As part of the broader COVID-19 stimulus package, the Federal Government is making significant funding available in loan form to small and mid-sized nonprofits. Funds were authorized under the Coronavirus Aid, Relief, and Economic Security Act (CARES) signed into law on Friday, March 27th. Before you dive into the details, evaluate carefully how it will work for your nonprofit.
Now is the time to evaluate
Accessing the CARES Act loans can offer your nonprofit important benefits. These loans are funds for nonprofits to retain staff and pay essential bills like rent and utilities into summer 2020. Even if your nonprofit is not anticipating a need to reduce staffing during the coming weeks, these funds may — and I emphasize, may — be useful for maintaining or expanding programs that are critically needed during this crisis.
The CARES Act caused a frenzy of applications for new loans. The speed involved in birthing the CARES act means the systems to administer them are only now getting into place, especially for the banks. If your nonprofit is diving into one of these loans, now is the time to consider a key question: what funds will you have available to use to repay a loan?
Make no mistake: These are loans
The CARES Act allocated money to go into loans via the federal Small Business Administration (SBA) Economic Injury Disaster Loan (EIDL) system and created a new separate loan mechanism called the Paycheck Protection Program (PPP). These loans are designed to assist all small organizations, for-profit businesses as well as nonprofits. Visit the iMission Resources page for additional information on the terms of these loans.
As you may know, your program grants have restrictions which prevent using grant funds for most administrative costs. Many grant agreements also explicitly exclude using grant funding for any repayment of loan interest or principal. In addition, some donated funds may also be restricted from use for loan repayment depending on the written descriptions used to originally solicit the funds from donors. In total, these grant and donor restrictions could seriously impact your nonprofit’s ability to repay any loans.
Potential for loan forgiveness
The Paycheck Protection Program (PPP) is designed to enable your nonprofit to maintain your staffing levels, or at least get back to your “normal” staffing level, by June 30, 2020 – even if your organization’s activities and programs have been curtailed by social distancing restrictions. If your staffing levels don’t change through this time period, the loan is forgiven and doesn’t have to be repaid. The forgiveness level may not be 100%, however, and depends on how you have spent the loan funds. Given the evaluation process, your lender may not let you know of whether and how much of your loan is forgiven until December of this year. Even if you comply with all the loan requirements and documentation, you may be required to start paying back the loan after the initial 6 month grace period – starting in November 2020 – before you know the full extent of your loan forgiveness level. PPP loans can also be used for adding staff, however, the level of forgiveness may decrease depending on when they were hired and compensation levels. The EIDL also has a $10,000 loan advance that is reportedly forgivable under certain circumstances.
Bravely peer into the financial future
Before applying for any loans, it’s important to take a close look at an updated picture of your organization’s cash flow, or income and expenditures, over the coming months. Start with your budget spreadsheet by month, and update it for your best guess at the likely range of income and expenses you plan to have. For the short-term, you will want to focus on your monthly income and expenses, or if your budget runs based on payroll periods, look within that time interval. Forecast out at least 12 months time to see where extra unrestricted funds will possibly come from so that you can repay the debt if you apply for a loan. Try not to rely on a balance sheet operating reserve, especially since that rainy day fund is likely already being hit with the current Covid19 crisis.
Using a copy of your budget spreadsheet for this kind of forecasting gives you a flexible tool or model to use to test “what-ifs” to allow you to see what happens to your cash flow in different scenarios. For example, what does it look like when all or part of the PPP loan would require repayment? What if you keep staff on payroll to maximize loan forgiveness? What if you do not rehire as much staff by June 30th, can you manage the higher loan repayment amounts? What if you need to start repaying the loan in November of this year?
Don’t go it alone
Pull in your accounting team to discuss the forecast variables and assumptions in detail. Your team may have ideas on ways to slow activities or payments in the short term. Get additional financial help if needed – many professional groups are offering free or extended payment terms because of the Covid crisis.
Now is a good time to let your grant-funders, both private foundations as well as state funders, know that your nonprofit organization is seeking a PPP or EIDL loan. Talk to them to see if they will change the grant agreement to allow for PPP or EIDL loan repayment if you were to get one. If this is possible, be sure to get the change in writing and ensure your grant funders understand that you are relying on this change when taking on one of these loans. You should check in with your grant funders on the treatment of their grant funding when you receive word from your bank that the loan is forgiven. Also, in your current and future donation solicitations such as now with a major donor, take care to describe the use of donations very broadly in any correspondence with them so that you have maximum flexibility in how donations can be used.
Good documentation is required
For the PPP and EIDL loan applications, you will need your most recent 990 form. For those of you with a December 30th fiscal year-end, see if your tax filing group can get it done now. The lenders will also want your most recent financials — a Statement of Revenue and Expenses, as well as a Balance Sheet – preferably the set that your board has seen. And, make sure your board or executive committee is following along on your evolving financial forecast whichever way you choose to proceed. A good board treasurer will understand the uncertainties around any financial forecasting in the midst of a pandemic.
If you succeed in achieving your pre-Covid staffing level, you must retain the necessary employment documentation to prove hiring dates and staff levels. Your PPP lender will ask for these in evaluating the portion of the loan to be forgiven.
Applying for the loans
Based on the documentation you provide in these applications, the lender will determine what level of loan you are able to receive. Needless to say, you must attest to the accuracy of the information you supply. For the EIDL loan application, you apply online to the SBA, but due to very high demand, the site may be very slow. Once you’re on the site, be sure to click the box asking for the $10,000 advance. There are some differences in vocabulary in the SBA world. The forms ask about “owners” although they do know that 501c3s don’t have any. Fill in an organization officer’s name as an “owner” as we have heard that putting N/A in the online form can kick out the application. Also, try listing 0% for the ownership level when asked on the form. In the forms, the SBA asks for “sales” when they mean revenue or income. The online process may take several hours to complete because of the large volume they are experiencing just now, but stick with it.
For the PPP, roughly 50 different Connecticut lenders are offering these loans and additional lenders are becoming eligible each day. Some lenders will take applications from non-customers, but some are working only with existing banking customers. We have heard that Peoples and Webster banks are processing loan requests quickly, however, check with your own bank first to see what they offer and ask about the time frame they are experiencing for application processing. You will be working with a bank loan officer from the commercial side of your bank so it is likely to be someone from a different bank department who will help you, rather than someone you already know from your regular bank branch staff.
The terms of the PPP loan vary between different lenders. You will want to apply to just one lender for the PPP, but your organization can apply to both the PPP and EIDL programs if you choose.
Before you sign the final documents
After the application process and before signing the final documents, be sure to read all the terms of the loan in detail. You will also want to be sure to share the loan information with your board treasurer and make arrangements to have your board or executive committee approve the borrowing plans.
For more information and resources, please visit iMission’s Covid-19 Resources for Nonprofits.
About The Author
Dorothy Adams is a nonprofit interim executive and serves on the board of the CT-based community development lender, Capital for Change. To contact Dorothy directly, you can find her on LinkedIn.