Personal loans a bad idea

Jane Kendall | May 4, 2009

Jane Kendall

When I did something really bad, my mom would say "The very idea!"

That's what I say about any loans from a nonprofit to its board or staff members.

By federal law, private foundations cannot make such loans, but other 501(c)3 nonprofits can.

But, the N.C. Center for Nonprofits is clear in its Principles and Practices for Nonprofit Excellence: "A nonprofit's board should strictly prohibit financial loans to board members, the executive director/CEO, and other personnel and volunteers."

Though some loans are legal, they may:

* Jeopardize the public's trust in the organization, making it hard to attract funds and talent.

And the public will know. IRS Form 990 (Schedule L) now requires public disclosure of any loans to board members or executives.

* Create a conflict of interest. You have to question the judgment of the officers or directors who approved it.

* Make donors wonder why there's excess cash available.

A Chronicle of Philanthropy story tells of a board that viewed a loan to its executive as a prudent investment because he paid more interest than banks. It backfired when the local United Fund eliminated the group's funding, saying, "If the charity had that much to loan someone, it seemed they didn't need our money."

Wise nonprofits do keep at least three to six months' expenses in an operating contingency fund to continue programs despite unanticipated revenue losses.

* Complicate termination of executives with outstanding loans.

* Waste resources if the nonprofit must write off loans or sue to recover the funds.

* Invite "intermediate sanctions" by the IRS, which levies large penalties on all involved.

Even mundane situations may involve inadvertent loans. For example, giving a paycheck before payday is a personal loan. Prohibit it.

When people need cash advances for legitimate travel, they should return unused funds immediately after the trip. Reconcile the advances with expenses using original receipts.

A petty cash box that allows "IOUs" is serving as a bank for personal loans. When someone needs cash for an approved small purchase, have them sign a record with the amount and date. Right after the purchase, be sure the cash and the original receipt match up.

So, when it comes to a personal loan, don't even think about it. The very idea!

Jane Kendall is president of the N.C. Center for Nonprofits. This article is adapted from Common Ground, the group's newsletter.