The Board's Fiduciary Duty in Nonprofit Financing: Why Every Borrowing Decision Needs a Written Debt Policy

Published October 19, 2026 | By Kevin D. Williams, Attorney at Law

Borrowing can help a nonprofit bridge a timing gap, purchase a facility, or invest in a service expansion. But financing is more than a transaction between management and a lender. It is a governance decision that can affect the organization’s finances, assets, and ability to deliver on its mission for years.

A written debt policy gives the board a consistent framework for considering nonprofit financing before an urgent need arises. It clarifies who may authorize borrowing, what information directors need, and how the organization will evaluate its repayment plan. Most importantly, it turns fiduciary oversight into a repeatable process rather than an informal judgment made under pressure.

What does a board’s duty of care mean when borrowing?

The duty of care generally calls on directors to make decisions in good faith, with reasonable attention and diligence, and in the organization’s best interests. The precise legal standard depends on applicable law and the organization’s governing documents. For a significant financing decision, responsible oversight usually means understanding the purpose, costs, risks, and repayment plan, not simply approving a resolution presented at the last minute.

Guidance from the Massachusetts Attorney General’s Office identifies borrowing among the significant transactions that may warrant board action. Requirements vary by jurisdiction, so directors should review their state law, articles, bylaws, lender requirements, and any restrictions tied to grants or donated funds.

A debt policy helps the board fulfill its oversight role. It does not guarantee a financing will succeed, and it does not replace judgment. It sets expectations for the analysis and approval process.

Informal borrowing versus a written policy

Without a policy, an organization may rely on custom, unclear officer authority, or an emergency vote with limited information. A written policy establishes a shared standard before the next financing request arrives.

Issue	Informal approach	Written debt policy
Who can borrow	Authority may be unclear or assumed	Approval authority and thresholds are defined
Repayment plan	“Future revenue” may be treated as enough	A specific, supportable repayment source is required
Financial analysis	Forecasts and costs may vary by proposal	Cash-flow, liquidity, and debt-service review follow a consistent process
Board deliberation	Directors may receive incomplete materials	Required documents, questions, and recorded approvals are specified
Follow-up	Reporting may be inconsistent	Ongoing monitoring and escalation are assigned

The policy need not be complicated. It should be tailored to the organization’s scale, risk tolerance, and financing needs, and reviewed periodically.

What should a nonprofit debt policy include?

1. Authorization thresholds and limits

Define which financing decisions require full-board approval and what limited authority, if any, may be delegated to a committee or officer. Consider treating long-term borrowing, guarantees, refinancing, lines secured by organizational assets, and material changes to approved terms as significant decisions.

Set clear limits for delegated authority, including a maximum amount, permitted purpose, term, and reporting obligation. Confirm that those limits align with bylaws, state law, and lender requirements. A policy should not grant authority that governing documents do not allow.

2. A documented repayment source

Require management to identify where scheduled payments will come from. A repayment source should be specific and reasonably supported, not simply “future fundraising,” “growth,” or “anticipated revenue.”

The board should ask whether projected income is recurring, restricted, contractually committed, or dependent on assumptions that could change. Donor-restricted funds and assets require special care: the organization should not assume they are available for repayment or collateral without confirming the applicable restrictions and legal authority.

3. Debt-service coverage and cash-flow analysis

Require a forecast that includes existing obligations, the proposed payment schedule, and a realistic view of cash available to meet debt service. A common analytical measure compares cash available for debt service with scheduled principal and interest. The policy should define how the organization calculates that measure and set a target suited to its finances and the lender’s requirements.

There is no universal coverage target appropriate to every nonprofit. A church with predictable giving, a grant-funded organization, and a nonprofit operating a fee-based program may have very different revenue patterns. Consider testing the forecast against downside scenarios, such as a delayed grant, lower-than-expected donations, or increased operating costs.

4. A board approval process and decision record

Specify what directors should receive before a vote, how conflicts of interest will be handled, and what the minutes should record. Materials may include the proposed use of proceeds, financing terms, total borrowing costs, alternatives considered, existing debt, repayment assumptions, effects on liquidity, and any collateral or covenant requirements.

A clear record helps preserve institutional memory. It also gives future board members a way to understand why the organization borrowed and what conditions were approved.

Questions directors should ask before voting

A board does not need to become the organization’s lender or financial analyst. It does need enough information to evaluate whether the proposed financing fits the mission and the organization’s capacity. Before voting, directors can ask:

• What specific organizational need will this financing address?

• What alternatives were considered, including delaying, scaling, or funding the project another way?

• What is the full cost of borrowing, including fees and any variable-rate or early-payment terms?

• What funds will repay the debt, and how dependable are those funds?

• How will payments affect cash reserves, existing programs, and other commitments?

• What happens if revenue arrives late or the project underperforms?

• Does the loan involve collateral, guarantees, restrictions, or covenants that could limit future choices?

• Who will monitor payments, covenant compliance, and forecast changes, and how often will the board receive updates?

The answers should be available before approval, not after the organization has signed.

Governance and personal risk: keep the distinction clear

An organization that borrows without clear authority or a realistic repayment plan may face cash-flow pressure, missed payments, damaged lender relationships, or reduced resources for mission-critical programs. Poor documentation can also make it harder to show that the board considered the organization’s interests and the relevant risks.

At the same time, directors are not automatically personally liable simply because a nonprofit takes on debt. Personal exposure can depend on the facts and applicable law, for example, whether a director signed a personal guarantee, acted outside authorized duties, or engaged in conduct that creates separate legal responsibility. Directors should understand what they are being asked to sign and seek qualified advice when needed.

Practical steps to adopt a debt policy

1. Review governing documents. Check bylaws, articles, board resolutions, and relevant state requirements for borrowing authority and approval procedures.

2. Inventory current obligations. List loans, credit lines, leases, guarantees, collateral, payment dates, and applicable covenants.

3. Draft a policy that fits your organization. Define approval thresholds, permitted delegated authority, repayment-source standards, coverage analysis, documentation, and reporting.

4. Ask the finance committee and qualified advisers to review it. Confirm that the policy is workable and consistent with accounting, legal, and lender requirements.

5. Approve and document the policy. Record the board’s action and make the final version accessible to directors and appropriate staff.

6. Revisit it regularly. Review the policy when the organization’s scale, risk, cash flow, or financing needs materially change.

Financing should follow governance, not replace it

A debt policy is not an argument for or against borrowing. It is a way to make sure financing decisions are deliberate, documented, and connected to a credible plan for repayment. When directors know the approval rules and the questions to ask, the board is better positioned to weigh opportunity against risk and protect the organization’s ability to serve.

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Beyond borrowing, organizations may also explore whether licensing their data could become an additional source of income. Through Stephen Capital Partners’ affiliation with Mode, there may be an opportunity for organizations to earn money by licensing data. Specific program details have not been provided, so organizations should seek current information before making decisions.

For advisory information and practical resources, visit Stephen Capital Partners or the Stan Store. Mission-driven founders can also explore the Entrepreneur’s Guide ($37): “Everything you need to think clearly, make confident decisions, and operate like a real founder.” Start Building with Clarity.

Kevin D. Williams, Attorney at Law, writes on nonprofit governance, finance, and mission-driven leadership. This article is for general educational purposes and is not legal, accounting, or financial advice. Consult qualified professionals regarding your organization’s circumstances.

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