Written by Sheila Filion, CPA, CA
Partner, Virtus Group
Not for profit organizations often undertake activities which may require external financing – whether it is to buy a building or cover operating expenses during slow times of the year. The financing strategy of the organization should align with the strategic plan and budget expectations, as these documents will define what the funds will be needed for, and when they will be needed. A borrowing policy establishes the framework for borrowing money and defines the expectations of the board.
A borrowing policy should outline the approved purposes for borrowing, the authority to borrow funds and any limits regarding the type of products, maximum borrowing limits and security that may be provided to a lender. Clear definition around the purpose for the borrowing ensures that the long term impact of the transaction is considered, and that the transaction assists the organization in meetings its goals. Borrowing to address current year or recurring operating deficits may have a negative effect on your long term viability.
The authority to make borrowing decisions and execute transactions should consider good internal control practices to limit the risk of fraud or inappropriate decisions. It may be prudent to require board approval of all borrowing transactions to ensure that the board is knowledgeable about the obligations the organization is undertaking. There are many financing products available, each with its own risks and rewards. Assessing the features is important to ensure that the products chosen meet your needs in a cost effective manner. The policy should address all forms of financing, not just the traditional products such as lines of credit or mortgages. Activities such as leasing, renting or leasehold improvements paid by a landlord are forms of financing whose borrowing costs are not as obvious. Any prohibitions should be clearly outlined in the policy.
Borrowing needs may change over time, and thus, a regular review of the borrowing policy is important to ensure that the financing strategy aligns with the current state of the organization.
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