Nonprofit Sector

Crisis Funding and Debt: What Nonprofits Need to Know

April 2, 2020

Updated March 1, 2021

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 organizations now face tough decisions about laying off or furloughing staff, and some are forced to consider shutting their doors – for good.

Fortunately, there are programs available to help nonprofits through this crisis. While many are grant-based, various loan products can help nonprofits meet crucial short-term cash needs. 

But is it wise to take on debt right now? The answer to that question depends on how feasible it is for the nonprofit to repay that loan in the future.

To help nonprofits determine if taking on debt is right for them, we have created this brief guide to understanding debt options in the COVID-19 crisis. We will continue to update our guidance as NFF learns more about available programs and resources.

CARES Act update

To help organizations make it through this crisis, the federal government enacted the CARES Act in March 2020. The CARES Act included the Paycheck Protection Program (PPP), an effort to help small businesses and nonprofits prevent layoffs and business closures. Organizations with 500 employees or fewer that maintained their payroll during coronavirus could receive cash-flow assistance. If they received a PPP loan, the amount used for payroll costs, interest on mortgage obligations, rent, and utilities could be forgiven.

On December 27, 2020, a new COVID-19 relief package, the Economic Aid Act, was signed into law that authorized over $284 billion in PPP loans to new borrowers who have not previously obtained a PPP loan (first draw loans) and to existing borrowers who previously received a PPP loan (second draw loans). The Small Business Administration (SBA) will be accepting both first and second draw loan applications from participating lenders through March 31, 2021.

Nonprofits may also be able to apply for an Economic Injury Disaster Loan (EIDL). The EIDL program is designed to provide economic relief to businesses that are currently experiencing a temporary loss of revenue due to COVID-19. This chart offers a detailed breakdown of the differences between EIDL and PPP loans.

Theatre venues will also be eligible for relief under the Save Our Stages (SOS) Act. The program includes $15 billion in grants to shuttered venues, and will be administered by the SBA’s Office of Disaster Assistance. However, if you have received a PPP loan on or after December 27, 2020, you may not apply for SVO funding.

Other debt options for nonprofits

Aside from loan programs specific to COVID-19, nonprofits might consider lines of credit, working capital loans, bridge loans, program-related investments, and/or mission-related investments. These loan products can come from commercial banks, community development finance institutions (CDFIs), and foundations. These tools can bridge cash flow, pay for sudden expenses, or finance expenses paid over time in smaller chunks, such as building repairs.

In some cases, government funding and these loan products can work together. An organization that is waiting to be reimbursed by the government 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 – lines of credit or bridge loans – may help organizations that are continuing to provide services but aren’t able to receive revenue in a timely manner. These types of loans can be found at commercial banks and CDFIs. In addition, many philanthropic institutions are creating funds like this to help organizations during this time. 

Should my nonprofit take on debt?

NFF has always maintained that strategically deployed debt is a powerful financial tool that can bridge delayed revenue. It’s a riskier proposition if trying to plug a long-standing budget gap – but even in this case, it can still be effective. In either scenario, organizations must consider whether they know how they will ultimately repay the loan, then determine how likely they are to secure those funds.

When leveraged correctly, debt can help nonprofits weather this storm. However, it is vital that nonprofits understand the terms of the loan – including when the loan has to be repaid, interest, and fees – and develop a feasible repayment plan to avoid creating deeper financial issues. 

For more resources designed to support nonprofits through COVID-19, visit NFF's COVID-19 Tools and Resources page.

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