A nonprofit organization can have and use a credit card, as this financial tool is a common and necessary part of modern business operations. Financial institutions treat nonprofits similarly to for-profit businesses, but with stricter governance and fiduciary expectations regarding the use of funds. While a credit card provides significant operational advantages, it also introduces specific compliance and oversight requirements. This article focuses on securing a card, the internal policies required, and the compliance framework that ensures responsible use within the nonprofit sector.
Legality and Operational Necessity
A nonprofit’s ability to obtain a credit card stems from its legal status as a corporate entity, often recognized by the Internal Revenue Service (IRS) through a 501(c)(3) designation. This corporate structure allows the organization, identified by its Employer Identification Number (EIN), to enter into contracts and incur debt, which is the foundation for a credit card agreement. Using a corporate card provides immediate coverage for unexpected or time-sensitive expenses, such as emergency repairs or last-minute travel arrangements.
Credit cards simplify payments for online vendors and subscription services that require card details for recurring transactions. This streamlined purchasing reduces the administrative burden associated with managing cash or processing staff expense reimbursements. Consistent and responsible use of the card also helps establish a formal business credit history, which can be beneficial for securing better terms on future loans or lines of credit.
The Nonprofit Application Process
Securing a credit card for a nonprofit is distinct from a personal application, as the card is issued to the legal entity, not an individual. The application requires foundational organizational documents to verify the nonprofit’s existence and authority to borrow. These commonly include the organization’s Articles of Incorporation, bylaws, and a formal board resolution explicitly authorizing the application and use of the credit card.
A frequent hurdle is the requirement for a personal guarantee from a founder, executive director, or board member. Because many nonprofits are newer organizations or have a limited credit history, banks often mitigate their risk by requiring an individual to assume personal liability for the debt if the organization defaults. This personal guarantee means the individual’s personal credit score is used for underwriting, and their personal assets could be at risk. Organizations with substantial revenue history and strong financial standing may be able to secure a corporate card that relies solely on the organization’s financial health, thereby protecting individual leaders from this personal liability.
Establishing Robust Credit Card Policies
Once a card is secured, establishing a formal, written credit card policy is a requirement of good governance and fiduciary duty. This policy serves as the internal control document, clearly outlining the rules for card usage to prevent misuse and ensure accountability. The organization must define who is an authorized user, typically limiting cards to key staff members whose roles require frequent purchasing.
The policy must set clear spending limits on each card, which can be customized based on the user’s role and the card’s intended purpose. A mandatory requirement for all transactions is the timely submission of an original receipt and a documented business purpose for the expense. This detailed documentation is fundamental for audit trails and for reconciling the monthly statement, which should be reviewed by a manager or board member who is not the cardholder to ensure proper segregation of duties.
Navigating Liability and Tax Compliance
The misuse of a nonprofit’s credit card can lead to serious legal and tax consequences. A significant risk is the violation of the prohibition against private inurement, which occurs when an “insider” uses the nonprofit’s assets for personal gain. Examples of private inurement related to credit cards include using the organizational card for personal expenses or directing credit card reward points, which are considered an organizational asset, to a private individual’s personal account.
Misuse can jeopardize the organization’s tax-exempt status, leading to the revocation of its 501(c)(3) designation by the IRS. Furthermore, the IRS can impose excise taxes on the individuals who improperly benefited from the transaction. By maintaining scrupulous records and enforcing a policy that prohibits personal use, the nonprofit helps to maintain the corporate veil. This separation shields board members and officers from personal liability for the organization’s debts, unless they were required to sign a personal guarantee or are found to have committed fraud or engaged in illegal activity.
Selecting the Right Card for Nonprofit Needs
The selection of a credit card should be a strategic decision based on the nonprofit’s operational and financial profile. Many organizations prioritize a card with low or no annual fees, ensuring administrative costs do not detract from the mission-related budget. A suitable credit limit is also important, as it must be high enough to accommodate the organization’s typical monthly expenditures and any large, infrequent purchases.
The reward structure of a card should directly align with the organization’s spending patterns. For nonprofits with frequent fundraising travel or program-related trips, a card that offers travel points or airline miles may be a good fit. Conversely, organizations with high operational expenses often benefit more from a cash-back card, where the cash rebate can be applied directly to the organization’s general operating fund. Features like detailed reporting capabilities and integration with accounting software are also valuable, as they simplify the mandatory monthly reconciliation and provide a clear audit trail for financial transparency.