Article written by, Yongmei Chen, Senior Vice President, Community Development Lending, Eastern Bank
There are well over a million non-profits in operation today in America, and they are the cornerstones of our communities. Since these organizations often operate in unique operating environments and also in various business models, they often need a financing partner that can appreciate their particular financial situations and provide solutions to meet their needs.
Lending to non-profit organizations presents unique challenges to banks. The traditional “Five Cs of Credit” (credit history, collateral, conditions, character, and capacity) due diligence process doesn’t always apply to the non-profit borrowers. So, what are some of the key factors, in addition to the Five Cs, that banks evaluate when lending to non-profits?
The management team of a non-profit is comprised of the board and the executive team.
The organization is stronger if board members include professionals and business people who can assist in decisions ranging from finance to real estate projects. The overall assessment of the board also includes member stability, background and general trends of past board membership versus the current membership.
It is also essential for a lender to learn the backgrounds of key employees—those responsible for fundraising, project management, financing and business execution. The stability of the executive team and their relationship/interaction with the board are often good indicators on the health of an organization.
Most organizations rely on fundraising to support or supplement its operational expenses. A lender usually evaluates an organization’s fundraising ability by examining the composition of its donor base.
If an organization has a large and diversified donor pool, it is usually an indication that the organization has a well-executed development plan.
Board participation in fundraising serves as another indicator for the lender. A strong organization usually has an engaged board of directors behind it.
Due to the unique nature of revenue and funding sources, most non-profit organizations experience fluctuating cash flow cycles throughout the year. An organization’s ability to plan and manage its cash flow and maintain the necessary liquidity level is a major area of evaluation for a lender. It is also expected that an organization should have a good handle on its restricted funds and the discipline to keep them out of the working capital funds.
Yongmei Chen has been in the banking industry for over 20 years and is currently a Senior Vice President of Community Development Lending Group at Eastern Bank. Her lending focus is in the areas of affordable housing, economic revitalization projects that involves tax credits, and general non-profit lending. Yongmei is also an active member of several boards of directors in the Greater Boston area. She can be reached at (617) 897-1048 or email@example.com.