Philanthropy & Funding

Overdue Credit for Nonprofits

The American Nonprofits Federal Credit Union will provide loans and other much-needed financial services to member organizations.

Let’s say you’re a loan applicant with limited cash reserves and clients who are notoriously slow payers. Your odds of getting a loan approved are slim, even if you’ve been in business for decades.

Welcome to the financial reality that many nonprofit organizations face daily. “It’s a market failure,” says Pamela Davis, founder and CEO of the Nonprofits Insurance Alliance Group. “Most banks and credit unions don’t generally lend to nonprofits. They look at the way these organizations operate and say, ‘That’s not what we consider to be creditworthy.’” After 25 years of addressing another market failure—insurance coverage for nonprofits—Davis has stepped up, reluctantly, to create the first credit union in the United States that is specifically tailored for nonprofits.

“I spent a year trying to get talked out of this idea,” she says. “It’s such a big initiative.” In industry surveys conducted by Nonprofits Insurance Alliance, nonprofit leaders consistently bring up credit challenges as something they are eager to solve. “The amount of executive time and energy that goes into cobbling together solutions,” she adds, “takes time away from when these organizations could be thinking creatively about better ways to serve their clients.”

The credit union will be sponsored by a newly formed organization, American Nonprofits. The National Credit Union Administration has given preliminary approval for membership eligibility requirements. Beyond startup funding, the new credit union aims to raise $10 million in capital. Davis anticipates that a large portion of that sum will come from “patient capital” in the form of subordinated investments. The rest will come from a portion of member deposits that qualify as capital and from grants. (In April, the Silicon Valley Foundation approved a $50,000 grant for American Nonprofits.)

In pitching this idea to potential supporters, Davis draws on more than two decades of experience with the Nonprofits Insurance Alliance Group. When she started the insurance cooperative in the 1980s, nonprofits were considered “too risky to insure,” she says. Yet without proof of insurance, nonprofits couldn’t qualify for grants or government contracts. “Commercial insurance companies would say, ‘Oh, those nonprofits—bunch of do-gooders, social workers, taking care of vulnerable populations. You can’t insure that.’”

The Nonprofits Insurance Alliance Group has proven otherwise, insuring 12,000 nonprofits in 31 states and the District of Columbia. It has generated earned capital of $165 million and assets of $330 million as well as returning $26 million in dividends to its member nonprofits, according to 2012 audited financials. The self-sustaining model generates a 100-fold return on investment.

With about 80 percent of members paying for insurance by installment, “we know that nonprofits are great credit risks,” Davis says. Occasionally, an organization will need extra time. “So often, it’s that the county is obligated to pay, or the city, or they’re waiting for a federal contract that’s due. When we have extended credit under those circumstances,” she adds, “we’ve never gotten burned.”

Late payments are a disruptive but common practice in the nonprofit sector. The Nonprofit Finance Fund found in its 2012 survey that 52 percent of nonprofits receiving federal support report late payments. Nonprofits “have different financial models, needs, and restrictions from for-profits, and can benefit from specialized financial services,” says Antony Bugg-Levine, CEO of the Nonprofit Finance Fund.

The new credit union will offer products that take into account these unique needs. At a minimum, Davis expects to offer credit cards, lines of credit secured by government contracts, bridge loans, cash-flow lines, and loans for equipment, facilities, or vehicles. Employees, volunteers, and stakeholders of member nonprofits will be eligible for consumer products.

Technology will enable the American Nonprofits Federal Credit Union to run a lean operation without having to open bricks-and-mortar branches. Through a shared branching network, members of the new credit union will also be able to use the existing network of federal credit unions and ATMs.

If the new credit union succeeds with nonprofit customers, traditional lenders will likely take notice. “If you look at insurance, nonprofits are now competed for by insurers. The market has changed 180 degrees,” Davis says. “That’s the same thing we’d like to do on the credit union side.”

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  • Jack Shakely's avatar

    BY Jack Shakely

    ON May 23, 2013 11:12 AM

    Pamela Davis could prove that nonprofits were good insurance risks. She had the data. But the insurance industry imply didn’t believe her. She went her own way and made history.

    Now Ms. Davis tells us that nonprofits are credit-worthy, and she has the facts to back her up. Isn’t it about time that foundations and banks believe her? I certainly do.

  • Nancy Best's avatar

    BY Nancy Best

    ON May 23, 2013 03:44 PM

    Non-government Organizations (NGOs) are a critical factor in today’s social challenged world. They depend too heavily on federal, state, and urban governments for funding that is always short-sighted. Foundation funding is highly competitive, while it will be a major component of the financial strength of each. They do an amazing job with low overhead, many volunteers as a workforce, and a somewhat fragile donation base that runs a tide of “expense” donations and faith based donations, as well as the first quarter “donation” cycle. It is GREAT that there is a belief in their form and function. Kudos!

  • BY George Hofheimer

    ON May 24, 2013 06:24 AM

    As a analyst for the credit union system, I am intrigued by this idea. We have explored different underwriting criteria for consumers, but less so for organizations…especially nonprofits. I recall Wainwright Bank in Boston focused their commercial lending efforts on nonprofits, but they were acquired by Eastern Bank in 2010 and it doesn’t look like they serve nonprofits at the same level. This could be a classic case of disruptive innovation.

  • BY Bill Walters

    ON May 29, 2013 12:08 PM

    I was on the Nonprofits Insurance Alliance of California (NIAC) board for five years, and can say that the Nonproifts Insurance Alliance Groups has to be one of the best run companies in California.  Pamela and her staff have made this a well oiled machine, with a professional demeano;, providing an invaluable service to the nonprofit sector.  Board meetings were a pleasure to attend, watching and listening to staff reports, and the continuous push to improve.
    The nonprofit credit union is an ambitious project, but if anyone can pull it off, it will be Pamela and associates.

  • As a banker in a Community bank based in Washington, DC; I would say that many banks DO lend to nonprofits. It is especially easy to lend to them with Federal and Municipal Government receivables. Maybe a little tough if you’re anywhere in California or Detroit, but otherwise this is a pretty easy proposition. I have over 100 nonprofit clients and the organizations with good leadership and strong CFO’s understand that if you have to be late on a payment it shouldn’t be the bank.

    I’ve handled loans for equipment, lines of credit, outstanding pension liability, and real estate purchases for nonprofits all over the DC area for a wide range of 501(c)3’s and (c)6’s. A credit union may also be able to handle these requests, but they’ll do it without paying taxes…Last I checked, receivables paid by governments are paid with TAX money.

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