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How Nonprofit Organizations Can Restructure Unsustainable Debt Levels

By Spodek Law Group | February 20, 2024

How Nonprofit Organizations Can Restructure Unsustainable Debt Levels

Nonprofit organizations provide critical services and support to communities across the country. However, many nonprofits struggle with financial sustainability and carrying high debt loads. When a nonprofit’s debt becomes unmanageable, it can threaten the organization’s ability to fulfill its mission. Fortunately, there are strategies nonprofits can use to restructure and reduce debt to sustainable levels.

Understanding Nonprofit Debt

Like any organization, nonprofits may utilize debt and financing to fund growth and operations. Common sources of nonprofit debt include:

  • Loans from banks or other lenders
  • Mortgages on buildings and property
  • Lines of credit
  • Bonds issued to investors
  • Outstanding payments to vendors

Most nonprofits have some debt on their balance sheets. However, high debt levels can become problematic when interest and principal payments consume too much of an organization’s budget. Signs that a nonprofit has an unsustainable debt load include:

  • Debt payments exceed 20-25% of annual expenses
  • Drawing extensively on lines of credit to fund operations
  • Using new debt to pay existing obligations
  • Inability to build savings and cash reserves

High debt reduces financial flexibility and leaves nonprofits vulnerable to economic downturns or revenue disruptions. It can also lead to poor organizational health and inability to invest in strategic priorities.

Debt Restructuring Strategies

If your nonprofit is carrying excessive debt, the organization should act quickly to restructure and reduce obligations. Common strategies include:

1. Working with Lenders

Approach lenders directly to discuss options like refinancing debt, extending repayment timelines, reducing interest rates, or forgiving a portion of loans. Lenders want to help valuable community organizations, and nonprofits often have more leverage than they realize.

2. Debt Consolidation

Consolidate multiple high-interest debts into a single, lower-rate obligation through a nonprofit lender like Nonprofit Finance Fund. This reduces monthly payments and simplifies repayment.

3. Sale-Leaseback Agreements

Sell assets like buildings to an investor, then lease the asset back long-term. This converts equity into cash for debt repayment. Here is an example of a nonprofit using a sale-leaseback.

4. Debt-for-Nature Swaps

Convert debt into a restricted contribution for conservation projects. The Nature Conservancy provides an example of this creative approach.

5. Federal Community Development Financial Institutions (CDFI) Fund

The CDFI Fund has a Capital Magnet Fund that provides competitively awarded grants to CDFIs and qualified nonprofit housing developers. These funds can help nonprofits reduce debt.

6. Changing Operational Budgeting

Restructure budgets and operations to focus more resources on repaying obligations. This may include cutting expenses, increasing revenue-generating activities, or even merging with another organization.

7. Debt Forgiveness Campaigns

Launch a community campaign asking lenders, donors, and other stakeholders to forgive a portion of the nonprofit’s debt as a charitable act. Emphasize the social benefits if the organization can continue serving its mission.

Best Practices for Nonprofit Debt Management

In addition to the strategies above, nonprofits should implement best practices to borrow and manage debt responsibly:

  • Set clear policies limiting debt to a percentage of expenses
  • Build cash reserves equal to 3-6 months of spending
  • Forecast cash flow needs for the next 1-3 years
  • Only borrow for critical investments tied to strategic goals
  • Continuously monitor the organization’s debt coverage ratio
  • Have board oversight for all debt decisions
  • Consult qualified financial advisors on complex deals

Following these guidelines will help nonprofits maintain sustainable debt loads in support of their missions.

Expert Debt Management Assistance for Nonprofits

Restructuring and repaying nonprofit debt can be complex, with major implications for the organization. Consulting experienced financial and legal experts is highly recommended when developing a debt reduction plan.

Pro Bono Partnership and Taproot Foundation connect nonprofits to free consulting from finance professionals. Lawyers from firms like Adler & Colvin also assist with debt restructuring. For hands-on management support, nonprofit finance firms like Nonprofit Finance Fund and Mission Capital provide financial guidance tailored to the nonprofit sector.

With expert help and quick action, organizations can restructure debt to sustainable levels and continue serving their communities. Reach out today to discuss options for stabilizing your nonprofit’s finances.

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