Nonprofits: What They Really Mean to Our Economy
Michael DarnaudNonprofits represent over 5% of the US economy and yet, most people have a number of misconceptions about them. In your own experience, you’ve probably heard things like “it’s harder to work with nonprofits 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 1,8 million nonprofits in the United states and exactly a third of them exceed $1Million in revenues. Altogether, nonprofits, 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 only, they borrowed over $700Billion, with a minimal default rate. And yet, if you talk to Nonprofit 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.Why is that? Nonprofits often run up against common misconceptions about how they operate, and what it’s like to do business with them. One is that non-profits take forever to make decisions, since there can be many people involved in the decision-making process, such as Management, and at least a quorum of Board members, to approve any important decision. Also, since they are by definition not focused on making a profit, some question whether they really use best practices when it comes to marketing their own activities? Another reason is that there is 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 such a community institution down? And others wonder how their loans would be secured, since they presume that most non-profits don’t have much in terms of assets.The reality is quite different. Well-managed organizations, 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 and, oftentimes, some Board members bring particular knowledge that will help the organization arrive at a decision in a timely manner. With regards to marketing acumen, just as with many similar-sized for-profit organizations, 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, labor strike or extreme weather, in which case each party will have to become more creative about loan management and repayment. One way to ensure against negative outcomes is to secure the loan with assets that don’t impact the non-profit’s core business. Often times, Board members will be happy to personally guarantee the loan, which shows an even deeper commitment from the organization 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 particular area of focus was to encourage the funding of low and moderate-income neighborhoods. 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. That decision is left entirely to the bank’s management, in accord with its stated objectives.Some of the senior executives I’ve surveyed, who head either FinTech companies that lend to small and medium size businesses, or to 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 nonprofits 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 nonprofit 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 professional business development executive who has prior experience in helping FinTech companies or banks establish and run a non-profit lending practice.
