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. .

Conclusion

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.

Tizku Lemitzvot,

Shuey

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.

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