As the economy turns up the heat on nonprofits, some national organizations are pressuring their local chapters for loans. This often makes chapters uncomfortable, especially since many have doubts about their own financial security.
Some even worry that the request is illegal, since donors did not sign off on having their money channeled in a different direction.
However, refusing a loan may not be an option.
If the national board made, or at least approved, the decision, the charter gives the national board this sort of authority over chapters, and neither the chapter nor the national bylaws prohibit it.
While perhaps coercive, the “request” is probably legal. This would be particularly true if the national board was made up of chapter representatives who had a say in the decision to appeal to the chapters.
Though donors did not contribute to have their money sent elsewhere, the national organization could probably argue successfully that the money is being used to further the same mission that donors are giving to locally.
It could even argue that the mission will be advanced further faster because of the additional services that only the national entity can offer.
In truth, a chapter’s position is enhanced by a strong national organization. And the nonprofit’s name and brand can be irreparably harmed if the national organization should fail.
Nonprofits should begin by having their board chairs contact the chair of the national entity and have a frank discussion.
They should ask how the money will be used. They will need to find out whether funds will go toward creating additional programs, providing services to the chapter or paying vendors.
They also should ask how external communications will be handled so that if or when the public gets wind of this the organization’s brand is not compromised.
Further, board chairs should ask why the organization can’t obtain its needed funding through a bank, and what would happen if, down the line, the national organization cannot afford to repay its debts.
Board chairs must ensure that there are not substantive problems with the national organization that could negatively impact local chapters.
If the local chapter is satisfied that the need is legitimate and the risk is relatively low, it should determine whether lending the money will truly hamper the work it is doing at the local level.
If not, it should make the loan and focus on what it will get back. If so, it may consider sending in a lesser amount as a good faith offering.
If a local chapter is not satisfied that the need is legitimate and the risk appropriate, or if it feels that making the loan will cause resentment and distrust to drive a permanent wedge between it and the national organization, it must either lay out its own conditions for the loan or say no. Both will be easier to do because it took the above steps.
In all likelihood, a number of national officers of organizations with chapters are looking at this as a quick way to raise funds in these difficult economic times. For the weaker organizations, this may just hasten their demise.
Terrie Temkin is founding partner at the Miami, Fla.-based management consulting group CoreStrategies for Nonprofits Inc. For five years, her “On Nonprofits” column appeared biweekly in The Miami Herald.