There are many reasons why charities borrow money. They may need a loan for a third party with the charging of interest. Money lending is not a charity object; they do it for future investments. Workers need to think outside the box to make the deal possible and beneficial for both sides.
Actually, it’s the matter of social finances – to arrange the innovative funding. The classical scheme about same day payday loans doesn’t work here – even if the charity needs money urgently, it should prove the purpose of fulfilling other requirements.
What Is Charity?
According to Charitable Organization Law, these institutions are completely non-profit. The only people, who control the assets, are the trustees. They are in charge of bringing charity’s mission into life and ensure that financial deals run well. Similar facilities usually are not taxed by the Internal Revenue Service. Yet, some irrelevant business activity can be taxed, when it’s detected.
For being a non-profit foundation, every charity has to pass three tests:
- Organizational – you must choose a category between educational, scientific, religious, etc.;
- Political – no politicians should be involved in the process;
- Asset – the charity founder doesn’t make it for some personal gain or a particular employee’s benefit. That’s one of the main angles to consider before bringing your next project to life.
So, charity can’t provide corporate income. It analyzes options for borrowing money and plans the terms of repayment. Any bank wants a decent profile of a company with a dependable source to get cash for repayment from.
Trustees and Conflict of Interests
Charities may need to buy some lands or buildings. It’s a good practice to have at least three trustees: a chairman, secretary, and treasurer. They are not paid for performed duties, except for some circumstances. No special qualifications are required to become a charity’s next trustee. But it’s not enough to attend a few meetings – preparing for this social role means being ready for overtime work. Moreover, the property should be revised before the organization can use it.
Any trustee handles all the government documents and is accountable for every mistake. Even so, the problems those people meet are pretty specific. First, it’s about indemnities or personal interest in making decisions. The important thing here is finding an alternative way to prevent a conflict. In this case, the borrowing money process will be harmless for the institution.
Types of Loans
Charities have many needs and fees to cover. If they’ve already asked for money, probably potential investors refused. It happens for some kind of infrastructure project or an upgraded IT system. Nowadays there are such types of loans:
- Overdraft facilities – many commercial banks provide it. “Overdraft” is an account with almost a “zero” balance. But, the charity may still withdraw cash and be charged at a stable interest rate. The previous agreement is obvious here;
- Revolving credit facilities – this method helps to manage credit flows;
- Term loans – organizations use it to buy real estate or new equipment. The interest rate may be floating, and the repayment schedule is specified for a customer. Term loans may be set for a short period or last up to 25 years. The loan limits the financial adherence the charity can take on, like dividends or debts.
Repayment on a fixed date or social return – you can choose anyway. It depends on the initial purpose of the loan.
Borrowing by charities is not always secured, as trustees tend to believe. They need to act properly and lawfully all the time; taking a loan is not a game for bluffing. Show interest in the company’s position and be aware of possible liabilities. Among the popular ones are financial loss due to improper actions or a third party with a legal claim. Such problems or financial mistakes can lead to bankruptcy.
The trustees need to be sure about the accountability of all the members. The Commission takes regulatory action against institutions that fail to provide accounts’ copies.
What about the internal resources? Here comes “the rule of prudence”, which states trustees must:
- Avoid using the assets;
- Avoid over-committing;
- Take care, when borrowing;
- Make sure you use assets only for right needs;
- Do not violate restrictions about spending funds.