Lending to Nonprofits in Uncertain Times
3/20/2025
With potential cutbacks in federal spending and shifting donation patterns, banks that work with nonprofit borrowers should take a proactive approach to risk management. In a recent RMA Journal article, Kathy Swift, a nonprofit development officer at Olympia, Washington-based Heritage Bank, shared practical strategies for supporting nonprofit clients while safeguarding the bank’s portfolio.
Prioritize Open and Frequent Communication
Banks need to hear both good and bad news from their nonprofit borrowers. “If they go radio silent, that’s the first sign of a potential problem,” Swift warned. She recommends routine check-ins, especially for borrowers facing challenges, to stay ahead of potential issues before they escalate.
Go Beyond Historic Credit Models
Past economic crises, like the Great Recession and the pandemic, provide useful context for nonprofit lending risk—but today’s environment presents new challenges. Many nonprofits are depleting stimulus and grant funds that previously masked financial strain. Relying on historic credit scoring models alone could lead to inaccurate risk assessments. Instead, lenders should consider real-time financial data and external factors, such as shifts in government funding or delayed reimbursements for contracted services, when evaluating nonprofit creditworthiness.
Monitor Financial Trends for Warning Signs
Tracking nonprofit borrowers’ deposit and credit line activity can reveal early indicators of distress. Swift suggests setting up a dashboard to monitor trends, allowing banks to flag potential shortfalls—such as a lack of funds to cover an upcoming payroll disbursement—before they become crises.
Consider Short-Term Solutions for Long-Term Partnerships
Delayed payments from government agencies or grant cycles can create cash flow disruptions for nonprofits. Lenders can support financially sound borrowers by offering short-term forbearance or liquidity solutions to bridge gaps. When assessing these cases, Swift says it’s critical to ensure that nonprofits are keeping up with payroll taxes to avoid serious legal and financial risks.
Expect Nonprofits To Adapt
Nonprofit borrowers should be willing to make tough decisions to stay financially viable. Banks should evaluate whether a borrower is taking necessary steps like adjusting staffing, cost structure, and programming to funding changes. If not, deeper financial trouble may be ahead.
Balance Lending Risks With Broader Relationships
While nonprofits may carry more credit risk than for-profit clients, banks can structure relationships to balance risk and reward. Swift advises looking beyond just loans—including deposit relationships and operating accounts—to ensure a profitable banking relationship.
Sustainable business practices are essential on both sides of the lending relationship. By staying engaged, monitoring financial health, and working collaboratively with borrowers, banks can support their communities while maintaining a healthy balance sheet and delivering value to shareholders.
