Nonprofits differ from for-profit companies in a variety of ways. However, one thing all organizations have in common is that they have to pay bills.
Some nonprofits sell memberships, charge membership fees or charge for products or services, apparel or accessories. Others rely solely on grants or donations. All of these situations can result in a nonprofit being owed money.
When for profit companies are owed money, they often turn to a debt collection agency to help. Is this an option for nonprofits? Yes and no.
Here are some common situations where a nonprofit might be owed money, and how they might pursue payment.
Collecting Unpaid Pledges
Nothing is more frustrating in fundraising than people who pledge to support the organization and do not follow through.
If a pledge was simply a pledge, that is someone offered to give you money and did not do so, you may be out of luck when it comes to collecting. Social pressure delivered by board members or others who know the donor may be your best chance at getting the donor to live up to their promise. No matter how tempting it is, do not go to social media with your complaints. You could damage your organization’s reputation and cause legal problems for yourself.
If a pledge was given in exchange for something else, such as a table at a gala, event tickets or naming rights on a building, then the donor is legally obligated to pay the gift. In this situation, you may want to consult with a debt collector.
While all companies and organizations want to protect their brand name, since they depend on contributors, nonprofits have to be even more careful about legal issues and mitigate reputational risk.
This doesn’t mean that sending an overdue payment to a debt collector is off the table. Because they are trained negotiators, debt collectors may solve a situation more quickly and painlessly than your own attempts to do so. A professional collector will typically not be emotional and can try to preserve the relationship between the nonprofit and the person who promises to give. Someone who owes and can’t pay immediately may be embarrassed to say this but can be more open with a collector who can then come up with a plan to collect the money.
Collecting Tuitions and Membership Fees
Museums, schools and community organizations are usually nonprofit entities. They may charge memberships or tuition and have the ability to do so on a sliding scale.
While memberships and tuition are legally binding agreements, it may be harder to send the complete cost for someone who pays the full amount to collections. If you offer memberships at different levels or income-based rates, then you are much more likely to get pushback from full price members, who may feel you are unfairly targeting them for full payment and not others. In these cases, it makes more sense to simply lower the amount that the family or member owes.
Collecting Grants and Other Nonprofit Funding
There are three main sources of grant money: businesses, government, and foundations. Grants generally come with signed agreements and requirements. Funders may stop paying on a grant because they feel that the organization is not living up to its end of the agreement or because they are having their own financial difficulties. If you are in dispute with a grant-giving organization, you can ideally solve it without involving lawyers or collection agencies.
However, if you have lived up to your end of an agreement and are not receiving the promised funds, you may wish to involve either a lawyer or a collection agency. It’s important to review your grant agreements and see if there is any language about nonpayment. You may have waived your right to pursue collections when you accepted the grant. Be aware that some state governments are notoriously late in paying on grants, and you may not have any practical recourse.
States or other organizations may also contract with nonprofits to provide certain services for their clients or residents. These payment agreements are also legally binding and need to be carefully considered before signing. Depending on the reason for nonpayment.
As a nonprofit, you are trying to make the world a better place. To accomplish that important work, you need to keep your lights on and your doors open. Understanding when and how to collect on unpaid funds will help you do that.
Dean Kaplan is president of The Kaplan Group, a commercial collection agency specializing in large claims and international transactions. Dean has expertise in working with all types of 501(C) organizations ranging from professional and trade associations to the charitable sector. Today, he provides business planning, training, and consultation to a variety of nonprofits and public global companies.