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Community Lending Series Part II: The Three Challenges for Services Providers

By Lauren Fulton

Part I of our Community Lending series reviewed the split between OnePierce Community Resiliency Fund's three funding programs: 1) grants; 2) community loans; and 3) health innovation funds. It also began an overview of OnePierce’s Community Lending Program, including details and the differences between working capital and real estate loans. This post will focus on when loans may not be appropriate for community organizations.

OnePierce Investment Strategy

OnePierce elected to use and distribute loans due to certain advantages – which we’ll cover in Part III of this series – but it is also important to note that loans are not appropriate for all providers or all circumstances. OnePierce also offers grants to fill the gap for providers when loans aren’t the best solution for their needs. We would never want to jeopardize the financial health of an organization by recommending a loan when that is not the appropriate financing tool.

Here are three circumstances when loans may not be appropriate as financing:

1. Organization is in start-up mode or still determining its business plan

Loans have real financial implications if not repaid, and many start-up organizations (or established organizations transitioning to different business models) do not have stable revenue sources to repay loans. While this creates a problem for lenders, it is more of a challenge for providers stuck with a loan they are unable to repay. Interest can mount and legal challenges can be raised. It’s best for everyone that a dedicated community lender with the organization's best interest at heart takes a robust stance on whether they believe a start-up organization can repay a loan – and only issues the loan if repayment seems possible.

2. Organizational business model does not have stable revenue sources

Even with concrete business plans, many small, community-based providers need to be flexible and adapt their services based on donations or demand. For example, a small food bank may distribute different amounts of food each month according to the donations it receives. This business model is effective and plays a critical role in supporting access to food and nutrition in our communities. However, it’s not necessarily the right model for an organization applying for loans that have set interest payments and repayment timelines. Instead, these organizations are better off applying for grants, to maintain maximum flexibility, instead of letting loans complicate their model.

3. Organization cannot afford interest on the loans

OnePierce furnishes low-interest loans, and it has previously offered zero-interest bridge loans for CARES Act contractors. In setting its interest rates, OnePierce works to balance the repayment capacity of its borrowers and the cost of administering the loan program. This often means that OnePierce rates are concessionary when compared to that of traditional lenders. While zero-interest loans have benefitted the community during COVID, they are not sustainable for OnePierce in the long term. Earnings from interest enable OnePierce to recoup its administration costs. If an organization's business model does not produce enough revenue to pay interest on loans, it is not yet ready to accept a loan.

Are Loans Right for Your Organization?

OnePierce offers grants and community loans in order to serve more service providers and community-based organizations within Pierce County. Some providers will require grants, whereas others will have the business models and experience to take on loans.

If your organization is deciding on the right financing fit, please contact us. We are happy to speak with you about your organization’s financing needs and to determine together whether OnePierce can support your work to improve the lives of everyone in our communities.

Community Lending Series Part III

Let's connect about your funding needs

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