Loan, Donation, Investment?

Rob Packer, Fund Manager and Leonardo Letelier, CEO of Sitawi, wrote an article that sheds light on the perspectives offered by Sitawi to the third sector, in an area of knowledge still little explored by non-profit organizations in the country: its financial management. To check the version of the article published on the portal EMPREENDEDOR SOCIAL, from Folha de S. Paulo, Click here.

“Although common in the public and private sectors, the use of loans is still incipient in the social sector, which can end up raising uncertainties about how to use this form of financing correctly. A question we often receive at Sitawi is why raise funds through loans when we can raise donations (in the case of non-profit social organizations). Or again, why borrow when we can get a capital injection (by selling shares or shares, in the case of for-profit organizations)?

In reality, one is not better than the other, they are different forms of capital and therefore have different uses: a donation or capital injection brings “new” money, a loan brings existing capital from the future to the present (it is a bridge “of time”, not of capital).

Focusing on the non-profit sector, a donation is a form of income that increases the organization's equity, but generates expectations of use and reporting to those who contributed the capital. A loan is a commitment made by the borrowing organization that it will pay back the lender. In this way, a financial expense is created for the organization (in this case, interest). However, this is an expense that can help strengthen the organization.

In the case of a loan, it is important that the organization has identified its receipts, as, as we will see, one of the most common uses of Sitawi's funding is as a kind of “bridge loan”. Let's analyze this case in a little more detail. For example, an organization that helps artisans generate income by building bridges with retailers has signed a contract for a sale of 1,000 pieces to a chain of stores that pays ninety days after delivery. To meet the demand, the organization must buy raw materials, pay the people involved, bear other associated expenses, make the delivery and still wait another ninety days to receive the product delivered - totaling a 'mismatch' of 120 to 180 days between capital outflow and inflow. All this puts more pressure on an already scarce resource in social organizations: money.

In this example, an organization may spend donated capital (which was in its capital reserve) or borrowed capital; but what's the difference? Using donations, the organization saves interest, but uses the reserve as working capital, which is equivalent to leaving the money “out of the house” until the end of the contract with the retailer. During this time (which in the example is up to 180 days), the organization cannot use the reserve for its expansion or investment in the organization. In addition, you expose yourself to other unforeseen events, such as late payment by the retailer, delays in disbursing other expected donations, or you could miss an unexpected second opportunity.

In other words, a loan is suitable for solving a temporary cash flow need in a flexible manner. In addition, in the case of a social and environmental loan from Sitawi, there are other benefits, such as access to strategic advice or our network of donors and partners. Depending on the size of the organization, the financial return on resources in reserves can also help with interest payments, minimizing the “net” outlay and further improving cost-effectiveness. In the long term, having taken and repaid a loan can generate additional confidence in the organization, adding value to the history and opening up new opportunities for the organization.

At Sitawi, we believe that a loan is a tool that expands the offer of financial products available to social organizations, complementing (not replacing) donations or income generation. It’s a way to give more flexibility and support a successful organization to use its financial resources efficiently.”

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