1 of 25

Strategic Use of Debt Capital

March 15, 2023

2 of 25

Today’s Presenters

Kate Barr

President & CEO, Propel Nonprofits

Dana Lieberman

Senior Vice President, IFF

Martin Ludden

Executive Director, Saint Paul Neighborhood Network (SPNN)

Veena Iyer

Executive Director, Immigrant Law Center of Minnesota

3 of 25

Business model components

Revenue mix

Infra-structure

Program costs

Capital structure

Capital structure

Capital structure

4 of 25

Operating Revenue Is

  • Funds used by nonprofit to pay for regular costs of delivering programs and operating the organization

​

  • Reflected in the annual operating budget

​

​

Operating

income

Operating

expenses

5 of 25

Types of Capital – Financial and non-financial

Economic

Social

Cultural

Symbolic

Material assets and financial resources

Network of relationships

Knowledge and skills of staff; thought leadership

Prestige and social recognition

Source: Gaëlle Cotterlaz-Rannard and Michel Ferrary: A Bourdieusian Perspective on the Business Model: Exploring the Virtuous Circle of Societal Value Creation and Capture by Nonprofit Organizations

6 of 25

What does capital do for you?

  • Stability
  • Flexibility
  • Resilience, change, and adaptability
  • Durability

7 of 25

Working Capital

  • Cashflow

Manage the normal cash cycle for the organization

Stability and flexibility

  • Operating Reserves

Protects and stabilizes the enterprise in case of disruption of cash flow

Stability and resilience

  • Opportunity/Change

Funds for growth, scaling, R&D and innovation, or recovery

Flexibility, resilience, and adaptability

​

​

8 of 25

Long Term Capital

Fixed Assets

    • Purchase and improve productive assets
      • Land, buildings and improvements
      • Leasehold improvements
      • Furniture, fixtures, technology, and equipment

​

Endowment/Long term Capital

    • Provides for permanent obligations
      • Permanently restricted gifts to maintain commitments
      • Board designated quasi-endowment funds
      • Invested for long term preservation and appreciation with annual draw used for annual budget or designated purpose

9 of 25

What Capitalization Do Nonprofits Need?

    • Working capital

All

    • Operating reserves
    • Opportunity/change capital
    • Appropriate fixed assets

Most

    • Building and building reserves
    • Endowments

Some

10 of 25

Where does capital come from?

Owned capital

    • Accumulated from surpluses over time (revenue more than expense)

Contributed capital

    • Capital campaigns for facilities
    • Campaigns for change capital

Debt capital

    • Borrowed working capital
    • Borrowed for fixed assets

11 of 25

When is (and isn’t) debt capital a good option?

Working capital

Yes - Managing cyclical cash flow

Change capital

Possibly – growth, expansion, scaling

Cautiously – recovery from deficit, turnaround

Fixed assets

Yes – purchase and improve productive assets

Long term capital/endowment

Rarely – sophisticated financial planning and analysis needed

12 of 25

Q&A and discussion with panel

13 of 25

Accessing Debt Capital

14 of 25

Sources of loans

  • Commercial Banks
  • Public programs: SBA, USDA, state and local agencies
  • Specialized lenders
  • Leasing companies

15 of 25

Mission based lenders

  • Social purpose loan funds
  • Community Development Financial Institutions (CDFIs)
  • Foundations

16 of 25

Criteria for Lenders

    • Plan for source of repayment
    • Contingency plans for repayment
    • Quality of management and plans

Always

    • Collateral type and value
    • Fit with lender niche: location, industry, loan size, purpose

Often

    • Organizational structure (nonprofit, for profit) or ownership
    • Double or triple bottom line measures

Sometimes

17 of 25

Loan Terms

Repayment

    • Duration of repayment matches use

​

    • Possible balloon payment term

​

    • Lines of credit

Security

    • Real estate or equipment

​

    • Corporate assets collateral

​

    • Guarantees

Costs

    • Interest rates (fixed or variable)

​

    • Loan origination or maintenance fees

​

    • Out of pocket costs for transaction

Other Terms

    • Financial & organization information

​

    • Financial and management covenants

​

    • Impact data reporting

​

    • Prepayment fee

​

18 of 25

How to prepare for loan requests

Develop leadership support for borrowing

Identify who will be involved from the organization

Be prepared to share your organizational strategy and plans

Have current and historical financial reports

    • Do your own analysis of what you need – you’re the expert in your organization

Be prepared to describe the capital needs and options

    • Purpose, amount, and repayment plans

19 of 25

Borrower Lessons Learned

  • Readiness to use debt capital
  • Internal plans and decisions
  • Find the right lender
  • Match loan purpose with loan structure
  • Work through complications and obstacles
  • Build a productive relationship with lender
  • Awareness of risk vital

20 of 25

Productive Lender Relationships

  • Understand if this is a transactional or ongoing relationship
  • Understand goals of each party
  • Identify shared goals
  • Understand the compliance requirements
  • Communicate the expected information flow
  • Continually develop trust – no surprises
  • Manage changes in staff or circumstances

21 of 25

Faulty Norms

  • Nonprofits shouldn’t budget for surpluses 
  • Nonprofits shouldn’t have much cash
  • Nonprofits shouldn’t have/can’t afford nice thing
  • Nonprofits shouldn’t take on debt

​

​

22 of 25

Environmental Problems

  • Perception of nonprofits as risky or not well managed
  • Bank policies don’t consider nonprofit business models
  • Implicit bias and racial stereotypes; Systemic racism and racist policies

23 of 25

Q&A and discussion

24 of 25

Resources & Wrap Up

25 of 25

Thank you to today’s webinar sponsor: �communitybrands