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U.S. nonprofits are growing in number, revenue and assets, according to the most recent data available on this important segment of the economy. Credit unions considering lending to nonprofits may want to be aware of these recent financial trends, as well as some of the ways lending to these organizations might differ from lending to for-profit member businesses.
According to the Urban Institute’s “Nonprofit Sector in Brief 2015,” the number of nonprofits registered with the Internal Revenue Service increased by about 3,000 a year between 2003 and 2013. Religious congregations and organizations generating less than $50,000 in annual revenue aren’t required to register, however, so the total number of nonprofits is unknown, according to the report.
Finances related to U.S. nonprofits are also opaque, considering only a small percentage is required to file some version of Form 990, the return for organizations exempt from income tax. Based on filings with the IRS, however, reporting nonprofits’ revenues and assets grew more quickly between 2012 and 2013 than did their expenses, the Urban Institute said. Revenues increased 3 percent to $2.26 trillion, assets rose 5.2 percent to $5.17 trillion, and expenses grew 1.7 percent to $2.10 trillion.
Nonprofits, excluding those serving government and business, contributed an estimated $905.9 billion to the U.S. economy in 2013, or roughly 5 percent of GDP.
As nonprofits continue to grow and expand their efforts, some credit unions are providing capital to help organizations bridge any gaps between revenue and spending. According to the Urban Institute, government contracts and grants constitute nearly one-third of 2013 nonprofit revenues, so if government funding goes down or timing for grants is delayed, that can leave a huge hole in a nonprofit’s budget or cash flow.
If your credit union elects to expand nonprofit lending, here are two common missteps to watch out for.
1. Referencing the wrong “revenue” account when assessing ability to repay. Nonprofits generally have three categories of revenue accounts that they use for reporting: permanently restricted (the donor or state law imposes restrictions on usage), temporarily restricted (the donor imposes time or purpose restrictions on the use of funds) and unrestricted funds. However, the permanently and temporarily restricted funds are often not available for use in debt repayment because they are earmarked for specific use. If your credit union is evaluating a nonprofit, the most accurate measure of capacity will be unrestricted funds, a subset of program service revenue.
2. Failing to hold the nonprofit to proper financial management and reporting standards. To reduce the likelihood of delinquencies and losses, the credit union should make sure that nonprofits provide regular financial statements and meet loan covenants, in the same way member businesses are required to do so. On occasion these organizations may choose to also take out loans from board members or others within the nonprofit, so within the updated financial documents, pay special attention to and ask about other debt that may not be with your or another financial institution.
Using a streamlined credit analysis solution designed specifically for nonprofit borrowers can help provide loan officers with a more accurate assessment of creditworthiness and can consistently measure and document credit risk in the nonprofit. Some solutions use real-time benchmarking data to show how a nonprofit compares financially to other organizations in that National Taxonomy of Exempt Entities or sector code.
While such a system is not a replacement for sound lending decisions, a streamlined credit analysis process can help ensure the credit union makes safe loans while the nonprofits it serves can continue their mission.
Mary Ellen Biery is research specialist at Sageworks, Raleigh, N.C.
