Many non-profit organizations have needs for various types of credit facilities from a financial institution. Credit needs vary from operating lines of credit, to long-term financing for buildings and equipment. As in any sector, there are those organizations that are debt adverse and others that use substantial debt to leverage growth. Regardless of where your organization is on the debt continuum, there is a common thread when it comes to requesting a loan from any financial institution—the underwriting process from the lender.
To help you and your organization increase the chance of success in obtaining a loan and shorten the time for a decision, there are a number of things you, as the borrower, can do.
Tell Your Story
When obtaining a loan, your organization now has a new business partner, and with any new partners the more information you provide up-front, the better their understanding of the needs and activities that exist before they “invest.” To help in creating this understanding, you should first prepare a document that contains:
- A short history of your organization
- A short and easy to follow description on the core programs
- A copy of the Articles of Incorporation and By-laws
- An organizational chart(s) of both management and the Board of Directors
- Biographies or resumes of key management and officers of the organization
- A description of the competitive landscape in which the organization operates, including a list of organizations that provide similar programs
- A description of the purpose for the loan and what the outcomes would be if the loan is obtained
For some of the above, the inclusion of charts, graphs and pictures are encouraged to assist the reader to more easily become familiar with your organization.
Now, we move on to preparing a complete and easy to follow financial information reporting package. This package needs to be well-organized and complete, and contain:
- Three most current years of audited financial statements, or any level of outside CPA prepared financial statements
- Most current interim/internal financial statement
- Three most current years of 990s
- A current detailed listing and aging report for pledges and receivables of any kind
- A current detailed listing and aging of accounts payable and other outstanding debt
- A description of the major revenue sources, including a discussion of any unusual timing of the revenue streams
- A description of the major expense items
While preparing these two information packages, it would be helpful to understand the key elements that go into the underwriting process at any financial institution. The cornerstone of underwriting is characterized by the five Cs of credit. These five Cs assist the underwriter in determining two things: the credit worthiness of the organization and, most importantly to the lender, your ability to repay the debt. The five Cs are:
Character = Integrity
This is the general impression you and the organization make on the potential lender. The lender will form a subjective opinion as to whether or not the organization is sufficiently trustworthy to repay the loan. The educational background and experience of the management team in the industry will be reviewed. The quality of your references, if any, and the background, tenure and experience levels of your Board of Directors will also be taken into consideration.
Capacity = Sufficient Cash Flow to Service the Obligation
The ability to repay is often viewed as the most critical factor. The prospective lender will want to know exactly how you intend to repay the loan. The lender will consider the cash flow from the organization, the timing of the repayment and the probability of successful repayment of the loan. Payment history on existing credit relationships is considered an indicator of future payment performance. Lenders will also want to know about additional sources of repayment, also known as a secondary source of repayment.
Capital = Net Worth
This is the net cash and other assets in the organization, and is often an indication of how well it’s been managed from a fiscal perspective in the past. Capital is often referred to as, “skin in the game,” meaning, the organization has assets at risk along with the lender, thus ensuring a motivation and desire to have successful operations.
Collateral = Assets to Secure Debt
Also known as guarantees, these are additional forms of security you can provide the lender. Providing collateral means an owned asset or assets are pledged to the lender with the agreement it will be the repayment source in case you can’t repay the loan. A guarantee, on the other hand, is just that. Some other person or entity signs a guarantee document promising to repay the loan if you can’t. Personal guarantees are more often used in general commercial lending to privately owned businesses. Most often, loans to non-profits do not contain these guarantees; however, in some circumstances, a lender may require such a guarantee, in addition to collateral, as security for a loan. This may be a requirement for an organization that has had some difficult financial history.
Conditions = Of the Borrower and the General Economy
This C focuses on the intended purpose of the loan. What will the loan proceeds be used for? Working capital? Additional equipment? Property? The lender will also consider the local economic climate and conditions, both within the industry and in other industries that could affect your organization, such as funding or contracting sources.
By contemplating and considering the five Cs of credit, the preparation of your loan “package” will provide the lender and its underwriting group with sufficient information to have a clear picture of your organization.
The preparation of these two documents should be completed before any meetings with a potential lender. A complete, well-organized package will demonstrate to the lender the understanding you have of your organization. It will indicate you are approaching the loan request in a thoughtful and professional manner.
While the preparation and delivery of this package does not guarantee a loan will be approved, it does, however, make it easier for the lender to provide an answer more quickly. By always viewing the lender as a “partner” in your organization, the process will be less painful and generally more successful.