WristbandsNow.com

The challenge (and opportunity) of nonprofit debt

The for-profit world used to complain that the nonprofit world (especially in the arts) needed to behave more like businesses.

Now that nonprofits are suffering the same wrenching impacts as every other industry, the complaint is that we were behaving too much like businesses.

The current such complaint relates to nonprofit use of debt.

One of the things for-profit businesses do is use debt to advance their profits.

If it's cheaper to get capital by borrowing the money, they borrow. If it's cheaper to get capital by buying, they buy.

Over the past decades, major nonprofits discovered this new terrain, and started using it to leverage their resources (instead of spending those donations, let's use them as collateral against low-interest bonds, and we can pay the interest with the investment returns).

When the financial markets collapsed this last time around, a whole bunch of folks holding debt and collateral against debt saw their financial position turn upside-down (homeowners, for example, found themselves with mortgage debt greater than the value of their homes).

It's easy to blame the individuals stuck with the bag (who might have known better), and slightly more productive to blame the system (which didn't help them know better).

But it would be a mistake to shun the tool we used to get here -- in this case, debt.

No doubt, many businesses on the commercial and nonprofit side underestimated their risk in using debt, as this New York Times article suggests about nonprofits.

And I'm not about to step to the general defense of nonprofits that over-extended themselves on the prospect of ever-increasing investment returns.

However, in the thoughtful pursuit of mission, a nonprofit is charged with exploring any resource it can bring to bear -- ever balanced against the risk of using that resource.

And tax-exempt debt is one of those resources.

A circular saw is a potentially deadly device, but it's an essential tool for building big things.

We can't stop using the saw.

But we can certainly learn to use it with more humility, focus, and intent.