Nonprofit Financial Sustainability During COVID-19

MAY 15, 2020

While the Coronavirus Aid, Relief, and Economic Security (CARES) Act provided some financial relief for struggling nonprofits, it falls far short of fully covering their needs. Our latest blog post offers tips for sustaining nonprofit finances during the COVID-19 pandemic.

Funding Options Through the CARES Act

The CARES Act provided nonprofits with funding through various programs, including the Paycheck Protection Program (PPP) (which is available to 501(c)(3) entities, but not to other types of nonprofits), Economic Injury Disaster Loans (EIDL) and Emergency Grants (EIDL Grants). After resources from these programs depleted within two weeks of the CARES Act passage, Congress passed a new bill on April 24 to replenish those funds, the Paycheck Protection Program and Health Care Enhancement Act. Applications that were previously submitted for PPP and EIDL continued to be processed on a first-come, first-served basis. With the passage of the new act, nonprofits that had not yet applied can now submit applications. And while nonprofits are not eligible to participate in the Main Street lending program, the Federal Reserve has stated they are exploring alternative funding options for charities. Here are some best practices when applying for these funds:

Note Important Dates and Allow for Lead Time

Nonprofits must plan accordingly to meet deadlines for the various programs available to them. Currently, the deadline to apply for the PPP program is June 30, 2020, and the EIDL application deadline is December 31, 2020. Nonprofits should keep a close ear to the ground for any updates to application deadlines.

Organizations should allow sufficient lead time to:

1. Reconstruct financial records to calculate average total monthly payroll costs for the preceding 12 months.
2. Recalculate payroll costs if the application is deemed inadequate for including non-qualifying expenses.
3. Prepare and submit multiple applications in cases where the organization is applying for multiple physical locations.
4. Allow for delays caused by lender or SBA system capacity issues, which have been widespread to date.

Know the Application Rules

Many borrowers have had to restart the lengthy application process due to the inclusion of improper or incomplete information.  For example, when applying for the PPP program, 1099 workers must be excluded from payroll calculations. Another PPP program misconception is that one application can be submitted per business concern. This is not true for those applying for PPP for multiple physical locations. It would be a waste of precious time to reconstruct historical data and calculate average monthly payroll costs in total when the application would require supporting information by location.

If applying for multiple programs, borrowers must also be careful not to use the EIDL loan for the same purpose as the PPP loan. EIDL allows borrowers to cover fixed debts, payroll expenses, accounts payable, and other bills that cannot be paid due to the crisis.

For example, if borrowers use EIDL to cover payroll for certain workers in a certain period, PPP funds cannot be used to cover those same workers in that same period. The EIDL funds can be used to cover a different period or a different set of workers.

If nonprofits are applying for these loans, they should contact their lenders to understand clearly all the requirements to avoid any critical errors.

Establish Disciplined Tracking Systems

Now more than ever, it is critical to meticulously track costs and retain all supporting documents. This will allow the nonprofit borrower to stay in compliance with rules around the PPP and EIDL and avoid potential ramifications. In the case of the PPP, it will also position the organization to obtain loan forgiveness.

Borrowers should retain receipts, payroll registers, pay stubs, unemployment and insurance filings, cancelled checks, mortgage, lease, and utility proofs of payment, as well as any other documentation to support costs incurred and payments made.

Ledgers, systems, and mechanisms should be put in place to track spending of each loan dollar separately by program and by expense type, such as payroll versus non-payroll costs.

Explored Other Funding Options

In addition to the federal programs, states, cities and localities are offering a variety of programs for nonprofits. These programs range from grants to deferments on existing financial obligations to loan facilitation. Organizations should check local economic development websites frequently for updates.

Cost-Cutting Measures

Many local communities are relying on nonprofit organizations to help them through this trying time. But given the realities of the current environment, nonprofits are dealing with new demands and constrained capacity at the same time.

It’s a stressful time to run an organization, given the dual responsibilities of delivering your mission and protecting the health and safety of your employees, volunteers and other stakeholders. Your organization is being tested in ways never imagined and under unthinkable circumstances. To survive, all organizations should consider what costs can be reduced immediately to increase cash on hand. But what are the options?

1. Take a close look at non-mission-critical expenses, identify those that may be easiest to cut, and Be aware of penalties or other fees associated with early termination of services or changes in terms.
2. Renegotiate necessary expenses by requesting discounts during the procurement process. Don’t be afraid to ask vendors if they are willing to donate or lower costs for a nonprofit organization.
3. Contact lenders and certain credit companies, many of which are extending delayed payment terms and implementing no late Understand which payments must be prioritized and which offer some flexibility.
4. Leverage any available methods, including the loan programs included in the CARES Act, to offset costs.
5. Contact service providers such as your phone company, insurance company, or internet provider for a better rate plan or other options. Certain utility, phone, and internet service providers are suspending disconnections for non-payment. A variety of vehicle financing companies are forgiving payments.
6. Understand your organization’s cash flow and prioritize This includes cash on hand, expected revenue, projected expenses, and any restricted grant dollars that may be released.
7. Review options available to accelerate collection of receivables.
8. Review the organization’s access to savings and your working capital sources. Is now a good time to take out a line of credit? Will it align with your mission-critical services? Do you have a clear plan for repayment?
9. Are there opportunities to convert restricted dollars to unrestricted funds that can be used for general operations?
10. If a planned event is cancelled, reach out to ticketholders to see if the individuals are willing to convert the cost of the ticket into a donation, rather than receive a refund.

In addition, the CARES Act introduced several employment provisions that will ease the financial burden on nonprofits. Whether your organization is retaining employees or has had to make difficult decisions around layoffs and is now facing increased unemployment costs, there is relief available.

Finally, there are several tactics that—while not directly financial in nature—may drive efficient operations and yield long term financial results. Consider the following creative maneuvers to optimize operations and redirect resources:

1. Use staff time to work on tasks that have been backlogged, such as training materials for volunteers.
2. Share resources and foster partnerships. Offer up staff who may not be fully used in your organization as a resource for another organization.
3. Devise new fundraising ideas for your organization and train staff to prepare to execute.
4. Contact volunteers for your organization who may have time on their hands to increase their engagement and and involvement.

Looking Ahead

Nonprofit organizations should pay close attention to developments around potential financial relief. While the PPP and EIDL programs have been replenished, they are still facing unprecedented levels of demand from both the private sector and nonprofit organizations. Organizations should keep apprised of how these programs evolve, as well as any additional actions from Congress, Treasury, and even state and local governments and agencies. Doing so will enable nonprofit leaders to act fast when new relief options are available and will help increase their chances of being able to continue their missions in a challenging landscape.