This article was written by Michael Darnaud, and is based on his direct market research and personal observations, having reached out to over 500 non-profits at Executive Director or CFO level. Michael argues that non-profits (in the USA, specifically) are subject to various misconceptions around their finances and funding. In this piece, he sets out to bust some of these myths.
Non-profit organisations represent over 5% of the US economy and yet most people have several misconceptions about them. In your own experience, you’ve probably heard things like “it’s harder to work with non-profits than with for-profit businesses”, “they don’t operate efficiently” or “they represent a very small portion of the economy”. The reality is quite different.
According to GuideStar, there are over one million non-profits in the USA and a third of them exceed $1million in revenue. Altogether, non-profits (also referred to as 501C3s) generated close to $2trillion in revenue in 2017 and owned over $3.5trillion in assets. In 2017, in the US alone, they borrowed over $700billion, with a minimal default rate. And yet, if you talk to non-profit executive directors or CFOs – and I’ve contacted over 500 of them in the past 18 months – they will tell you that they find it extremely difficult to raise money.
Myths that make it hard for non-profits to raise funds
One common misperception is that non-profits take forever to make decisions, since there can be many people involved in the decision-making process, including management and at least a quorum of board members, to approve any important decision.
Another issue that lenders raise is that since non-profits are by definition not focused on making a profit, can they be sure that they’ll really use best practices when it comes to marketing their own activities?
There is also the perception that making a loan that ends in default could be traumatic, both for the borrower and the lending entity. For example, if a local church defaults on a loan, potential lenders are concerned about the steps they may need to take. Could they stomach shutting down such a community institution?
Others wonder how their loans would be secured, since they presume that most non-profits don’t have much in terms of assets.
Combatting the myths
The reality in US non-profits tends to be quite different. Well-managed organisations, whether non-profits or for-profits, have established superior communication channels between their management teams and their boards. This often enables relatively fast decision-making. Oftentimes, board members bring particular knowledge that will help the organisation arrive at a decision in a timely manner.
With regards to marketing acumen, just as with many similar-sized for-profit organisations, the majority of 501 C3s actively leverage social media tools, such as Facebook, Twitter, Instagram, YouTube Live, Periscope, etc.
Additionally, most non-profits are run very conservatively when it comes to financial management. They would not consider signing up for a loan unless they are absolutely certain they will be able to repay it.
Of course, one cannot exclude Force Majeure events, such as war, labour strike or extreme weather, in which case each party will have to become more creative about loan management and repayment.
One way to insure against negative outcomes is to secure a loan with assets that don’t impact the non-profit’s core business. Board members may be happy to personally guarantee the loan, which shows an even deeper commitment from the organisation to be able to repay it in time.
In 1977, Congress passed the Community Reinvestment Act (CRA), one of the Carter Administration’s key initiatives. This law was meant to encourage financial institutions help meet the credit needs of their local communities by providing what is sometimes referred to as “portfolio loans.”
One area of focus was to encourage the funding of low and moderate-income neighbourhoods. In 1989, during the first Bush administration, the regulators added the notion of a CRA-compliance rating system, which spans from “Outstanding” to “Significant Non-Compliance.”
Today, most banks either have an entire department focused on compliance with the Community Reinvestment Act, or on incorporating many of its recommendations throughout their entire operations. That does not mean they have to lend to non-profits, however. That decision is left entirely to the bank’s management, in accord with its stated objectives.
Lenders leading the way
Some of the senior executives I’ve surveyed, who head either FinTech companies that lend to small and medium size businesses or mid-size banks, have mentioned the issues previously covered as the reason why they chose not to lend to non-profits. However, the ones that strive to lead B Corporations or care about the triple bottom line, clearly see the value in lending to non-profits as it allows them to directly show how they care about environmental and social issues, not just financial ones. Some progressive banks, including Beneficial State Bank, New Resource Bank, and even the larger Silicon Valley Bank, have built significant business practices around non-profits and this has helped them gain new customers in the for-profit world.
If you are lucky enough to visit their headquarters, you will notice that this activity is an integral part of their physical presence, with special boards, activities, and designated spaces reminding every employee of the bank’s commitment to support surrounding communities and social causes less fortunate than them.
The non-profit sector is a force to be reckoned with, as it now represents over 5% of the US GDP. FinTech companies and banks of all sizes should take a fresh look at this critical market segment of our economy and help them grow into the 21st century.
About the author
Michael Darnaud is a senior technology executive with extensive experience in sales, business development and marketing. Michael has advised, and worked for, start-ups serving a range of industries, including government, transportation and financial technology (fintech) and other technologies.
Most recently, Michael lead sales and marketing for a crowdfunding company that provides affordable loans to non-profits. There, he built a pipeline of $100M and provided loans and deposits to a variety of non-profits. Michael was also responsible for building partnerships with leading banks, credit unions and family foundations, as well as community-development financial institutions.
Michael previously worked as a Senior Consultant at PwC, helping Fortune 1000 companies around the world implement the latest social media solutions. He was COO of a software company that was sold to Diebold, and in charge of business development at an internet appliance company that was sold to IBM.
For more information and news from Michael, or to tap into his knowledge of the non-profit sector, visit his LinkedIn page or email him.