Finance for Not-for-Profit Organisations

Not-for-profit organisations have the same practical needs as any business, a bus for the community group, a vehicle for outreach, equipment for the club, a fit-out for the hall, without the same access to capital. Grants take time and don’t cover everything, and reserves are there for a reason. Finance fills the gap, and it’s more available to not-for-profits than many committees assume. Here’s how it works, how lenders look at an organisation that isn’t run for profit, and what to have ready.

What not-for-profits finance

The common purchases are much the same as for a small business:

• Vehicles and buses for transport, outreach and community programs
• Equipment, from sporting and fitness gear to kitchen, medical and office equipment
• Machinery and tools for maintenance and grounds
• Fit-outs for halls, clubrooms and community spaces

These are financed as assets, typically through a chattel mortgage or a lease, in the same way a business would. Our guide to chattel mortgages explains the structure, and the broader picture is in our guide to asset finance.

How lenders assess a not-for-profit

The difference from a business isn’t the purchase; it’s the borrower. Most not-for-profits are incorporated associations registered under state law, or companies limited by guarantee, and some are registered charities. Lenders assess them on:

• The organisation’s finances. Recent financial statements, income sources (memberships, grants, fundraising, fees) and the reliability of that income. A lender wants to see the organisation can carry the repayments from its ordinary income, not from a one-off grant.
• Its constitution or rules. To confirm the organisation can borrow and give security, and who is authorised to sign.
• A resolution to borrow. Committee or board approval, minuted, authorising the finance and naming the signatories. Lenders will ask for it, and having it before you apply saves weeks.
• The asset. Because personal guarantees from volunteer committee members are uncommon, lenders rely more heavily on the asset itself as security. Standard, resaleable assets such as vehicles and common equipment are the easiest to finance.

We’ve covered how not-for-profits sit alongside sole traders, companies and trusts in our guide to how your business structure affects finance.

Guarantees

This is the question committees ask first. In a company, directors almost always guarantee the loan personally. In a not-for-profit, that’s far less common, because volunteers rarely accept personal liability for an organisation’s debt, and lenders know it. It’s the reason the organisation’s own finances and the asset carry more of the assessment. Whether any guarantee is asked for depends on the lender, the amount and the organisation’s position, and it’s worth raising early so nobody is surprised.

Tax and GST

Many not-for-profits have concessions on GST, income tax or fringe benefits tax, depending on their status and registration. Those concessions can affect the whole-of-life cost of a financed asset and which finance structure suits best. It’s general information only and it varies by organisation, so it’s one to confirm with your accountant or the ATO before choosing a structure.

Grants and finance together

Finance and grants aren’t either/or. A common arrangement is using a grant as a deposit and financing the balance, which stretches the grant further and gets the asset into use sooner. Lenders are used to seeing grant income in an organisation’s accounts; what they look for is that the ongoing repayments are covered by recurring income, not by a grant that won’t repeat.

What to have ready

• The constitution or rules, and the certificate of incorporation
• The minuted resolution approving the borrowing and naming the signatories
• Recent financial statements and a summary of income sources
• ID for the authorised signatories
• Details of the asset, the price, and whether it’s a dealer or private purchase

How the process works

It runs the same way as any asset finance: establish the organisation’s position, compare lenders, get pre-approval if the asset hasn’t been chosen, then submit the formal application with the invoice or contract of sale. The lender pays the supplier on approval and the asset goes to work. The only real difference is the paperwork above, and if that’s ready, a not-for-profit application is no slower than a business one.

Where a broker fits

Not every lender is set up for not-for-profits, and the ones that are differ in what they’ll ask for. A broker who deals with associations, clubs and charities knows which lenders fit, what resolution and constitution wording they’ll want, and how to present the organisation’s finances, so the application goes in once and cleanly. For vehicles and equipment, see equipment finance; for broader organisational borrowing, business loans.

This article is general information only and is not legal, tax or financial advice. Confirm your organisation’s position with your accountant or adviser.

Damo Treadgold is the director of Treadgold Finance, an FBAA-accredited finance broker on the Sunshine Coast, arranging vehicle, equipment and business finance for businesses and not-for-profit organisations Australia-wide.

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