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May we pledge restricted funds as security?

Your Legal Questions Answered

May we pledge restricted funds as security?

May donor-restricted funds be pledged as security for a bank loan? If not, could donor-restricted funds nevertheless be used to satisfy creditor claims if the nonprofit has no other assets?

Normally the answer to these questions is No. Unless the donor-restriction is a temporary restriction to use the funds for a certain purpose, and you are going to obtain the bank loan to fulfill that purpose, you should not pledge the funds as security for a loan for another purpose. If the restriction is a permanent restriction that allows use of the income for general charitable purposes, you would probably be able to pledge the income as security for the loan, but generally the principal of restricted funds is not available to the general creditors of a charity. (See Nonprofit Issues®, August 1, 2006.)

Friday, August 12, 2011

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