Nonprofit Banking Basics: 4 Tips for Successful Cash Management

Nonprofit Banking Basics: 4 Tips for Successful Cash Management

Choosing the best bank for your nonprofit will depend on several factors, from the initial deposit to the presence of brick-and-mortar locations in the areas you operate.

Nonprofits tend to prefer banks that offer free or low-fee checking accounts, ample options for credit, a robust online platform for managing accounts and any additional services such as payroll processing.

Opening a bank account for your nonprofit is about more than just finding a place to store your money. Instead, think of your bank as a partner who will help you grow and succeed in your mission.

In this article, we’ll explore the basics of what nonprofits need to know about choosing and opening a bank account, as well as several important tips for making the most of your various cash management solutions.

Understanding the basics of banking as a nonprofit

Nonprofits are subject to different rules for reporting on their financial activities, especially when it comes to where they receive donations from and how these proceeds are accounted for by the nonprofit itself and by the bank they work with.

While there are numerous differences between a regular business and a nonprofit (that you should speak to a banker and an accountant about), at a high level these differences settle into a few key areas:

• Funding—Both the federal government and some banks place special restrictions on the source of funds for nonprofits. For example, 501(c)(3) nonprofits (the most common type) are restricted from accepting donations for political purposes. Additionally, depending on the state you operate in, you may have to apply as a nonprofit in other states you solicit donations from before collecting any funds.
• Purpose and Use of Funds—The purpose of a nonprofit, as stated in U.S. tax law, is to further a charitable mission. This means you are required to follow certain laws on the use of your funds to retain your tax-exempt status. For example, there are limitations on how much money you can spend on operations in relation to your charitable mission.
• Taxes—In the context of finance, one of the benefits of registering a business as a nonprofit is to ensure any funds raised are tax-exempt, meaning more money will go to furthering your mission. This means that you’ll have to follow special sets of rules for accounting for and reporting on your donations and other financial information to the IRS.

When it comes to opening a bank account for your nonprofit, you’ll want to consider each of these three areas to ensure you find a bank with experience in working with the special regulatory structures that surround nonprofits.

For example, does your bank have any restrictions on the source of your funds? Does it provide you with tools for tracking the origin of these funds for reporting purposes? Do you have access to the tools and banking advice you need to make smart decisions about how to collect, store, grow and distribute your funds?

Remember, the single most important difference between a regular business bank account and a bank account for nonprofits is the higher level of regulation surrounding the source, storage and use of your collected funds.

For this reason, you’ll want to work with a bank that has experience in helping nonprofits navigate this additional level of regulation to ensure you can spend your time and efforts on furthering your mission.

What you’ll need to open a nonprofit bank account

In most cases, the steps to register a new 501(c)(3) nonprofit are relatively simple and largely mimic the steps you’ll follow to open a regular business in your state.

First, you’ll need to incorporate your nonprofit by drafting Articles of Incorporation, setting bylaws, nominating a board of officers and acquiring any necessary permits (much like how you would incorporate a regular business). At this point, you will also have to apply for an Employer Identification Number (EIN) from the IRS and account for any other steps in starting a new business.

Then, once you have everything established, you will work with the IRS to file the forms necessary for recognition as a nonprofit.

Once your nonprofit paperwork is approved, you can go to your bank of choice and open an account (or set of accounts) unique to your new nonprofit status. The exact documentation will depend on the bank, but in general you’ll have to provide the following:

• All incorporation paperwork outlining who owns and operates the nonprofit.
• Your EIN or another form of tax identification.
• The letter from the IRS that outlines your tax-exempt status and notes your exact nonprofit status (whether 501(c)(3), 501(c)(4) or another entity type).

Additionally, make sure to consolidate any funds held in other business bank accounts owned by your nonprofit into your new nonprofit-specific accounts to ensure ongoing compliance with your new status.

4 tips to make the most of your new nonprofit bank account

Once you’ve chosen a bank to open your nonprofit account with, you’ll want to capitalize on the different benefits offered.

This might mean leveraging the bank’s various tools to streamline and improve your collection efforts. In other cases, you may just want to speak with a local banker about the different options available for more efficiently managing your nonprofit’s finances.

Whatever the case may be, the four tips below should help guide you through the most important early steps in ensuring a strong financial future for your nonprofit.

1. Set up merchant services so you can accept credit card and online donations

The term “merchant services” refers to the suite of technology and payment solutions offered by a bank to help you collect and process credit card donations, digital transfers and other non-cash transactions.

In a world where people prefer to make contributions with credit cards over checks and cash, most modern nonprofits rely on some form of merchant services provider to help them set up payment portals to accept these transactions.

Whether you need a handheld payment processor to take with you to fundraisers or a widget on your website where users can donate funds, the quickest and fastest solution for setting up your business to accept these kinds of donations is to leverage your bank’s merchant services and payment processing solutions.

2. Use automated tools to monitor your nonprofit’s cash flow

Ensuring your nonprofit has a healthy cash flow is often one of the most significant hurdles you will face when first setting up your new entity.

To start, you’ll want to put automated cash flow tracking solutions in place as quickly as possible so you can begin to understand how money moves into and out of your nonprofit at a more advanced level.

Additionally, for compliance purposes, it’s important to flag and track any large donations received to ensure you have everything in order in case of an audit.

For this reason, many nonprofits turn to either their banker or bookkeeper for solutions on how they can more accurately track where money enters their business, and from whom.

3. Understand your obligations to protect your nonprofit’s funds

A key component of managing any nonprofit’s finances is understanding the fiduciary duty that board members have in ensuring funds are handled and accounted for in a transparent, compliant and mission-oriented manner.

Because of the rules surrounding the use of funds as a nonprofit, you’ll have to be careful to ensure the money is both protected and well-taken care of from the moment you accept a donation to when it leaves your hands and is used to further your organization’s mission.

As one example, federally registered 501(c)(3) organizations are generally exempt from paying federal taxes on the growth of invested funds (much like how they are exempt from paying taxes on the funds in the first place).

However, failing to perform proper due diligence in how, when and why you invest these funds could lead to problems down the road should the nonprofit lose money on these investments.

The same is true for how you spend your organization’s collected funds.

You can’t simply spend a large sum of money on a new swimming pool for your nonprofit. Instead, the fiduciary duty of the board members helps to reaffirm that any donated funds should only be used on the costs of operating the nonprofit and furthering its mission.

4. Consider saving your money in a Certificate of Deposit (CD) or another low-risk growth option

Nonprofits often receive donations in quick bursts, usually coinciding with annual or semi-annual giving campaigns.

A common strategy that many employ to ensure their funds can stretch throughout the year is to either hold these funds in a high-yield savings account or money market account or take out a[PR1]  certificate of deposit (CD).

With the average inflation rate over the past century sitting at around 3.2%, and the average consumer price index still holding above this mark, it’s important to ensure your collected funds grow in value if you intend to hold them for a significant period of time (of more than several months).

That is why it may be wise to consider different savings and investment options for any liquid funds you intend to hold for the long term.

Whether you’re saving up for a fundraiser next year or simply want access to a rainy-day fund in case donations dry up, it’s important to put your nonprofit’s liquid cash reserves to work to ensure you’re capitalizing on the full value of the funds collected.

Speak with one of our local bankers about your nonprofit’s financial needs

Partnering with a bank that has a deep knowledge of both the regulatory frameworks surrounding nonprofits and the technology you need to effectively manage your funds is critical to your mission’s success.

From helping you navigate the complexities of managing donations to equipping you with the tools needed to accept credit card donations and process online transactions, your bank will often be your first and most important stop to properly grow and manage your nonprofit.

At Associated Bank, we volunteer, invest and take an active role in helping our local communities, whether that’s directly through our numerous community growth programs or indirectly by supporting the nonprofits and organizations foundational to our success.

If you’re thinking about starting a nonprofit, or you’ve recently formed a nonprofit and are looking for a banking partner to help you grow, our experienced bankers are happy to discuss the different options, solutions and tools we have available for furthering your mission.

To speak with a local banker about how we can help your nonprofit grow and prosper, please reach out to us online or find a local branch near you.