Will Your Charter School Get a Loan? How a Credit Committee Decides and What You Can Do to Support a ‘yes’!
Applying for a loan can be a stressful process. Who decides whether a charter school loan will be approved? And how can a charter school bolster its application?
Many charter schools rely on Community Development Financial Institutions (CDFIs) for loans. CDFIs are mission-driven lenders who consider community benefit as well as financial factors when making loans. There are also commercial banks and private investment funds, both for-profit and non-profit.
Most lenders have a credit committee, a group of 3-5 people who review each transaction and decide whether it is a god fit for the lender. The credit committee is typically comprised of staff, board members, and/or others with finance, legal, and community development experience. When making a decision to approve a loan, the credit committee looks for a comprehensive picture of the charter school’s mission, academic performance, governance, financial strength, and community engagement in addition to the school’s financial story. Here are three things you can do to best advocate for a loan.
1. Help Your Advocate Help You
The loan officer or loan underwriter works closely with the charter school to understand the organization’s mission, assess its capital needs, and advocate for the school at the credit committee. It is their job to synthesize all your conversations and due diligence items into a credit memo that they present to the committee.
Sharing your school’s story with the underwriter – both the successes and the challenges – is the best way to equip them to present the full picture of your organization. It might feel uncomfortable to talk about past financial struggles or leadership transitions; charter schools often fear that discussing hardships will reflect poorly on the school and jeopardize financing. Rest assured, mission-driven credit committees are eager to understand the backstory and context for any negative results or incidents and shouldn't reject a loan solely because an organization had one bad year or a leader who was not the right fit. Mission-oriented lenders seek to partner with a school for the long term – and invest in a community’s future. If a credit committee finds there are issues that aren’t fully explained, they might hesitate to sign off on a loan.
2. Help Prepare the Presentation
Prior to the credit committee meeting, the underwriter will circulate a copy of their credit memo, which lays out in writing your school’s request for financing. The credit memo highlights the assets of the school and strengths of its financing request. It also identifies the possible risks to repayment – and the mitigants to those risks. This credit memo can be 20-30 pages and includes much of the information that was requested of the school during the loan application or due diligence. This is why it is important to provide the school’s information in a clear manner – all of that information goes into the story being presented to the credit committee. The school can share its written story and that can help the underwriter prepare the credit memo. Sharing full information will allow the credit committee to make an informed decision.
The credit memo is a proprietary document that is not available for the school to review it.
Committee members will read the memo and come to the meeting with questions. As your advocate, the underwriter will address any concerns and share additional insights that might not have made it into the memo. The school does not present at the credit committee, unlike a credit rating agency interview.
3. Overcommunicate about all of the Common Charter School Factors
All credit committee meetings – for any type of loan – include deep dives into the financial strengths, and management and governance of applicants. When discussing charter schools in particular, conversation also centers around factors that influence the school’s ability to repay the loan. These might include:
Charter Term and Authorizer
Lenders assess the school’s charter status, the timing of its renewal, and its renewal history. If the charter is up for renewal during the term of the loan, the lender will want to know whether the school is in good standing with the authorizer. If a school is under a corrective action plan with the authorizer, the lender will want to understand the school’s path towards compliance and renewal.
Lenders want to understand the school’s ability to reach and maintain enrollment targets. To assess this, they review historical and projected student enrollment numbers. Has the school met its enrollment projections – and, if not, is there a clear plan to increase enrollment? If your school saw a decline in enrollment one year, you’ll want to share additional context with your underwriter to give them a full picture. Enrollment levels are important to a lender because they translate both to revenue that keeps the school’s operations healthy and to impact measured by number of students served. One school we lent to experienced a precipitous drop in enrollment from one year to the next; when we looked into why that occurred, we learned that a pilot curriculum was not well-received by the students and their families. When the school brought back its old curriculum, it saw full enrollment return.
Academic performance impacts enrollment and charter renewal. Does your school consistently outperform state and district schools and your peer charter schools on academic performance? Fantastic. If not, that’s OK too. We understand that measuring and interpreting academic performance isn’t easy. There are many reasons why results don’t always show steady upward progress: tests change, teacher turnover, student mobility, etc. We’ve approved loans to top-performing schools; we’ve also approved loans to schools that underperform their peers but that have reliable management and a clear plan for improvement. Lenders generally just want to understand how the school performs academically compared to other charter schools in the area – and if their trends in scores are stable or improving.
Do students and families love your charter school? Student retention rates are one metric lenders use to understand the school culture. Student retention rates between 85-90% are ideal; such a high rate signals to lenders that there is consistent parent engagement and a well-functioning feedback loop between students, families, and the school’s leadership. One memorable credit memo included statistics on how many families sent siblings to a charter school that one child had attended. The school focused on small, personalized learning environments that enabled students to develop close relationships with teachers and peers – and built trust between the school and the families it serves.
Many CDFIs increasingly view their lending through a racial equity lens, seeking to expand their work with organizations led by and serving Black people, Indigenous people, and people of color (BIPOC). As part of this process, CDFIs want to learn more about how their borrowers support BIPOC communities. Some CDFIs, including NFF, are piloting a racial equity matrix: a research-based assessment designed to evaluate a school’s institutional commitment to equitable learning environments. Knowing that structural racism too often restrains children’s potential, CDFIs seek partnerships with schools that demonstrate commitments to high-quality education for BIPOC students. The matrix addresses qualitative measures of how well a school’s leadership and policies address equity issues as they build a learning community.
The Vote and Approval
Once the credit committee has considered the request and had the opportunity to ask questions, it is time for committee members to vote. At NFF and many other CDFIs and lenders, each committee member’s vote has equal weight, and a certain number of votes are needed to make a quorum. In rare occasions, the underwriter may not have the answer to a question or concern that is raised and will need to go back to the school for additional context.
If the committee approves the loan, it will move to closing, the stage where documentation, terms, and logistics are finalized.
CDFI financing is more than just capital; it is a signal of partnership with your school and the community. You can support your financing goals by treating this as a partnership rather than just another application for resources.
This guest blog post is the second in a series from Nonprofit Finance Fund. Dana Stranz is the Manager of Portfolio Management.