How Can Nonprofits Borrow Money Under ONCA?

The Ontario Not-for-Profit Corporations Act (ONCA) has introduced several changes to the way nonprofits operate in Ontario. One significant change is related to borrowing money. This article will explain what this change is, why it matters, and how it affects nonprofits in Ontario.

What Is the Change?

Under the previous rules, nonprofits in Ontario needed to specify their borrowing powers in their letters patent or bylaws. This meant that if a nonprofit wanted to borrow money or issue debt, they had to explicitly include this power in their governing documents. If they didn't, they had to go through the process of amending these documents, which could be time-consuming and cumbersome.

With the new ONCA rules, nonprofits automatically have the power to borrow money and issue debt. This power is granted by default, meaning that nonprofits no longer need to specify it in their articles or bylaws. However, if a nonprofit's articles or bylaws specifically state that they do not have this power, then they must follow those restrictions.

Why Does This Matter?

This change is important for several reasons:

1. Easier Access to Funds: Nonprofits often need to borrow money for various purposes, such as expanding their services, purchasing equipment, or covering short-term cash flow gaps. With the power to borrow by default, nonprofits can access funds more quickly and efficiently.
2. Timely Securing of Repayable Capital: In the past, the process of amending bylaws to include borrowing powers could delay the ability to secure needed capital. This change eliminates that delay, allowing nonprofits to secure repayable capital on a timely basis.
3. Operational Flexibility: The ability to borrow money by default provides nonprofits with greater flexibility in their financial planning and operations. They can respond more swiftly to opportunities and challenges without being hindered by administrative hurdles.
4. Cost Savings: Amending articles or bylaws to include borrowing powers often involves legal fees and other costs. By having the power to borrow by default, nonprofits can save on these expenses and allocate more resources to their core missions.

How Does This Affect Nonprofits in Ontario?

For nonprofits operating in Ontario, this change means a shift in how they approach financial planning and governance. Here are some key considerations:

1. Review Governing Documents: Nonprofits should review their articles and bylaws to ensure they understand their borrowing powers. If their documents explicitly prohibit borrowing, they may need to consider whether to amend them to align with their current needs.
2. Board Policies: While the power to borrow is now granted by default, it is still essential for nonprofits to have clear policies and procedures in place. The board of directors should establish guidelines for when and how the organization can borrow money, ensuring that decisions are made responsibly and transparently.
3. Financial Management: With the ability to borrow money more easily, nonprofits need to have strong financial management practices. This includes maintaining accurate financial records, preparing realistic budgets, and having a clear plan for repaying any borrowed funds.
4. Communication with Stakeholders: Nonprofits should communicate this change to their stakeholders, including donors, members, and volunteers. Transparency about how the organization manages its finances and the reasons for borrowing can help maintain trust and support.

The ONCA has made a significant change by allowing nonprofits in Ontario to borrow money and issue debt by default. This change simplifies the process, providing easier access to funds and greater operational flexibility. However, it also requires nonprofits to have strong governance and financial management practices in place to ensure that borrowing decisions are made responsibly. By understanding and adapting to this change, nonprofits can better position themselves to achieve their missions and serve their communities effectively.

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