money on table

Editor’s Note: In 2023 we’re going to introduce several guest bloggers. This blog post on nonprofits and collection agencies was written by Dean Kaplan, President of The Kaplan Group, a commercial collection agency. If you’re interested in being a guest blogger, let us know.

Nonprofits and for profits differ in many ways. But, one thing the two types of organizations have in common is that they both need to collect money in order to keep on the lights. People often believe that selling items or charging for something jeopardizes a nonprofit’s tax-free status. This is not true. Some nonprofits have classes for which they charge or membership programs. Others may sell products or services. There are some nonprofits that depend solely on grants and donations. All of these situations can result in a nonprofit being owed money. Is a collection agency an option for a nonprofit? In short, yes. There is nothing about hiring a collection agency that would jeopardize a nonprofit’s tax status. However, nonprofits do have other concerns.

Here are some questions you might have about how nonprofits could work with collection agencies.

Can You Collect from a Donor Who Hasn’t Paid?

There are two types of pledges that people make to nonprofits. One type is simply a promise to donate a certain amount of money. Although it might be frustrating if someone does not live up their promise, this kind of pledge is not legally binding. Your best bet in this case is to ask board members, or other supporters who know the would-be-donor, to exert a little social pressure. As in almost all collection cases, going to social media is a horrible idea. Doing so can open you up to legal repercussions and hurt your reputation.

However, if something was given in exchange for the pledge, then the donor is legally bound to pay the pledge. The “something” could be a table at a gala, their name in a program, naming rights for a building, or any merchandise. If someone has received something like this, but not paid their pledge, then you may want to consult with a collection agency. Nonprofits have to be even more careful about their reputation than for profit companies. This makes sending an overdue payment to a debt collector a great idea. Because collection agencies are trained negotiators, they might be able to solve a situation more quickly and painlessly than your own attempts to do so.

What if Someone Doesn’t Pay Their Tuition or Membership?

First, it’s extremely important that you fully understand your state’s tax laws when it comes to charging for classes or services. Some states require that nonprofits offer a certain number of free or subsidized services in order to maintain their tax-exempt status.

While memberships and tuition agreements are legally binding, it may be harder on your reputation to send someone who doesn’t pay the complete cost to a collection agency. If you offer memberships on a sliding scale, then supporters may feel you are unfairly targeting some people for full payment and not others. If you do decide to pursue the student or member, a collection agency might be your best bet. An agency can protect your reputation while collecting on the debt.

What if a Grantor Doesn’t Pay? What if it’s the State?

Grants usually come with signed agreements and requirements. These agreements are legally binding contracts and you should review them carefully. It’s also important to review your grant agreements and see if there is any language about nonpayment. Some agreements may require you to waive your right to pursue collections when you accept the grant. If not, and you have lived up to the terms of a grant and are not receiving the promised funds, you may wish to involve either a lawyer or a collection agency.

States or other organizations may also contract with nonprofits to provide certain services for their clients or residents. These payment agreements are legally binding and you need to consider them carefully before signing. Depending on the reason for nonpayment, a collection agency may be helpful.

Just like nonprofits, people often have misunderstandings about collections and collection agencies. Understanding how you can work with one may protect your bottom line and your reputation.

About Our Guest Author

Dean Kaplan graduated with an MBA from the prestigious University of Chicago Booth School of Business. In the two decades prior to joining The Kaplan Group, Dean ran a variety of manufacturing, technology and consulting businesses, both as an owner or senior executive. As the President of The Kaplan Group, Dean personally handles all large claims. He has traveled to over 40 countries for business and work, and loves to be of service.