Long-term financial decisions made for non-profits can often involve the consideration of loans that can help your organization meet its financial needs. When taking on non-profit debt, there are many things that can be accomplished, yet organizations often overlook some of the negative situations that can arise when too much debt is incurred. Without the deep involvement of a senior financial advisor the ramifications of debt can easily be overlooked. Here is the price nonprofits can pay if they are not diligent in managing their debt wisely.

Changing Economic Conditions

When the economy is suffering, many of the corporate and private donations that might be expected can either disappear or be drastically decreased. This, in turn, affects your ability to pay off your non-profit debt, allowing interest to build.

Economic changes can also impact expenses if certain required services will see a rise in cost. This can limit plans the organization might have in place, such as building a new library for a school. All these things will also affect non-profit debt payments and interfere with strategic goals that require financial backing.

Adjustable rates will also be affected by economic change. This can either impact investments you might have made or any loans that were based on an adjustable rate. If the interest rate rises this will increase the amount due for payments, negatively impacting cash flow. If they lower, this will bring in less return on your investment (ROI).

No Contingency Plans

Taking on non-profit debt without a contingency plan is a major mistake. You must have a plan in place to allow you to continue with loan payments should something unforeseeable occur. Contingency strategies would include:

• A reserve fund to cover debt payments
• A plan to tap unrestricted funds if required
• A list of projects or requirements that can be deferred should debt repayment fall behind
• A list of programs that can be reduced if required

Without such contingency plans in place, your organization will quickly be forced to cancel major programs, delay or cancel plans for growth and tap into funds that were otherwise accounted for in the budget.

Poor Credit

There are many reasons your non-profit might wish to access more credit. Borrowing to even out cash flow is a perfect example, as you can often see delays between funds coming in between needing to pay bills or staff. In this case, a quick loan to keep things running is a must, but with poor credit, this option might not be available. You might also want to invest in capital purchases when opportunities arise, such as a deal on a new facility. If the funds are not available and a loan is required you run the chance of missing out on these opportunities. Maintaining an excellent credit rating will allow you to reach out to lenders when you need to, and get the funds that you require.

Insolvency

When your non-profit organization takes on too much debt, the foundation can become insolvent. Poor management of non-profit debt can be the downfall of your organization, interfering with operations and even leading to a complete shutdown. Before filing for bankruptcy, you can speak to a Licensed Insolvency Trustee at Charles Advisory Services to discuss filing for a Division 1 proposal instead.

If you are carrying non-profit debt and need assistance, we can help. Give Charles Advisory a call at (416) 915-9007, or contact us here.