Nonprofit organizations are not immune to the current financial challenges. An often-underutilized tool to help with these challenges is tax-exempt financing. Whether your organization is a health system, residential healthcare or senior housing facility, or another nonprofit organization outside of the healthcare space, there are options to explore that should fit your needs.
Bank held tax-exempt financing is advantageous in today’s market because it can provide a lower interest rate for new loans. It also serves as an attainable alternative to borrowing in public markets along with the flexibility of another source of capital for your organization. With tax-exempt financing, the interest a bank receives on the loan is exempt from Federal Income Taxes, and banks pass that savings on to customers via a lower interest rate.
This type of lending isn’t for every customer or for every bank. Below are some key questions to ask a potential partner before exploring this option:
What has your other experience been with tax-exempt financing?
Look for a lending partner that is used to dealing with nonprofits and familiar with how this type of lending works. An experienced partner will be able to address the benefits of this type of financing as well as its unique structure. They will also be able to steer you toward other lending solutions when tax-exempt financing isn’t the right fit for your business.
How does this type of financing work?
Ask for a detailed breakdown of the current rate, cost to your organization and – equally as important – the savings in the long run. While tax-exempt financing can sometimes require heavier legal fees to complete required additional documentation at the onset, the greatest benefit lies in the long-term savings to an organization.
To put this into perspective on a $5,000,000 loan for a nonprofit organization: as of today, the interest rate on a traditional loan might be 7.85% on a floating rate basis. On a tax-exempt basis, that rate is 6.51%, which could lead to a $67,500 in annual debt service difference to that customer.
What type of borrowing does this apply to?
Tax-exempt borrowing is only applicable to financing, or refinancing in certain instances, capital projects, and now that the rates are higher, this is an excellent time to consider leveraging this tool to lower your rates. It is worth noting that because of the additional costs associated with structuring tax-exempt loans, they are most beneficial to organizations looking to borrow $3M+, ideal for purchasing new locations or major renovations. If you are looking to borrow under $3M or for working capital, this likely will not be the right option for you.
The benefit of working with a bank vs. public market borrowing is that many smaller nonprofit organizations are not able to borrow in the public market, so banks allow for greater flexibility. They can also be another capital source and offer the potential for a partnership that can support future business needs.
What documentation should I be prepared to share with my lender?
In the bond market, an organization is required to report publicly their financial information both at the onset of a relationship and along the way. By working with a bank, the information goes to one source (your banking partner) and the transactions are private. Be prepared to have all documentation related to your project available and a clearly outlined letter of intent for the purpose for which you seek the loan.
Not every bank has an appetite for this type of lending so be sure to investigate a potential banking partner’s interest and experience with tax-exempt lending. I have personally worked on these deals for 30+ years and WSFS is keen to highlight the benefits of this financing because it benefits the community. As we all continue to navigate a tumultuous financial environment, it is important to ensure you’re able to explore every avenue to advance your mission for the betterment of your community.
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