Last week, we talked about how awesome the current interest rate environment is and how you should be taking advantage of that opportunity. Well, the other side of that coin is that loans are hitting adjustment periods, and guess what? Yikes! Interest rates are going up! I'm seeing increases from 4% to 7%, and even 8%. So today, I want to share a real life story of an organization who looked at their opportunity at that intersection and came out better for it.

 Is Your Nonprofit's Loan Interest Rate Increasing? 

     As you know, the increase in the interest expense (or the cost to the nonprofit) rises as this rate increases. But more than just increasing cost, higher rates will most likely create a longer period of indebtedness, meaning it will take you longer to pay that loan off. Of course, we all know that the quicker we can eliminate monthly debt payments, the more monthly funds available to be used for the mission.

 An Interest Rate Success Story

     I consulted on a scenario just like this with one of my clients, and we looked at their options and found an incredible solution that they did not see at first. They had some operating reserves which included some excess cash that they were sitting on These excess reserves exceeded what they needed as their emergency funds. They had already earmarked some funds that were for operating reserves, meaning they were for emergencies only, so we were looking at funds that were truly excess. (If you can't tell whether you have excess operating reserves by reading your financial reports, you probably need to update your financials so they can become actionable for these kinds of conversations.) So, this nonprofit knew what they had, knew that they didn't need it, knew that it was beyond the excess that they needed to earmark, and they made a decision to make a lump sum payment on their loan now.

     After making this lump sum payment, they continued making their scheduled debt payments as they had already forecasted. Do you know what the impact of that lump sum payment was? Surprisingly, they're now going to be out of debt within one month of their original plan, and the total interest that they’ll pay is only increasing by $3,000!

     Obviously, these results are unique to their loan balance, monthly payment, and lump sum payment amount. But I just want to point out that sometimes money earning 4% may be better used to pay off loans that cost 8%. Not only does that make sense mathematically, but it also results in the nonprofit freeing up those monthly payments sooner, and using those resources instead to fund and create impact in their mission!

 Does Your Nonprofit Have Excess Operating Reserves?

     So, if you don't know how to find these numbers in your financials, chances are you need to improve your financial reporting or you need a CFO like me to help explore the possibilities. I'm happy to help! Feel free to schedule a consult with me here!