Financial Underwriting on Nonprofit Loans

by

“Underwriting” is just a fancy word for performing a thorough review of a borrower’s information to determine whether a lender elects to make a loan.

By understanding what institutional lenders are looking for and by taking action now, nonprofits will be in a better position to attract financing when needed. 

The greatest concern that faces a lender is that the borrower is not able to satisfy the obligation. Significant time and effort is spent dissecting past financial performance and metrics to hopefully avoid such outcomes.

Thus, a bank’s first-impressions is critical and the first thing they often look at are financials. 

Having financial reporting professionally compiled is a must. Whether that means just third party compiled, reviewed or audited is based on the size of the organization and the underlying loan need. 

All too often, poorly presented financials have turned lenders away from qualified borrowers. Multi-year financial health, succinctly presented, with positive year-to-year trends is the first impression you want to make. 

As referenced in the year-to-year trends comment above, more important than showing strong financials is a nonprofit’s ability to illustrate that trends are pointing to a strong financial outcome into the future. 

Remember, lenders will be relying on future financial performance to satisfy the loan you are requesting.

In evaluating your financials, we encourage all nonprofits to ask themselves the following questions as it relates to the areas below as well as why the answer is what it is:

Revenue (Incomes)

  • Are we typically realizing growth year-over-year?
  • Do we have multiple sources of revenue or is it concentrated (donors, public support, rental income, grants, service revenue, etc.)?

Expenses

  • Are expenses outpacing revenues?
  • Will the loan or reason for the loan result in a long-term increase or decrease in overall expenses?

Donor Support

  • Are our financial donor participation numbers seeing year-over-year growth?
  • Is the donor attrition rate growing or decreasing?

Now more than ever, having a trusted ProAdvisor that can help counsel nonprofits on its options as well as assist in gathering the necessary information and succinctly communicating with lenders to best position the organization is vital.  

Todd Tarbert is CEO of Semble, a trusted non-profit advisor. To learn more about its services, you can call a representative at 877-973-6253. To see the financial impact Semble can have, try out its free online loan calculate by clicking here.