Interest rates are at levels not seen since the 1980s. Following the pandemic, we saw historically low interest rates and a strong economic rebound which led to elevated inflation. To combat the rapidly rising prices, the Federal Reserve began increasing interest rates at a speed not seen in 40 years. The monetary policy of the past 3 years has significantly impacted the economy and has businesses and nonprofits alike questioning how to best navigate these unusual economic conditions. In this article, we will explore how high interest rates impact nonprofits and what can be done to mitigate some of the negative impacts.
First, how do high interest rates impact nonprofits?
- Increased Borrowing Costs: Nonprofits that rely on loans or credit lines may face higher interest expenses when interest rates rise. This can further exacerbate any cash flow issues and create higher operating costs and lower Net Income figures.
- Reduced Investment Income: Many nonprofits rely on investment income from their endowments or reserves to support their operations. When interest rates are high, returns on fixed-income investments like bonds or certificates of deposit may be more attractive than traditional stock investments.
- Donor Giving: High interest rates can influence individual and corporate donors’ financial positions. If donors are earning more from their investments, they might be more inclined to donate to nonprofits. However, if higher interest rates are associated with economic instability, donors may have less disposable income to contribute.
- Reduced Grant Funding: Some nonprofits depend on grant funding from government agencies or foundations. Government budgets for social programs and/or grants to nonprofits may be affected when interest rates rise. Governments may allocate more funds toward paying their debt or reducing budget deficits, potentially leading to cuts in grant funding for nonprofits.
- Economic Conditions: High interest rates can be associated with broader economic conditions, such as slower economic growth and/or higher unemployment. These conditions can affect the demand for nonprofit services and the financial stability of the communities they serve. Nonprofits may face increased demand for their services while dealing with reduced funding.
- Investment Decisions: Nonprofits that manage their own investments may need to adjust their investment strategies in response to high interest rates. They may seek higher-yield investments, which can come with higher risk, or reevaluate their asset allocation to optimize returns.
What can nonprofits do to combat the negative effects of high interest rates?
- Financial Planning and Analysis: Maintain a strong financial planning and analysis process. Regularly review and update your budget, cash position, cash flow projections, and financial statements to understand how changing interest rates may impact your organization’s financial positions.
- Diversify Revenue Sources: Overreliance on a single source of funding can leave a nonprofit particularly vulnerable to economic fluctuations or changes in government spending. Diversify your revenue sources by seeking support from individual donors, corporate donors, foundations, city and state grants, government grants, and program revenue streams. This diversification can help reduce the negative impact associated with high interest rates.
- Manage Debt Wisely: If your organization carries debt, consider refinancing it when interest rates are low to lock in more favorable terms. Additionally, explore options for consolidating or restructuring debt to reduce overall interest expenses.
- Review Investment Strategies: If your nonprofit manages investments, work with a financial advisor to review your investment strategy. Consider adjusting your asset allocation to align with your risk tolerance and financial goals, especially in a rising interest rate environment.
- Build Financial Reserves: Maintain a healthy reserve fund to provide a financial cushion during challenging times. A reserve fund can help bridge funding gaps and cover unexpected expenses when interest rates are high. This can also help ensure you do not need to take out a costly loan due to timing issues.
- Cost Management: Assess your organization’s operational efficiency and look for ways to reduce unnecessary expenses. Ensure you are clear on the timing of your organization’s cash inflow and outflows. Implement cost-saving measures to ensure that your resources are used effectively and efficiently.
- Fundraising and Donor Relations: Strengthen your donor relationships and fundraising efforts. Engage with donors and communicate the impact of your work effectively. During periods of high interest rates, emphasize the importance of their continued support and your commitment to continue serving your audience.
- Scenario Planning: Develop scenarios that model the potential impact of rising interest rates on your finances. This can help you prepare for different outcomes and develop contingency plans to address financial challenges.
- Stay Informed: Keep a close eye on economic indicators and trends. Stay informed about changes in interest rates, inflation, and other economic factors that could affect your organization’s financial stability.
If your nonprofit needs help navigating these economic conditions and planning for, call the experts at Goldin Group CPAs. We stay current with the economic conditions and specialize in providing scenario planning, financial analysis, and cash flow management to help your nonprofit best navigate the unusual economy we find ourselves in.