A line of credit (LOC) is a valuable resource for most nonprofits. It can serve as a lifeline that allows organizations to continue delivering vital services while awaiting contract or grant payments. In some cases, an LOC can literally keep the lights on during periods of low liquidity. The need for an LOC stems from unevenly matched inflows and outflows of cash over the course of a year. Even organizations that budget properly and achieve year-end surpluses may need to access a line of credit occasionally to fund payroll, rent, and other critical expenses.
At the same time, misusing a line of credit is akin to playing with fire. Management must understand the risks as well as the benefits of drawing on and maintaining an LOC.
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