Do bankers lend money to those who don't need it? The topic was the so-called 'Equity Gap in America.' The assembled group pointed to the difficulty nonprofits who have been around less than five years have in seeking working capital to fund their enterprises.
They were primarily a group of smart, dedicated nonprofit executive directors who were interested in the topic of assisting nonprofits obtain working capital.
As a former bank CEO, I was invited to join the discussion. Many shared their difficulties in obtaining traditional bank financing to provide the cash flow to help them run their nonprofits. Some had an established reliable, earned income streams dating back several years. Some had collateral to offer to secure the loan, others had partial personal guarantees they were willing to offer. All were clearly doing work benefiting the community by assisting the poorest in the community and oftentimes providing a way for the poor to create products to earn a liveable wage. I was very impressed by the quality of the ideas and the results they were achieving.
So, what is the hang up with the banks they talked to? I had to be the bearer of bad news. In one specific example, I explained that a bank cannot typically make a $200,000 line of credit facility to an entity in which the collateral can easily disappear or where there is an absence of personal guarantees for the requested amount. Since banks are in the profit sector, they have to ensure the loans they make have a very good chance of being paid back. The small rate of interest earned ($10,000/year) by the bank is not enough to take on the risk of a potential loss of up to $200,000. This is a difficult message to explain as the executive director knows in her mind, there is no way the loan is going to be misused in any fashion. Bankers remember how and why they lose money and try to repeat those scenarios from happening again. It is a particularly difficult time for the banking industry as many banks are struggling with record levels of loans gone bad in this economic cycle. As a result, bankers are even more risk averse than several years ago.
Perhaps this explains the equity gap in America. The group subsequently discussed how to close the gap and assist those nonprofits who are currently shut out by the traditional banking system.
Several ideas emerged. Nonprofits could seek sponsorship from their board members by asking those who know the most of the organization and who are charged with supervising its actions to guarantee a portion of the financing requested. If 10 people on the board are doing this, it is easier than one or two having to bear this responsibility.
Nonprofits could start with a smaller loan request, build a relationship with a bank and have a better shot with a larger request as the bank better understands their operation.
Finally, an umbrella organization could emerge to be the link between the bank and the nonprofit to provide the working capital. Banks would lend money to or invest in the umbrella organization, in turn the organization would underwrite and make the loan to the nonprofit. The umbrella organization would develop a greater expertise making working capital loans to nonprofits. Individual banks would have a smaller exposure to any one credit or non-profit thereby reducing the risk of a total loss. These models currently exist in several forms in the real estate market, but have yet to emerge in the working capital arena to be able to assist nonprofits with their cash flow needs. Perhaps there are some stimulus dollars that qualify?
Given we are looking for ways to stimulate the economy and jump start job growth, we should not overlook the growing nonprofit job sector.
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