Clearing Accounts About Non-Profit Debt

To the Editor:

Susan Kenny Stevens is a big proponent of non-profits’ borrowing funds as a means of reaching their goals (Letters to the Editor, September 18) and supports Richard Linzer’s hypothesis that borrowing can be a substitute for endowment funds (“Charities Should Borrow Money, Not Hoard It,” My View, July 24). She’s partly right — there are appropriate situations for non-profits, as well as other businesses, to take on debt. But borrowing money to serve as a portion of an organization’s core operating funds — which is the point of endowments, by way of earned interest — is not one of them.

Hopefully, Ms. Stevens read Clara Miller’s letter (“Dubious Financial Rules Can’t Substitute for Good Management,” September 18), in which she made the eminently sensible point that “loans never substitute for revenues.”

Despite the rather misleading headline above it, which I did not write, my letter (“Non-Profit Groups Should Borrow Money Only as a Last Resort,” August 21) rebutting Mr. Linzer’s assertion was not a general dismissal of borrowing as a tool; it was a specific response to a specific case, and both Ms. Stevens and Ms. Miller took it beyond its context. Few would disagree that responsible borrowing ought to be an option for non-profits. I’m guessing that most of the loans Ms. Stevens’s firm manages are in the responsible category, thus explaining the low default rate. But all types of debt clearly are not equally valid management tools.

Scott Schaffer
President
Philabundance
Philadelphia

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To the Editor:

I have been reading with interest the mini-debate over not-for-profit debt that includes Scott Shaffer, Richard Linzer, and now Clara Miller and Susan Kenny Stevens, and I feel obligated to weigh in on a few key, and, as yet, undiscussed points.

Both Ms. Miller and Ms. Stevens eloquently articulate the view that not-for-profits need to act more like businesses in their pursuit of mission. I completely and wholeheartedly agree.

The staffs and boards of not-for-profits are stewards and, as such, should use all of the resources at their command to pursue their mission to the maximum. Debt and fund raising are such resources, and they both need to be utilized for the appropriate purpose at the appropriate time. Neither debt nor donations should be considered (or used) as a panacea nor as a substitute for good, solid management. To paraphrase Ms. Miller, narrow rules narrow your options.

But beyond all of that there is another facet of this issue, and that is that debt is retired only by organizations that make a profit. It cannot be repaid by losses, nor by simply having revenues and expenses balance each year. Thus, not-for-profit managers and policy setters need to understand that they should never borrow (for working capital or capital improvements) if they do not have a well-written and well-researched business plan that shows them solidly in the black.

Additionally, funders, who regularly berate not-for-profits for not being independent enough, need to let those organizations keep what they earn instead of requiring a return of every cent not expended, if they want the charitable organization to be capable of taking on more risk and responsibility for its own destiny. And finally, the public and the general press needs to stop thinking of not-for-profits as organizations where making money is wrong, where rightfully earned profits are pejoratively described as “excess income,” and where organizations that run efficiently and effectively are often lambasted in public or punished in next year’s grant or contract cycle.

Borrowing prudently is a business skill that all organizations — for-profit or not-for-profit — need. There is no dishonor in leveraging your assets to the benefit of the people you serve. Rather, organizations that act as prudent social entrepreneurs need to be lauded and encouraged. We need to assure that our not-for-profits are not discouraged from nor punished for any solid management practice.

Peter Brinckerhoff
President
Corporate Alternatives
Springfield, Ill.