Crisis Funding and Debt: What Organizations Need to Know
The COVID-19 crisis has made everything uncertain, but it has revealed something NFF has long been certain of: Most nonprofits don't have enough cash on hand to cover expenses if operations are disrupted. Many nonprofits are now facing tough decisions about laying off or furloughing staff, and some are forced to consider shutting their doors—for good.
There are programs available to help nonprofits through this crisis. Many are grant-based, but there are also loans available, which can be a good way to meet crucial short-term cash needs.
But, is it wise to take on debt right now? It depends on the feasibility of repayment.
NFF has always maintained that the strategic use of debt is a powerful financial tool that can help bridge to delayed revenue. It’s a riskier proposition if trying to plug a long-standing budget gap, but can still be effective. In either case, organizations must consider if they know the source of repayment funds and determine how likely they are to secure those funds.
To help nonprofits determine if taking on debt is right for them, we’re created this brief guide to understanding debt options in this crisis. We will continue to update our guidance as NFF learns more about available programs and resources.
To help organizations make it through this crisis, the federal government enacted the CARES Act, which has two loan programs nonprofits can access. Note that we are concerned that most of the available funding will go to for-profit businesses, and nonprofits that do receive loans will face delayed processing. We encourage eligible nonprofits to apply immediately but caution against making any decisions or plans based on the assumption of receiving these funds.
- Paycheck Protection Program (PPP) This program is through the Small Business Administration (SBA), which typically serves the for-profit sector, but PPP includes provisions for nonprofits with fewer than 500 employees. While this is a loan program, a portion of this funding behaves differently than traditional loans because qualifying expenses may be forgiven, acting like a grant (payroll expenses, interest on debt, utilities). (Additional resources below)
- Economic Injury and Disaster Loan (EIDL) This is broader than PPP in the expenses it will cover (such as the full mortgage payment, not just the interest) but the loans are not forgivable and must be repaid. However, as part of the application process, borrowers can request a $10,000 loan advance, which may be forgiven if used for qualifying operational expenditures, such as maintaining payroll.
NFF wants to remain optimistic that these programs can provide relief to the pain and pressure being felt throughout the sector. However, we acknowledge the potential that due to the overwhelming demand for funding there, community-based organizations could likely be left out. The current system is not set up to process nonprofit loans at scale. We continue to watch this closely.
Aside from loan programs specific to COVID-19, nonprofits might consider working-capital loans, lines of credit, bridge loans, and philanthropic-based loan funds. These can come from commercial banks, community development finance institutions, and foundations, who often administer loans through an intermediary. These tools can be used to bridge cash flow, sudden expenses, or for expenses paid over time in smaller chunks, such as building repairs.
It may be tempting to take out a loan to weather this storm, but it’s vital to understand the terms of the loan and have a feasible repayment plan to avoid creating new and deeper financial issues.
Using debt to manage delays in receiving funds:
Finally, many organizations are facing issues related to receipt of funds. For example, an organization that is waiting to be reimbursed by the government for providing a service might need to access cash during the interim in order to make payroll. Similarly, if an organization had to pay upfront expenses for a program or service that will generate revenue in six months, a loan to meet expenses until the program launches may be appropriate.
In today’s crisis, these types of loans - working capital or bridge loans - may help organizations that are continuing to provide services but aren’t able to receive revenue in a timely manner, or because of a delayed event that will eventually happen, but had to be postponed.
These types of loans can be found at commercial banks (many nonprofits have lines of credit, which can be used for issues of timing), and many funders are creating funds to help organizations during this time.
Working-Capital Loans/ Lines of Credit/ bridge loan Philanthropic-based loan funds (PRIs, MRIs) – Loan funds that are capitalized by foundations and (typically) managed by a third party to make loans to the social/ nonprofit sector. These are typically low-interest or 0% interest loans and can have other favorable terms related to payback or timing.
List of Banks Offering SBA Loans by State - The Jewish Federations of North America (NFF is NOT a current SBA lender. We are exploring this, but in the meantime, please visit this list of banks offering SBA loans.)
Sample Board Resolution to Apply for PPP
Loans Available for Nonprofits in the CARES Act - National Council on Nonprofits
CARES Act: How to Apply for Nonprofit Relief Funds - Independent Sector
FAQs About PPP SBA 7(a) Loans for Nonprofits - The Jewish Federations of North America
PPP Briefing - The Jewish Federations of North America
Comparison of PPP Loans and Economic Injury Disaster Loans - The Jewish Federations of North America
$349B in Forgivable Paycheck Protection Loans for Nonprofits. Here's How to Apply - Forbes