A new nonprofit organization has few options when it comes to establishing a credit history. Since nonprofits do not have shareholders or owners who can personally guarantee a company’s credit card or line of credit, and the directors of the board are not willing to provide personal guarantees, the organizations have to rely on their own credit history in order for a financial institution to approve any type of credit facility. Established organizations can point to their strong history of consistent funding or proven relationships with a financial institution in order to obtain a credit facility, but younger organizations have no such history to fall back on. Even a simple request by a financial institution to share the past 2 years of tax returns would be impossible for a startup nonprofit. In such cases, new organizations have very few options to build up their credit history.
In order to provide a company with a credit card or line of credit most financial institutions will require the organization to be in existence for at least 2 years so that the financial institution can review those tax returns in order to base its underwriting decision. Even American Express, a well-known credit card company, will not consider offering a credit card to a company that is less than 6 months old, and even after 6 months have passed the organization would still be required to provide a member’s personal guaranty. An organization’s existence of 2 years also does not guaranty a positive outcome since upon review of the tax returns, the financial institution may still require a personal guaranty or cash collateral that it could use to secure the credit facility.
These were some of the challenges that Cadasta Foundation faced in its initial stage of operation. Considering the organization’s decentralized structure where domestic and international travel by key staff members was critical, Cadasta had to either rely on staff using their personal credit cards to cover travel costs or find a way to provide its staff with company credit cards. Fortunately, Cadasta was able to find an option that was available to startup nonprofits by establishing a credit facility with Wells Fargo, which offers a Business Secured Credit Card (https://www.wellsfargo.com/biz/credit-cards/secured-card/) that provides an organization with a credit card with a maximum credit limit of $25,000. The organization can have up to 10 cards under its total credit limit that it can distribute between its staff. The credit card is cash secured with no personal guarantees and does not require for the organization to be in business for any minimum amount of time. Although, this option does limit an organization’s cash balance that is equivalent to the amount of the card’s credit limit, the Wells Fargo Credit Card allows young nonprofits to establish a credit relationship with a financial institution and start building its credit history.