This video series provides a broad overview of the lending process at Nonprofit Finance Fund. The videos each outline different stages of the process, from the initial intake call, all the way through loan management.
We recognize that there is an inherent power dynamic at play between a new borrower, who is seeking capital, and the lender, who is deciding whether or they can lend you capital. As a result, communication between borrowers and lenders can be challenging. The videos in this series will also showcase conversations between borrowers and lenders so that organizations know what to expect and how to make those conversations as productive as possible.
Want to learn more about using debt as a tool to achieve your nonprofit’s goals? Check out our Beginner’s Guide to Debt for Nonprofits video series.
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NFF’s Lending Process
Initial Conversation
In this video, we share what kind of information might be exchanged in an initial conversation with the NFF lending team.
Transcript
Meadow: Welcome to the first video in Nonprofit Finance Fund’s series: Understanding NFF’s Lending Process. In this video, we share what kind of information might be exchanged in an initial conversation with the NFF lending team.
Here is a broad overview of the steps in NFF’s lending process. We are going to assume you have already identified NFF as a potential lender. First, you will need to fill out our Loan Intake Form, which is available on our website or through the link in the video description. After you fill out the form, if your needs fit the kinds of loans we offer and your organization meets our minimum requirements to be considered for a loan, then a member of NFF’s Loan Origination team will reach out to you to set up an in initial conversation.
You’ll be working together, lender & borrower, over several months to close the loan, and then for however long the term of your loan is post-closing. Since this has the potential to be a long relationship, both you AND NFF will need to make sure the loan and relationship are a good fit. This initial conversation is the first step in making that determination together.
More specifically, you, as the borrower, will want to know about pricing and structure of the loan so you can decide if this is right for your organization. You are trying to answer:
- How do NFF’s costs compare to others you are exploring?
- What are the payment terms? This includes interest rate and relevant loan fees as well as the size & frequency of payments and the term length.
- Can your organization afford the loan based on those terms?
- What type of collateral, guarantees, or reserves are required?
- Does NFF understand your situation and are they willing to work with parameters that you have, like specific timelines or amounts?
- What happens if we run into challenges or fall behind on payments?
And on the other side, NFF needs to understand what your financing need is for the loan you seek, and whether one of our loan products fit that need. If we think it might, then we will need to gather additional information from you to be able to move to the next stage in the process. At NFF, we send you a Due Diligence Checklist that lists what additional information we need, you send us that info, and we do our initial analysis to decide how to move forward.
It’s important to know that NFF having a loan product that fits your needs is not the same as approval. NFF still needs to complete its underwriting process, where we assess your organization’s ability to take on new debt and manage repayment of the loan. Part of what we are trying to determine in the intake call is what are the potential obstacles we might face during underwriting, and do we have ways to work through those challenges. One thing we don’t want to do is to start that process (which can be time-intensive for everyone) if there isn’t a viable path to get across the finish line to approval. It wouldn’t be a good use of either your time or ours.
The timeline of these initial conversations largely depends on how long it takes to get all the due diligence documents together. This can be a big ask and a lot of work, so we recommend watching our What Lenders Look For video to make sure you’re prepared.
Now let’s see what this might look like in practice. Meet Sal, the Director of Finance for ABC, a workforce development nonprofit. ABC was approved for a new, large government contract this year. Since this contract is reimbursement-based, ABC must pay for expenses up front before they get reimbursed. Sal worked with his Executive Director and Board to determine they need a loan to help them manage expenses for this contract. Sal has already reached out to his local bank, where ABC has an established relationship, but was told he doesn’t qualify for a loan through them. So now he’s exploring a couple of other lenders, including NFF.
And this is Brittany, a Loan Originator here at NFF. She’s part of the team that helps organizations figure out whether our loan products might support their work. Brittany has reviewed ABC’s intake form, so she has a sense of their mission and financial picture.
The goal of this conversation is for them both to make an initial assessment about whether this is a good fit for both parties. Sal is trying to figure out how the cost of a loan through NFF compares to other lenders, and if ABC can afford one through NFF. Brittany is trying to understand how NFF can support ABC with a loan, including what type of loan might be a fit if they are a good candidate. Sal & Brittany just got on a call about ten minutes ago.
Before we drop you into the middle of their conversation, here are a few important things to know: This is not a call to get approval or even pre-approval. It’s simply a chance to understand ABC’s goals, impact, and financing needs — and to see whether an NFF loan might be a fit. This is a two-way relationship-building conversation. Both Sal and Brittany are starting to figure out whether a long-term partnership feels right — because loans aren’t just transactions; they’re ongoing relationships. This is also the safest place to ask every question, big or small. No one is expected to come in knowing lending jargon or processes.
They’ve introduced themselves, shared some background, and now Brittany has asked Sal what his questions are. Okay, let’s join them mid-conversation.
Brittany: Sal, thanks for walking me through ABC’s mission and the communities you serve. Hearing the real impact behind your work — not just the numbers — helps me understand what’s at stake and what you’re trying to make possible with this financing. That’s always where we start at NFF.
Just to set the tone here — this call isn’t any kind of pre-approval or decision point. Think of it as a “mutual fit” conversation. You’re learning about us, we’re learning about you, and together we’re figuring out whether an NFF loan could be supportive for ABC. No pressure either way.
And with that, I want to make sure we leave plenty of room for your questions. What’s top of mind for you right now?
Sal: Great, thanks Brittany. I’ll start by asking the question that is most top-of-mind for me right now: What are your current interest rates and fees for a loan?
Brittany: I appreciate you getting right to the point — it’s important for organizations to understand the full cost of capital upfront.
As a non-profit mission-driven lender, NFF offers the lowest fixed rates we can, given the capital we have available to lend. Interest rates and fees vary depending on the loan type and term, so once I have a clearer picture of ABC’s needs, I can give you more tailored numbers.
I can also send you our indicative rates at the end of the call, but please know we won’t lock our interest rate until we execute a term sheet, which comes a little later in the lending process. In terms of other costs, NFF charges an origination fee between 1% and 1.25% based on the size of the loan. We also have a modest legal fee to help cover the cost of drafting the loan documents.
Sal: Okay, this is roughly what I was expecting based on conversations I’m having with other lenders. I think we need a line of credit, but I know NFF offers other types of loans too. Do you think a line of credit is what we need? Or perhaps a bridge loan?
Brittany: From what you’ve shared — that ABC has a government contract where you pay expenses upfront and wait for reimbursement — yes, that usually points to a line of credit.
We’d consider a bridge loan if it were truly a one-time need, upfront need just to kick things off (e.g. to hire new staff or make upfront investments as they ramp up a new program if covered by the contract). But in ABC’s case, your contracts require monthly invoicing and tend to impact cash flow needs. In this case, your financial need is likely better suited to a line of credit.
Sal: Okay, thank you for clarifying that difference. Can you share anything that will be helpful for me to know about the terms and structure of a line of credit?
Brittany: Of course. Our lines of credit typically have a one-year term, but we can discuss including two optional annual renewals. The amount you can borrow is based on 80% of the money owed to you that is less than 90 days old. We also require a 30-day clean up period, which means you must bring the loan balance to $0 for 30 consecutive days once every 12 months. The clean-up helps us make sure the loan is helping smooth timing issues, not becoming permanent operating debt.
Sal: Got it. Just so I’m clear, a Line of Credit does not necessarily give us access to that line indefinitely, right?
Brittany: Right. That is one difference between a LOC and a credit card. A line of credit is intended to solve for a temporary and short-term timing difference between when you receive revenues and when you have to pay expenses. You can ask to renew a line of credit, but that is a whole new process. This is different from a credit card, which typically stays open as long as you’re using it.
Sal: Ok, understood, and thanks for clarifying that!
Brittany: I noticed on your intake form that you secured additional reimbursable contracts this year. Understanding how and when your reimbursements come in helps us think through the loan structure and amount. Can you tell me how those contract payments are earned? And how long do you expect it will take to receive reimbursement?
Sal: The contract is for three years, and we can submit our expenses for reimbursement once per month. The contract says we’ll be reimbursed within 30 days, but in our experience it often takes closer to 60 days. With our existing contracts, we have been using our cash reserves to cover expenses while we waited for reimbursements. But with this new, increased contract, we do not expect to have enough cash to cover the contract expenses while we wait for reimbursement.
Brittany: Got it. That context is really helpful. When do you anticipate needing the line of credit?
Sal: We are planning now and want to start in four months. We’ve crunched the numbers and estimate that we will would need to access to a $1.5M line of credit to ensure we have the cash we need to pay for expenses related to this increased government contract, as well as all other operating expenses, before reimbursement payments come in.
Brittany: Thanks for the context. The next step would be for me to send you our initial due diligence checklist — things like recent audits, monthly cash flow projections, aging receivables report, governance info, and a few other pieces that help us understand your full financial picture.
Sal: We do not do monthly cash flow projections, only quarterly. Is that going to be a problem? If so, is that something we can work on now?
Brittany: You definitely need monthly cashflow projections before we can move forward. I’m happy to send a template and walk you through it or point you to helpful videos if that makes it easier.
Sal: Yes, that would be great if you could send over that template and resources. I will work on this with our Executive Director and our Board’s Finance Committee.
Brittany: Of course. And before we wrap up, I want to learn a little more about ABCs governance and leadership structure – things like how your board and management team make financial decisions. That helps us understand how you operate and whether this financing fits into the way you already manage sustainability.
Meadow: Sal and Brittany talked for a while longer; they both probably had more questions. Brittany hears this phase all the time… “This might be a silly question…” and we’re always, always happy to hear those questions! It’s 1000x better to ask questions to understand everything thoroughly early on than to miss or misunderstand something important that could disrupt the process later on. When you don’t understand an answer, you can always ask the question again, or paraphrase the answer back. Really whatever you need to do to get the information you need to make an informed decision.
We hope this helped prepare you for your initial lending conversations. If you have more questions or want to learn about the next step, please check out the other videos in our series below.
Understanding the Term Sheet
In this video, we will share what you need to know about reviewing a loan term sheet.
Transcript
Meadow: Hello! Welcome to the second video in Nonprofit Finance Fund’s series: Understanding NFF’s Lending Process. In this video, we will share what you need to know about reviewing a loan term sheet.
At this point in the loan process with NFF, you have had a conversation with our loan origination team and you’ve sent over all the information that we’ve asked for. You might have had a follow-up conversation as well. All of that has gone well, the relationship is off to a good start, and the loan origination team has brought in an underwriter to do the next level of review and due diligence. Based on the underwriter’s initial analysis, which they’ve conducted in conversation with you, the underwriter has determined that a loan from NFF might be possible, so we create a term sheet.
The term sheet is a document that lays out what NFF is comfortable offering your organization based on the information you’ve supplied so far. We still need to verify a lot of your information, so the term sheet is just a preliminary and non-binding commitment. There’s no obligation on your part or ours to move forward if additional analysis shows it’s not a good fit for either party or if circumstances change.
So what is in a term sheet? The Term Sheet outlines:
- The loan size, which might be different than what was originally requested.
- The loan structure, which is when and how the money is lent and when and how you pay it back.
- The loan term, which is the period of time until maturity, when the loan has to be fully repaid.
- It locks in an interest rate for a period of time (so if the loan takes longer than that to close, the rate could change).
- It will include any prepayment options or penalties or other fees, like an origination fee or a prepayment penalty.
- It outlines closing deliverables, like the legal documents both parties will need to have before any payments can occur.
- If there are other conditions to the loan, like a guarantee, those will be outlined in the term sheet as well.
Once NFF provides this, you can schedule a call with your underwriter at NFF to go over the term sheet with you to make sure you understand it and to answer all of your questions.
Our goal is the same as yours as the borrower – to make sure you understand everything that is laid out in the term sheet. If it’s agreeable to you, you sign the term sheet and – in most cases – you will pay a “good faith deposit,” also sometimes called “earnest money,” which is applied toward the closing fee when your loan closes.
If there are any terms that you want to change or that don’t seem feasible, it is absolutely okay to negotiate and advocate for those changes. Some back-and-forth is expected, and it’s much easier to make adjustments at this stage than later in the loan process. Ultimately, NFF’s goal, the underwriter’s goal, is to develop a loan structure with a repayment schedule that matches the nonprofit’s revenue streams and has manageable repayment terms. The best loan structure is one that your organization will be able to repay. We welcome questions about things that might make managing the loan challenging, so we can work through them with you.
The timeline for this step of the process is usually between 1 to 2 weeks.
Okay. So, now we’re going to see what this might look like in practice.
We have with us Sal, the Director of Finance for ABC Nonprofit. Sal, with his board and leadership team, came to NFF asking for a $1,500,000 line of credit to help manage cash flow for an increasing number of government contracts, which pay on a delay. Sal filled out our intake form, had an intake call, and sent over his due diligence documents for ABC.
And then we also have LeNola, an Underwriter at NFF. As an underwriter, LeNola conducts the deep analysis to understand the organization. She does the due diligence and then crafts the loan terms that will work best for both parties. At this point in the process, Sal and LeNola have already met a few times, they’ve had a few conversations. LeNola has combed through all the information Sal sent over and conducted enough analysis to write a draft term sheet for a $1.4 million line of credit. This is less than what Sal originally asked for, but it is aligned with ABC’s need and its receivables which used for repayment. Sal and LeNola have already talked about that change. Now they’re on a call to discuss the term sheet, so we’ll show you a snapshot of that now.
Sal: Hey LeNola! It’s good to see you again. Thank you so much for sending along this draft Term Sheet of the line of credit we are exploring with NFF. I have reviewed it with our Executive Director and our Board Finance Committee. We’ve gathered some questions just so we can really understand all of what this means for ABC. So just hoping we can go over those today.
LeNola: Of course! Ask away!
Sal: All right. So I’m going to share the term sheet that you sent over, which I’ve marked up a bit. So my first question is related to this the word, “Revolving”. It says, “Nonprofit Finance Fund is pleased to provide this term sheet for a Revolving Line of Credit (“Loan”) of up to $1,400,000 to bridge payment from government contracts.” I just want to clarify: What does “revolving” mean, exactly?
LeNola: A revolving line of credit works somewhat like a credit card. You can access a certain amount that you request to borrow, pay back, and borrow again, as long as you stay within your limit. It is a flexible ongoing loan. But, unlike a credit card, a Line of Credit will only be available to you for a fixed term (in this case one year).
Sal: Okay, thank you. That’s what I assumed it meant; I just wasn’t familiar with that terminology.
Another thing I’m curious about is this “Legal Fee” of $5,000. I’m wondering if you can share what this covers.
LeNola: Right. So the Legal Fee covers NFF’s in-house legal representation. This estimate is based on the complexity of the loan. It could be more if we need to hire external counsel.
One more thing, which is pretty important: We strongly encourage you to have your own lawyer to review the loan agreement and other closing documents. And just to be clear – that legal fee listed in the term sheet does not cover legal costs for your own organization, for ABC. You want to hire someone who understands the loan terms and can represent your own best interests. If you are worried about these legal costs, there are some network organizations that can connect you to pro bono or legal counsel. Happy to send them over to you if that’s helpful.
Sal: Ok, great, so it sounds like this Legal Fee in the draft term sheet is more of an estimate, and we’ll need to budget for things like legal review on our side. That wasn’t something we had originally planned for when we were first looking into this line of credit. It’s definitely something that we’ll plan for now. If you have any resources around pro bono legal counsel, that would be really appreciated.
LeNola: Absolutely. I will include that in our follow-up email.
Sal: Okay. Thanks so much.
So my next question is related to security, or collateral. I know it basically means the lender needs something to fall back on if we can’t repay our loan. But we don’t own any real estate, so I’m not totally sure how this works.
LeNola: Right. This is a very good question. The Collateral needed for this Line of Credit is going to include all of ABC’s assets: any property that you own, including any equipment, inventory. In your case, it is mostly going to be accounts receivable.
Sal: Okay. It’s helpful to know that this covers more than real estate. And I’m also wondering about “UCC-1.” I should maybe know what this means, but maybe you could just explain a little more what that it is.
LeNola: UCC stands for Uniform Commercial Code. It’s a lot more important to understand what it is used for. It is kind of like a database that lenders use to see if any other lenders or banks have claims on assets. SO just to simplify that, to put it another way, if the organization has already pledged those assets as collateral to someone else, this is where we go to see that.
Sal: Okay. Since we do not have existing debt today, I guess I wouldn’t expect anything to show up there for us. But this is good to know for any future loans that we might seek out.
I also wanted to spend maybe a few minutes talking about the “Advance Rate” and the “Borrowing Base.” It says that the Advance Rate is equal to 80% of our eligible receivables. And then the “Borrowing Base” defines “eligible receivables” as those that are aged less than 90 days. Can you provide a little more detail so I understand these clauses?
LeNola: Absolutely. This is a very good question. We look at your receivables to determine how much you can borrow. Those are contracts that ABC has invoiced for but still waiting for reimbursement. Once those contracts pay, you’ll use those funds to pay down anything you’ve borrowed from your line of credit.
The borrowing base is the full amount of your eligible receivables, meaning invoiced contracts that are 3 months old or less. You can borrow 80% of that total, up to a maximum of $1.4 million, whatever is smaller. So, if 80% of your eligible receivables comes to more than $1.4 million, you can borrow the full $1.4 million. But if 80% of your receivables are less than $1.4M, you can only borrow up to that smaller amount. I think it might be easier to run through a couple of scenarios to illustrate what I mean.
Let’s say you were extremely busy and had $3 million in contracts invoiced last month. Since the advance rate is 80%, that’s $2.4 million. Because $2.4M exceeds the $1.4 million credit limit, you’re able to borrow up to the full $1.4 million. We’re going to pretend that you did that.
Now, in the following month, your receivables go down because some of those contracts paid. Your eligible receivables drop to $1 million, then 80% of that is $800,000. That becomes your new borrowing limit. So, if you still have $1.4 million outstanding on the line, from the prior month, you’d need to make a payment to bring your balance down to at least $800,000 or less. Fortunately, you have the cash to do that because the reimbursements came through. Does that make sense?
Sal: Hmm, I think so – but let me make sure I understand. So, this means as long as I have $1.75M in receivables, I’m able borrow the full amount of this $1.4 million line of credit. Is that accurate?
LeNola: Yeah, exactly. As long as those receivables are less than 90 days old.
Sal: Okay. This helps me understand how much we’ll have access to from this line of credit at different points over the year. I might have more questions later, or in the future. If you could send me these slides so we can test out some other possibilities and scenarios, that would be helpful.
LeNola: Absolutely. I will send this over after our call.
Sal: Okay. Just wanted to switch back to the term sheet. And also, I want to make sure I’m understanding everything related to this “Clean-Up” clause. It says: “The Borrower shall repay the entire outstanding balance amount of the loan and maintain a zero principal balance for 30 consecutive days over each 12-month period that the loan is outstanding.” So this means that the line of credit has to be repaid for 30 consecutive days over any 12-month period. Is that right?
LeNola: Absolutely. You’re going to need to plan for the clean-up at some point in the year. And that’s best to do using monthly cash flow projections. I saw in your quarterly projections that you have a large grant coming in the third quarter. It isn’t clear to me whether it will be received at the beginning or end of the quarter. Our loan originator, Brittany, told me you are working on monthly cash flow projections, right?
Sal: Yes! I am converting our quarterly cash flow projections to monthly projections using the template that Brittany shared. I will send it to you tomorrow. But we really want to save on interest expense, so we were planning to pay down the line of credit whenever we can, so we’ll be able to do at least two to three months per year. Could that count as our clean-up period?
LeNola: Absolutely!
Sal: Okay. That’s good news. So, I’m also curious about the “Good Faith Deposit” of $3,500. Would this deposit be refunded to us if we do not move forward with this line of credit from NFF?
LeNola: If we cannot obtain approval for your loan on our side, then yes, the deposit will be refunded net of expenses. However, it will not be refunded if you withdraw your application or if we get the loan approved but you do not move forward with closing.
Sal: Okay. I think this covers the questions that I had for today, but this has been really helpful to keep all of this in mind through the process. That makes sense and is good for us to keep in mind through this process.
Meadow: Sal and LeNola talked for a while longer. This was a condensed view of what reviewing a Term Sheet for a loan could look like between a prospective borrow and NFF.
I want to call attention to a few things that Sal did that we encourage you to do too. First, he wasn’t shy about what he didn’t understand. After LeNola answered his questions, he often rephrased or summarized her answer to make sure he understood. We call attention to this because this is a really good strategy to practice in any of your conversations with lenders!
If you’ve watched our other videos, you’ve heard us say this before: we’re always happy to answer questions! All questions are good questions in this process! It is better to thoroughly understand all aspects of the loan you’re seeking as early as you can, than hold your questions because you’re nervous to ask them. If the answer you get is confusing or full of jargon you don’t know, then ask us for clarification. That’s always welcome.
That’s it for this video. We hope it was helpful. If you have more questions or want to learn about the other steps in NFF’s lending process, check out the other videos in this series.
Underwriting
In this video, we will share what you need to know about the underwriting process.
Transcript
Welcome to the third video in Nonprofit Finance Fund’s series: Understanding NFF’s Lending Process.
My name is LeNola and I am an underwriter at Nonprofit Finance Fund. In this video, I will share what you need to know about the underwriting process.
As the underwriter, my job is to dig into the details, look at your organization’s finances, and understand what you need the loan for.
Because underwriting is usually the longest part of the lending process – taking at least a few weeks – we spend a lot of time together. Really, a lot of time together. With your help, I do a deep dive into understanding your organization and its needs, financial picture, current circumstances, history, plans for the future, and how our financing can help you achieve those plans. The more I understand, the easier it is for us to structure a loan that fits your situation and avoids issues down the road. The best part of my job is getting to know our clients.
You’re a nonprofit, and we are a nonprofit. We are in the business of supporting nonprofits to succeed in their mission-driven work, now and into the future. Our interests are aligned. What this means is that throughout the underwriting process we look for ways to reduce your risk and ours. We’re looking to increase the probability of successful repayment of the loan.
Ultimately, I compile my findings into a credit memo and present it to our credit committee, which is a team of decision-makers who vote on loan requests.
During the underwriting process, part of your role as the borrower is to answer questions and provide clarification and additional documentation through a series of meetings, calls, and follow up emails. We ask a lot of questions during underwriting, but – as the borrower – you should as well!
This is also a good time to ensure you have what you need to make it through closing. That includes securing legal counsel and preparing a board resolution to approve the loan.
Underwriting is a lengthy process, but this lets us lend to nonprofit organizations in a customized way that is not feasible for traditional lenders.
I’d like to show you an example of what some of these underwriting calls might sound like. So, in a minute, I’ll be joined by Sal, who is the Director of Finance for ABC nonprofit. We are discussing a $1.4M line of credit for ABC to help it manage cash flow. Sal has gone through our initial steps and now we’re working together on the underwriting. This might be the second or third time I’m connecting with Sal. I’ve sent a list of underwriting questions to him a day before.
So let’s jump into it.
LeNola: Hi Sal, nice to see you again. Thanks for hopping on the line. I have some more questions about the information shared in your last email, and I have some more general questions as well. Do you mind if I run through them and then I’ll leave some time at the end of our conversation if you have any of your own?
Sal: Hey LeNola, it’s good to see you again, too. That sounds great.
LeNola: All right, perfect. So let’s jump into it. Can you share a bit about who is responsible for managing and overseeing ABC’s finances? And how long everyone has been in their roles?
Sal: Sure. As the Director of Finance, I primarily manage ABC’s finances, but I work closely with our Executive Director on this. Our Board’s Finance Committee is heavily involved in our financial management, and they help us and support us with different decisions, including how we’ve decided to seek out this line of credit from NFF. I’ve been with ABC as the Director of Finance since 2021, and our Executive Director has been with the organization since it was founded about 15 years ago. The members of our Finance Committee really haven’t changed much since I started at ABC about 4 years ago.
LeNola: Perfect. You guys have a really stable team over there. Do you mind sending me the bios for the entire management team and your board members?
Sal: Sure, yes. I can those over by the end of the day.
LeNola: Ok, cool. So I’m just going to change gears a bit. Do you mind sharing a bit about ABC’s annual budgeting process?
Sal: Sure! Our fiscal year ends on June 30, so our budgeting process usually begins in February each year. We work with each department head to set our budgets, and then together with the full budget team to get a draft of the full organizational budget. Then we present that draft to our Finance Committee in May, and then we get the board’s final approval on that budget at our June board meeting.
LeNola: Ok. That’s pretty standard. Does ABC have any existing debt today, or has it ever had a loan or a line of credit or anything like that in the past?
Sal: The line of credit be our first time borrowing money, though we did take out a PPP loan during COVID.
LeNola: And was that forgiven?
Sal: Yes, it was fully forgiven in 2022.
LeNola: Ok. Perfect.
You shared earlier that you were awarded a larger contract this year with New York City Department of Small Business Services – larger than in prior years. Can you tell me, if you remember, what the first year was that you received an SBS contract? And what that average delay in reimbursement payments is?
Sal: Yes! So we were first awarded that contract from SBS in 2019. And what we’re seeing is, on average, reimbursement payments for our work on that contract tend to be about 60 days delayed.
LeNola: Ok. And I think you said also that this is going through the renewal process and you’re expected to increase. Do you mind putting me in touch with someone with SBS that can help me understand the renewal process? We usually do this for large contracts, reference calls with major funders as part of our process.
Sal: Sure, I can put you in touch with our primary contact there. I’ll let them know you will be reaching out with questions about the renewal process.
LeNola: Ok, perfect. I’ll let you know if I need anything else on that front. And then one more thing before I hand it over to you for questions: I’m looking at ABC’s audits for the last five years. It looks like there was an unrestricted operating deficit in fiscal year 2022. Can you explain what happened that year?
Sal: Yeah, that was a tough year because our COVID relief money ran out, and we hadn’t fully recovered some of the income we usually get from things like corporate sponsorships. Those were a bit slower to recover to our pre-COVID levels. And during that time we didn’t want to reduce the size of our operations during COVID because we wanted to keep all of our staff in place.
But as a result we were kind of stretched thin in 2022. Thankfully we made it through, and since then our earned revenue has picked up enough to cover that gap. This year we’re on track towards another slight surplus as well.
LeNola: Ok, perfect. We saw that with a lot of our clients as well in 2022.
Sal: So, I should also share that least week we learned that we will be receiving another new city contract in about a month, which might change our financial situation a bit. If we were awarded the new contract, can you share how it would affect the process for getting approved for this line of credit?
LeNola: Well, first of all, congratulations! That is very exciting news. How big is that contract?
Sal: It’s for $500,000 per year from the Mayor’s Office. And it would be for additional workforce development programming.
LeNola: Ok. So it’s possible your borrowing base is going to increase once you start invoicing. Do you mind sending over any documentation you have on the new contract and keep us posted on the timing? It’s going to be helpful for us to know about any major changes that pertain to your financials during underwriting – and after closing, too. If you can show a higher need and stronger repayment ability during the underwriting process, we might actually have some room to increase the loan amount before I take this to committee for approval.
Sal: Sure, I’ll send over the documentation we have on that new contract.
So I know you may have shared this already, LeNola, but I’m struggling to remember right now: Can you just remind me of all the fees associated with this line of credit? I know that we will owe interest on any outstanding balance that we have against the line of credit, but can you remind me what those other fees are that we need to plan around?
LeNola: Good question. First of all, it’s totally okay to ask again. You can ask as many times as you want. We have a loan origination fee, which is 1.25% of the loan amount. That’s a one-time fee. There is also the legal fee, which will be finalized as we get closer to closing, and then if you decide to extend the loan, there’s an extension fee of 0.25%.
Sal: Ok! Thanks for that reminder.
Then generally, in terms of the loan approval process, can you share a little bit about what we can expect to happen next, particularly after your credit committee makes a decision on our loan application?
LeNola: Absolutely. This is another very good question. Once I’ve completed the credit memo, I’m going to present your loan to our credit committee. There are several possible outcomes of the credit committee: They can vote on whether or not to approve a loan as I present it, they might approve but with changes or recommendations added to the loan structure, or they can ask for more information or further analysis before they make a decision. In that case, what it would normally mean is that I’m going to have to come back to you with more questions or due diligence requests, and then with that information, I’ll bring it back to the committee for another review.
If the credit committee approves your loan, we going to send you a commitment letter, which will outline the final terms of the loan, including any covenants or closing conditions, disbursement conditions that need to be met.
We can talk about the closing process in more detail later, but my role as an underwriter in the closing process is to make sure that the terms and the structure in the loan agreement are reflected accurately and I’ll be there to answer any questions that might come up. I’m going to stick with you all the way through the process until the loan closes.
Sal: Ok, thanks LeNola. That’s really helpful, just to know what’s ahead. You mentioned “closing” the loan – maybe I should have asked this earlier, but can you explain what you mean by “closing”? I was operating under the assumption that we were opening a line of credit?
LeNola: Ah, no problem! Very easy to clarify. “Closing” a loan simply means that we’re finalizing it. It’s the point when all the documents are signed, and all requirements are met, and the funds become available to you. So the wording might feel a little bit backwards since you’re “opening” a line of credit, but in lending we use “closing” the same exact way you would when you close a loan to buy a house. Once we close, the agreement is final and you can start drawing on your line of credit at that point.
Sal: Ok, that makes complete sense, thank you for clarifying that! I think that covers all my questions right now, but I’ll definitely reach out as we have more.
LeNola: Thanks Sal – I’ll be back in touch next week with my next list of underwriting questions.
Sal: Sounds great. Thanks, Lenola.
So, that was a condensed version of what an underwriting call with NFF might look like. In a real call we’d probably talk for longer and both have a lot more questions. We recommend taking a look at our What Lenders Look For video to get a better sense of the range of topics that will come up in an underwriting call, so you will be prepared to answer them.
That’s it for this video. If you have more questions or are interested in learning more about each part of the lending process, please take a look at the other videos in our series.
