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 may end up raising uncertainties about how to use this form of financing correctly. A question we frequently receive at Sitawi is why raise funds via loans if we can raise donations (in the case of non-profit social organizations). Or, why borrow if we can get a capital injection (through the sale of quotas 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 injection of capital 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 assets, 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 revenues, because, as we will see, one of the most common uses of Sitawi financing works as a kind of ?bridge loan?. Let's look at this case in a little more detail. For example, an organization that supports artisans to generate income by building bridges with retailers 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, should the organization buy raw materials, pay the people involved, bear other associated expenses, deliver and wait another ninety days to receive the product delivered? totaling a ?mismatching? 120 to 180 days between exit and capital inflow. All this puts more pressure on an already scarce resource in social organizations: money.

In this example, an organization can spend donated capital (which was in its capital reserve) or borrowed capital; but what's the difference? Using donations, the organization saves the interest, but uses the reserve as working capital, which is equivalent to leaving the money ?away from home? until the end of the contract with the retailer. In that 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, it is exposed to other unforeseen events, such as delays in payment by the retailer, delays in the disbursement of other expected donations, or it could even miss an unexpected second opportunity.

In other words, a loan is suitable for solving a temporary need for cash flow, in a flexible way. In addition, in the case of a Sitawi socio-environmental loan, 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 the resources in reserves can also help in the payment of interest, minimizing the ?net? and further improving the cost-benefit ratio. In the long term, having taken out and repaid a loan can build 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 generating income. It is a way to give more flexibility and support a successful organization to use its financial resources in an efficient way.?

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