🔒Banks find ways to finance nonprofits, despite their lending and revenue challenges

Founded in the basement of a Hopkinton home, the nonprofit Project Just Because moved locations five times in its first 24 years of existence as demand for its services grew and space became too tight. “I always wanted to buy a building, so our legacy would have staying power,” said Founder and President Cherylann Lambert Walsh. That staying power arrived in 2022 when Natick-based Middlesex Savings Bank provided a mortgage enabling Project Just Because to switch from renting facilities to buying three commercial condominiums for $2.1 million on South Street in Hopkinton, totaling more than 16,000 square feet. The nonprofit went from serving 40 families per week to 950 at the new facility, providing food, clothing, and household items to those in need, fulfilling Lambert Walsh’s vision when she started the nonprofit with her young children in 1998.

“The numbers have changed through the years. There is more need than ever,” she said. Because nonprofits have nontraditional financial structures, banks often have to get creative to provide them with enhanced financial services. Yet, nonprofits can become excellent bank clients, especially those with established cash-flow history. With more than 40,000 nonprofits operating in Massachusetts, they can make up significant portions of banks’ commercial loan portfolios.

“Nonprofits in general are considered higher risk,” said Sean O’Connell, president of Fidelity Bank in Leominster. “They can be trickier, because so many considerations go into them.”

Overcoming financial risk

When a for-profit business needs a commercial loan, a bank can assess its financial risk by evaluating the company’s revenue, cash flow, operational history, and profit-and-loss statements. Business owners often will provide equity and a personal guarantee, putting up assets like their homes in case the business defaults on the loan.

“It really is the cash flow and the collateral,” said Mary Dean, president and CEO of Clinton Savings Bank. Nonprofits don’t have owners, so no one can provide a personal guarantee of collateral. Their revenue typically relies on fundraising, grants, and distributions from endowments, all of which can vary from year to year. By design, they don’t have profits, so they don’t necessarily have money to draw on if their cash flow were to dry up.

“It is important to understand the business and how they get paid,” said Thomas Galvani, executive vice president and chief retail banking officer at Fidelity Bank. “To help nonprofits, it is helpful to see them similarly to for-profit businesses.” Cash flow and cash on hand are the big determining factors when making loans, Galvani said. The best nonprofit clients will have a long history of financial stability, reliable sources of revenue, and perhaps large endowments to fall back on. “Being a mutual bank, we want to support nonprofits in our community as much as possible, so we will service them where we can,” O’Connell said. If a nonprofit is newer or doesn’t have a strong financial history to justify a loan, Fidelity will establish a relationship with it similarly to any new business. The nonprofit can open an operating account so it can have basic financial services and build a rapport with Fidelity’s team. Clinton Savings Bank will partner with institutions like the Federal Home Loan Bank or the U.S. Department of Agriculture to help nonprofits get the financing they need. For example, Dean said a local nonprofit was looking to buy property and construct a building with a USDA loan, but the government agency couldn’t fund the construction under the loan conditions. So, Clinton Savings provided the financing for the construction, and then USDA bought out CSB’s loan once construction was complete. Nonprofit lending comprises 4% of CSB’s commercial loan portfolio. CSB offers nonprofits a unique deposit account with a higher interest rate than a typical business checking account. “When we are financing nonprofits, we know it is mission work,” Dean said. “These aren’t large national nonprofits. These are local and regional ones, and we know the good they do in the community.”

Providing charity

If all else fails, banks will make donations and sponsorships to nonprofits to help them fulfill their missions. Fidelity Bank donates about $450,000 to more than 200 nonprofits annually. “We support nonprofits in the community whether they are bank customers or not,” O’Connell said. Even though Fidelity didn’t provide the mortgage loan to Project Just Because, the bank – and Galvani, specifically – was critical in helping the nonprofit improve its financial standing by setting up fundraisers like a golf tournament and an auction night, said Karen Regan, fundraising director at the nonprofit. All that fundraising laid the groundwork for Project Just Because to get its mortgage loan, Regan said. The nonprofit still relies heavily on donations for its food bank, particularly from grocery stores around the region, like Trader Joe’s, she said. In the midst of the coronavirus pandemic, Project Just Because became a member agency of the Greater Boston Food Bank, which supercharged demand. The nonprofit spends an average of $263 per family each week. “It can be tough to get a bank because they view nonprofits as high risk,” Lambert Walsh said. “Luckily, we’ve had some deep-seated friends who helped us.” Brad Kane is editor of the Worcester Business Journal.