CFHZ’s Line of Credit Guarantee Program
*May 2020 Update* CFHZ was able to approve all 11 applications to our Line of Credit Guarantee Program (LOC), for a total of $1.7 million in guaranteed lines of credit to local nonprofits.
In April 2020, The Community Foundation of the Holland/Zeeland Area developed an innovative new program: The Line of Credit Guarantee Program. This program allowed nonprofit organizations that are tax exempt under Section 501(c)(3) of the Internal Revenue Code, serve a charitable purpose in the greater Holland/Zeeland area, and had a 2019 operating budget in excess of $500,000, to apply to have a CFHZ guaranteed line of credit established through West Michigan Community Bank.
Why CFHZ established this program
CFHZ listened to our community partners as they described significant and sudden cash flow challenges due to loss of revenue and increased demand for services during the COVID-19 pandemic. We heard that significant decisions need to be made quickly, and without a lot of clarity as to what the next 3-12 months are going to look like. In response, we launched the Line of Credit Guarantee Program as a way to further leverage our Community’s Endowment assets to support some of our mid-to-large nonprofit partners and preserve critical community capacity in a time of extraordinary need.
Here is what the program accomplishes:
- Gives our nonprofit partners quick access to capital without the need to go through the traditional underwriting process or use their own collateral for a line of credit or loan.
- Provides flexible working capital to allow our nonprofit partners time and flexibility to function at higher capacity as they navigate loss of revenue and/or increased need. This flexibility is particularly helpful as many organizations are re-working how they deliver services, embracing new service roles they haven’t had to in the past, and still need time to gain a better sense of their financial picture in the coming months.
- Eases the burden on our nonprofit partners to access this kind of tool. The process with WMCB was turnkey once an organization was selected for participation by CFHZ.
Guaranteed line of credit approved limits were as follows:
- Nonprofit organizations with a 2019 operating budget in excess of $1 million could apply for a line of credit of up to $200,000.
- Nonprofit organizations with a 2019 operating budget of $500,000 - $1 million could apply for a line of credit of up to $100,000.
Additional specifications of the Line of Credit through WMCB:
- It is a 3-year, interest-only LOC meaning that the nonprofit only has to pay interest during the three-year term, but the full amount of principal and interest must be paid off by the nonprofit by the end of the third year.
- The LOC has a floating interest rate of the current Prime rate with a floor of 4%. This means that the interest rate will be 4% unless the prime interest rate goes above 4% (it is currently at 3.25%).
- WMCB has waived all loan origination and closing fees.
- The nonprofit can draw on the LOC throughout the first two years, but the third year of the LOC is for repayment only.
- The dollars from the LOC can be used for any operational expenses, but the dollars cannot be used for capital related expenses such as facility improvement.
In addition to guaranteeing the LOC, CFHZ provides reimbursement to the nonprofit for all interest that the nonprofit has paid on the LOC during the first 2 years, up to 4% per year. During the third year that the LOC is open (third year is open for repayment only), CFHZ will not be reimbursing interest costs paid by the nonprofit.
As it isn’t grant money, we understand this Line of Credit Guarantee won’t prevent nonprofits from having to make tough choices down the road. We believe it will provide the gift of time for nonprofits to make those choices, along with the option to spread the difficult decisions out over a multi-year period.
We also acknowledge that by only allowing nonprofit organizations with budgets over $500,000 to apply for this program that the LOC was for a limited portion of our nonprofit sector. We recognize that many smaller nonprofit organizations are doing very important and critical work as well and want to be clear that this particular program is only one tool in our toolbox.
In addition to this LOC guarantee program, we utilized the Emergency Human Needs Fund to deploy capital over a six-week period to organizations providing emergency basic needs services. We have also reworked our competitive grantmaking strategy for the remainder of 2020. There will be more information provided about our new competitive grantmaking framework and process in June 2020.
Please note – participating in this Line of Credit Guarantee program does not preclude an organization from receiving a grant from CFHZ. This is an entirely different process and tool.