In years past, not-for-profit organizations that found themselves in financial trouble typically would have closed their doors and quietly dissolved. More recently, with increased institutional lending and funding to not-for-profits, organizations must operate more like for-profit businesses when winding up their operations. In times of distress, not-for-profit entities, often layered with debt and other obligations, are more likely to seek bankruptcy in order to wind up and/or transition their operations. Although not-for-profit organizations may look in many respects like for-profit business structures (e.g., generating revenues through for-profit affiliates and engaging in hedging transactions), key distinctions exist that lenders should be aware of when extending credit to a not-for-profit borrower.
Generally, for-profit entities have the goal of maximizing profits for the benefit of their shareholders. Not-for-profit entities have no shareholders—instead they operate with a goal of fulfilling their stated mission. Such a fundamental difference in purpose provides a vastly different landscape for lenders, and certain expectations that lenders bring with them from the for-profit context need to be closely examined when engaging in not-for-profit lending. This may lead to the consideration of additional covenants and protections, which otherwise might not be necessary when lending to for-profit borrowers. While certainly not a comprehensive review, we highlight some of the key differences below.
