If you’ve ever bought a house or signed a new lease you’re probably familiar with the term “personal guarantor”. Using a personal guarantor for personal purposes is common, but when it comes to business, things are different. For-profit companies are able to easily open credit cards built for them, but the same standard does not apply to nonprofits. Often CFOs or Executive Directors are unable to get a business credit card, so nonprofits end up using debit cards, or even worse, having their staff be the personal guarantors of the nonprofit’s credit card.
This is incredibly problematic, yet some view it as just part of working at a nonprofit. We’re here to shine a light on the risk of this common practice and urge you to think twice before signing on the dotted line. Here are the three most dangerous consequences of using a personal guarantor at a nonprofit:
1) Increased individual risk for employees
Employees already have a lot on the line when working at a nonprofit. It is common knowledge that nonprofit salaries are typically smaller when compared to those in for-profit spaces, so employees are most likely already sacrificing monetary benefits to serve in causes that are often extremely personal. And bringing a personal guarantor into the equation only adds more risk and pressure on employees.
Personally guaranteeing the card means that a nonprofit’s ability to pay back loans directly affects the signer’s personal credit. This can inhibit the personal guarantor’s ability to make purchases outside of work, like a house or car, and affects the rates at which they’re approved for other forms of personal loans. Additionally, if for some reason a nonprofit has to close its doors, the personal guarantor will be held personally responsible by the IRS to repay debt on the credit card account.
2) Muddying the IRS waters
At their core, nonprofits are built different from corporate companies or solo-entrepreneur businesses. Yet when it comes to traditional lines of credit, there are personal or business accounts, but nothing built for the structure of NGOs until recently. Nonprofits are not built in a hierarchical power system in the traditional business sense, most models are similar to a co-op model that values all positions in the organization and focuses on doing good in the world, not making money for personal gain.
This differs drastically from for-profits because employees do not have equity in the company, which is a huge reason why a staff member personally guaranteeing a credit card gets very messy. They are also bound to a board of directors and bound to vastly stricter finance regulations. But even though they abide by stricter guidelines and auditing systems, their credit options remain the same.
Most nonprofit CFOs would say that their #1 priority is minimizing risk for the organization, yet so many are convinced to personally hold risk for their organizations via lines of credit. In turn, this poses massive risk and can increase IRS suspicion, auditing, and even PR problems if a nonprofit is suspected of commingling or funneling funds for personal use.
3) Transitions get complicated
So what happens when a guarantor leaves? Another danger of using of using a credit card that requires a personal guarantor, is that leaving an organization becomes incredibly challenging. When CFOs retire or Executive Directors move on to another opportunity, this should be a time of celebration. But instead, it often becomes a huge pain. Complicated paperwork ensues to transition the existing guarantor over to another temporary employee if a new CFO or ED hasn’t been found yet.
Oftentimes, card programs run by local banks require additional in-person meetings to change over the guarantor which can be incredibly difficult given that the exiting and entering staffers have busy schedules and difficulty coordinating a time to visit a bank together. And then when a new CFO starts they’re stuck with more paperwork and the possibility of taking on the credit card responsibility and liability themselves.
Time and time again this situation is where we encounter new Executive Directors of CFOs – looking for help, advice, or a solution. And this common problem is one of the main reasons we created the a credit card specifically built for nonprofits. We believe in the amazing work that nonprofits do, and we believe that the amazing people who do that work should be supported, not penalized.
In summary, when it comes to personal guarantor at a nonprofit: don’t do it. If your organization is looking for a credit card to build and scale your nonprofit, give us a call at (512) 759-8575.
Featured photo by: Photo by Andrew Neel