Borrowing Restricted Net Assets

When a church’s finances are tight, it is possible to deplete reserves. At that point, churches may be tempted to borrow net assets with donor restrictions to cover operating expenses, often referred to as an “intraorganizational” loan. Churches are legally required to spend restricted net assets to further the intent and purposes expressed by the donor. Therefore, loans from net assets with restrictions should be avoided.

Intraorganizational loans are often more troublesome than other types of loans. State laws generally require that a church must demonstrate that a loan (an investment transaction from the standpoint of the restricted fund) is prudent. If the loan is simply to fund operating shortfalls or avoid reflecting the organization’s financial difficulties, the church’s board will generally have trouble demonstrating that a loan from net assets with restrictions is prudent as viewed from the restricted fund’s vantage point.

Intraorganizational loans are also tainted with duality of interests. It is very difficult for a church’s board to be objective when they are simultaneously responsible for the prudent investment of restricted funds and responsible for the proper overall operation of the church.

Churches often make intraorganizational loans without realizing they have done so. A simple way to determine if a church is borrowing from net assets with restrictions is to compare temporarily and permanently restricted net assets to total cash, marketable securities, plus any assets specifically termed restricted. If net assets with donor restrictions are greater than the sum of the above amounts, it is very likely that borrowing has occurred.

Although loans from net assets with restrictions should be avoided, if short-term borrowing is done, it should be approved by the board, including a repayment plan.

Definition of terms:

Net assets with donor restrictions are composed of permanently and temporarily restricted net assets:

  • Permanently restricted net assets result when a donor specifies investing the principal of a gift in perpetuity, with only the income to be utilized for unrestricted or temporarily restricted church purposes.

  • Temporarily restricted net assets result when a donor restricts a gift for a period of time or for a specific exempt purpose. Examples of time restrictions include a long-term pledge or promise to, a split-interest agreement (such as a charitable remainder trust) or waiting to fit the gift to a specific future project. Examples of purpose restrictions include certain equipment, a specific location, or a specific program (such as a building project).


For more information on donor restricted gifts, check out ECFA's eBook 10 Essentials of Giver-Restricted Gifts to Churches

This text is provided with the understanding that ECFA is not rendering legal, accounting, or other professional advice or service. Professional advice on specific issues should be sought from an accountant, lawyer, or other professional.