanding:

1. Lack of Control and Transparency

Whenever an organization uses a money changer it is voluntarily relinquishing control and permitting a third party to handle its money. While receipts can be issued and paper-trails followed, a small but unavoidable black hole is created.

Instead of having a bank statement that clearly shows where the donation originated from, the bank page will simply show an generic “incoming wire” (from the money changer) or even worse, an ambiguous “cash deposit.”

True Story: I have seen nonprofits arrive at a bank to deposit tens of thousands of shekel IN CASH. Now is this really the kind of impression an organization wants to make to its bank, donor or oversight body? Somehow, a wad of bills in a paper bag just doesn’t scream “trust me.”

2. Blurred Beneficiaries

When money is given to a money changer, the intended recipient is not the one either directly receiving the money nor cashing the check.

This is especially problematic with foreign currency checks, where the intended beneficiary never even deposits the check into the bank — an issue that effects the donor perhaps even more than the charity.

True story: Charities have no way of knowing where its money changer might redeem its check. Some money changers use Arab Banks to clear their checks. Putting politics aside, donors (and sometimes even the IRS) get mighty curious when a check earmarked for an Israeli cause has either “Bank of Cairo” or “Bank of Jordan” stamped on the back.

3. Cost is Now a Secondary Concern

In a previous post I quoted documentation that specifically mentions that cost is an irrelevant factor when the IRS examines a charity for effectiveness:

The Treasury Department is standing by its suggestions, thus, signaling to all that “life is simply more expensive and inconvenient as a result of global terrorism, and everyone is expected to bear a share of the new costs of doing business.”

And the IRS isn’t the only one using similar logic.

AND SPEAKING OF COST…

Did I mention that money changers might not even be cheaper than banks? If you’re looking for proof, contact me. I’ll make you a believer.

Tizku Lemitzvot,

Shuey

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 professional. Read the full disclaimer.

Israeli charities (amutot in Hebrew) rely on donations from overseas – no secret there.  Many foreign-based charities choose to create an American based nonprofit, more commonly referred to as a “Friends of” organization so donations can be tax-deductible vis-a-vis the American Federal Government. (In a previous post, I spoke about IRS trends when a “Friends of Organization” is applying for tax-exempt status.)

However, it could be that establishing a “Friends of” organization is not in your charity’s best interest. The following are some considerations that elaborate on:

Why not to establish a U.S. registered “Friends of” Organization to help fundraise?

1. Fees and Costs

Setup Costs: Experts estimate the fees associated with opening and registering a nonprofit organization in the United States at $5,000. With a complicated request, this number could increase. The organization has to answer to itself and to its donors if this cost is worth it. (More on startup fees can be found on the Social Citizen, “Want to Start a Nonprofit — Think Again.”)

Ongoing Administrative Costs: An American charity requires a presence in America. The government and private donors will expect a local address to handle their needs. Office space, supplies, travel, and salary are just a few of the ongoing expenses that can be expected for an American-based charity to support its ongoing costs.

2. Double the Regulatory Headache

On both sides of the ocean, international charity has become more complex in the last decade. A nonprofit that wishes to operate in two countries must, therefore, also adhere to two separate sets of relevant regulations, on issues ranging from philanthropy, tax, and law (too name but a few). Operating in accordance with one country’s regulations can be trying, let alone two countries (which by the way, can sometimes contradict one another). This is not to say that it is impossible. But an organization needs to understand from the outset that additional paperwork, manpower, and money might be required to ensure that both organizations are operating as they should.

3. Independence

Charities that want to register abroad (in this case the United States) need to understand and appreciate that for all intents and purposes, they are creating a new, separate entity there. The attempt by an Israeli institution to control, force, or participate in the American “Friends of” organization is not looked upon favorably by the I.R.S. (to put it mildly). The US government has hinted – and sometimes stated outright – that no charity shall be subservient to the control of another party; including but not limited to, donors, foundations, and other charities (local or abroad).  (For more, see my article on international charity.)

An Israeli charity might not by ready or willing to relinquish control over its fundraising efforts and branding to a separate entity – even one committed to helping raise funds. One only needs to examine the recent cases of American Friends of Magen David Adom and others to understand the potential clashes that can occur.

4. No Monopoly on Raising Money

Nowadays it is possible to issue US tax-deductible receipts to donors without actually being registered in America, namely through a Middleman Organization. Also known as Conduit Organizations, these charities’ by-laws allow them to give financial support to other worthy charities that forward similar goals. While the PEF is the most famous, many other 501(c)3 tax-exempt organizations offer similar services. Recently, some online donation portals have also joined the ranks. This is even assuming that all donors want a tax-deductible receipt, which not all donors do.

What should my organization do? Register as “Friends of” or not bother?

Only the organization – through its staff and board – can know the answer to this question; it shouldn’t hire a consulting firm or be pushed around by a big donor. Like everything else, it is about strategy and purpose.

However, there are some universal factors. The following are some considerations that might influence a decision:

Cost – It takes a buck to make a buck. Do the setup and ongoing expenses outweigh the benefits?

Volunteers – Does the organization have supporters living in the States that are willing (or unwilling) to take on the responsibilities for running a nonprofit?

Board Members – The IRS, among others, has frowned upon overlapping board members between American organizations and the foreign charities they support (see same post on international charity mentioned above). Does the organization have the fresh faces to help found an independent American charity?

Ongoing Fundraising Efforts – Will the organization be engaged in ongoing fundraising efforts in the United States throughout the year or just infrequent fundraising campaigns?

Donor Relations – One of the main reasons for creating a “Friends of” organization is to communicate, recruit, and retain donors. Can the organization accomplish these goals from Israel? (Remember that for the same job, an Israeli’s salaried employee will cost less than an American’s salary.) Will an American living in America but employed by the Israeli charity suffice?

Control – Never forget that an American charity (whether its actual called a “Friends of” or not) must be independent. Is the foreign-based charity willing and able to give up control to a group of supporters and like-minded individuals? (And yes, this consideration is so important that I mentioned it twice.)

Conclusion

I want to stress that I am not advocating one over the other – there is no objectively better option. However, I will say this: the instinctive, gut-reaction for an Israeli charity to automatically setup a “Friends of” organization, regardless of whether or not it fits into the strategy of the organization is, in my opinion, premature and incorrect. Simply put, money and time might be better spent elsewhere.

What’s your experience? Why not share a story that might help another organization out…

Tizku Lemitzvot,

Shuey

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.

A list of the essential articles I posted to Twitter from February 21– March 6, 2010.  This week’s topics include: Nonprofit Strategy & Governance; Social Media; Israel Finance & Economy; Global Finance & Economy; & Potpourri.

Sorry for the (relatively) long hiatus.  Between the holiday of Purim and a cold that knocked me out last week (and still lingers), I’ve been of the grid.  Good to be back.

Tizku Lemitzvot [May you continue to merit doing good deeds],

Shuey

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Nonprofit Strategy & Governanace

Game Changer? New US tax-status L3C allows company to focus on charity, earning profit is secondary. On @charitylawyer http://ow.ly/19LWC

Great facts that show NPOs playing critical role in economy (while silmutaniously misunderstood & under-appreciated) http://ow.ly/1ahxh

Does your Nonprofit bore people to tears? NPOs should use humor more often. http://ow.ly/1a7GL via @nptechblogs

As recession vaporized 1/5 of foundations’ assets, consider Program Related Investments (PRI) http://ow.ly/1aklC

Confused about Foundations & Program Related Investments (PRI)? Foundation Center elaborates: http://ow.ly/1alyW

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Social Media

Get most out of Twitter: Tap into discussions rather than broadcast own thoughts http://ow.ly/1e2bs via @ToldotYisrael

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Israel Finance & Economy

Israel is planning 2-year budget http://ow.ly/1adoN, could doing the same help NPOs develop strategy & save time/money?

G.S.: Bank of #Israel didn’t raise interest rates b/c of low inflation. Still predicts 3% by year’s end. http://ow.ly/1af8v via @Israel_News

Bill to abolish bank fees for checking accounts in #Israel doesn’t even make it out of the committee http://ow.ly/1adGk

#Israel c’tee recommended regulations to force Institutional Investors to stick to safer investments http://ow.ly/1b50K

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Global Finance & Economy

Don’t get comfortable! Only 2 months into the year & already many economic assumptions for 2010 are under fire. http://ow.ly/1a7lW

Europe’s Recovery Shows Signs of Stalling: http://ow.ly/1aGrx. With EURO weaking, US Dollar might gain strength…

The global economic crisis has the public angry at banks, not the Government. Will that change soon? http://ow.ly/1b4Z3

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Potpourri

Reduce Your Tax Bill by Accurately Deducting Charitable Gifts, on @Charitynav http://ow.ly/1e7yl

Change is hard but don’t fret: 5 Ways to Make Change Easier http://ow.ly/1a7yp via@guykawasaki

In a previous post, I mentioned that a loan and a line of credit serve the same purpose.  While that may be true in a broad sense, they actually can be quite different.  Hence, the different names.  The bank will look at both types of credit the same way, evaluating the amount of credit requested against the amount and type of collateral offered.  The customer, however, only cares about one thing, which option is cheaper.

Loan

Credit, as we all know, is money the bank gives you as a short term gift, so to speak.   A loan, then, can be viewed as a lump-sum gift.  We are generally familiar with loans when buying cars or homes.  These loans are for relatively long amounts of time where the borrower pays back the credit a little at a time, either monthly or quarterly, until the end of the loan term when — poof — the amount borrowed has all been paid back.

Bridge Loan

A bridge loan is different from the above loan.  The biggest difference between the two types is that a bridge loan is generally for a shorter period and is paid back in one payment, full, at the end of the loan’s term.  These type of loans are usually against an expected income/donation and function similarly to lines of credit.  A bridge loan is advantageous when the customer needs all of his credit limit right away and is expecting to pay it back in one shot.

Line of Credit

A line of credit is not a gift at all, but more of an understanding between the client and the bank.  The bank will allow the account to go into a minus up to a pre-agreed amount.  This type of credit is useful when the length of time that an organization will be in debt is known but the amount is not known.  During this credit period, depending on incomes received and daily activities, the actual amount of credit used could vary.  Some days the account is in minus and some days not.  Some days the entire line is used and other days only a portion.  The advantage of the line of credit is its flexibility; the customer is only charged interest for what is used.  Like the bridge loan, there are no interim payments for the line of credit, just the requirement to repay the credit in full when the period ends.  Assuming an organization knows from the beginning that it will be using all of its line of credit for the entire length of the debt period, a bridge loan is going to be a better option.

Show Me the Money

Built into the flexibility of a line of credit is a higher interest rate than that of a loan.  Over the term of the line of credit, because the full amount is rarely used, this option incurs less interest fees than a loan — despite its higher rate of interest.  Loans have a lower rate of interest but you need to borrow the entire amount from the bank.  If in the end you didn’t need the loan, tough luck and pay up.

Fees Involved

Both options will have two fees attached to them.  First, is the interest on the credit used.  Call it a gift or an understanding, anytime you use money that you technically don’t have, you’re going to pay for it.  Lines of credit will be based on Prime, which is based on the Bank of Israel’s interest rate, thus, subject to change.  Loans may also be based on Prime or fixed.  Second, both options will also have a one-time handling fee, as well.  Lines of credit might call these fees “credit allocation” (amalat haktza’at ashrei) while loans might refer to them as “preparation” (hachanat tefasim) or “folder opening” (petichat tik) fees.  These one-timers are generally based on a percentage of the credit being taken and may be dependant on the lenght of the credit, as well.

Be aware that business customers may get quoted higher rates than individual customers, as stipulated by the new Fee Law that went into effect July 2008.  Unfortunately, any nonprofit that has a yearly cash flow of over one million NIS is considered a business as far as the Bank of Israel is concerned.

Questions to Ask your Banker

• How much is the interest?
• Is the interest variable (based  on Prime) or fixed?
• How much is the handling fee?
• For loans, can you pay them back early? Is there a penalty involved?
• For lines of credit, what fees can I expect if none of the credit is used?  Are there any penalties?
• Are there any additional fees?
• What is the bank using as collateral?
• What promises/commitments have I made to the bank?

While I have provided a list of the basics, please, please, please, remember that each bank is slightly different.  Ask your banker any and all questions you think are relevant,  “The only stupid question is the one not asked.”

Tizku LeMitzvot [May you continue to merit doing good deeds],

Shuey