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Borrowing Restricted Net Assets

When a church’s finances are tight, it is possible to deplete cash 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 net assets with donor restrictions to further the intent and purposes expressed by the donor. Borrowing net assets with donor restrictions should be avoided because it could impair the church’s ability to expend the restricted funds on a timely basis.

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 may have difficulty demonstrating that a loan from restricted net assets 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 restricted net assets is to compare net assets with donor restrictions 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 or grant maker makes stipulations that are perpetual in nature regarding the use of a contributed asset that is more specific than the broad limits resulting from the following:  (a) the nature of the nonprofit organization, (b) the environment in which it operates, (c) the purposes specified in its articles of incorporation or bylaws or comparable documents for an unincorporated association.

  • Temporarily restricted net assets result when a donor or grant maker makes stipulations that are temporary in nature regarding the use of a contributed asset that is more specific than the broad limits resulting from the following:  (a) the nature of the nonprofit organization, (b) the environment in which it operates, (c) the purposes specified in its articles of incorporation or bylaws or comparable documents for an unincorporated association.

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.

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