Question: Can we loan the organization start-up funding?
This is not a unique question. We answer this several times a week. New organizations simply do not typically have funding when they are just getting set up. Founders or board members or just people who want to help get this thing off the ground offer to loan the organization money to get started and hope to be repaid once the nonprofit does start raising donations or program revenue whether through fundraising events, online social media soliciting or word of mouth awareness.
The Answer: Yes, but…
The simple answer is Yes, the nonprofit can agree to repay individuals who want to help get things started but who don’t want to consider those funds as a donation that they are making to the nonprofit. Nonprofit organizations can use loans to help fund its expenses, as any company can. The terms of the loan(s) are what need to be considered. Is the repayment structure of the loans privately benefiting the lender through interest being charged above and beyond reasonable? Is the lender an insider or disqualified person?
Best solution – Transparency and Documentation:
The best scenario we see most of the time for new nonprofit organizations is a founder or board members agree to lend startup funds at no interest to the nonprofit. This clearly demonstrates that no individual is privately benefiting through the lending of funds. In this set up, the nonprofit repays the startup funds back to the lender from its future donations or program revenues as these are received into the nonprofit. If there will be interest involved, be sure that the interest being charged is nominal and preferably below what traditional lenders would charge, again to demonstrate that the lender is not seeking personal benefit from transaction.
Additionally, any arrangements of lending and repayment should be documented as known and agreed to by the board of directors, to include how much the loan is and the terms or conditions of repayment as well as interest being charged or not. Record keeping is vital to transparency and avoids confusion later.
This helps the nonprofit’s leadership be fully accountable and informed. This also documents that the payments back to the lender is not considered later misunderstood to be salary or compensation, which might otherwise be taxable to that individual.