Guide to Getting Loans for Nonprofit Organizations

Many of the same rules apply to nonprofit directors and small business owners alike. Nonprofit organizations can use loan financing to help reach their short and long-term goals or maintain their operations. Nonprofit loans can be used to:

• Fund marketing events
• Consolidate debts
• Expand services
• Purchase property
• Pay overhead costs

Depending on your nonprofit’s mission, your reasons for financing may differ. For instance, nonprofits can use loans to pay emergency expenses or to address any time-sensitive financial needs or seasonal goals.

Even with heavy marketing and fundraising efforts, cash flow from donations can be unpredictable. Considering how heavily donor support factors into nonprofit funding, nonprofit directors must constantly be on their toes and manage their capital smartly. One way to do this is by taking advantage of working capital loans.

Maybe you've lost your tax-exempt status and are now struggling to pay property taxes, or perhaps you have a project you want to launch that you can’t financially afford. Whatever the reason for your need, ask yourself these questions:

• Why does the nonprofit organization need a loan?
• Will the organization be able to pay this loan back?

Keep in mind that loans – especially high-interest, short-term loans – are not a solution for long-term financial struggles. Any time you plan to take out a loan, prepare a plan to repay the loan amount. If it does not seem feasible to repay the loan, consider finding alternative financing options or borrowing a smaller amount.

It is recommended that nonprofits avoid taking out loans for a large amount if there is no guarantee that the loan can be paid back. Loans can be used to address any urgent or emergency financial needs and can be for small amounts.

Is It Hard to Get a Loan for a Nonprofit Business?

Loans for nonprofit organizations can be more difficult to obtain than other types of loans because nonprofits are often labeled as “high risk” by lenders. This is because lenders typically look at a company’s sales to determine revenue streams. Unfortunately, with donations as the primary source of nonprofit funding, lenders may consider nonprofit organizations more risky borrowers.

When looking for nonprofit funding, proving financial dependability to lenders is key. Map out financial statistics and a repayment plan with as much detail as possible.

Frequently, some measures can be taken to counterbalance that risk, such as offering collateral for the loan. Some lenders accept collateral as a security measure on a high-risk loan, as it guarantees that the lender will receive their payment even in the event of a defaulted loan. However, understand that you risk losing the collateral item if you miss loan repayments.

Financing for Nonprofit Organizations

A nonprofit loan can be used to cover a range of expenses that an organization faces. These expenses can vary depending on your industry or mission.

For instance, an environmentalist nonprofit may use a small loan to purchase equipment for a fundraising event. Here are a few examples of common ways a nonprofit borrower can use loan financing:

• Address a cash-flow gap. Working capital often fluctuates seasonally for nonprofit companies because fundraising success also fluctuates seasonally. The winter season is considered one of the most successful times to fundraise because the holidays often inspire giving. Conversely, the summer months and the concluding weeks of tax season are far more difficult. If a nonprofit is having trouble getting through the drier months, a loan may help.
• Make a big purchase. Nonprofit loans can solve an immediate financial need, which may help compensate for their lack of steady income. Significant investments like property, equipment, and advertising space could be too large as an out-of-pocket expense, and a loan may offer a better financing plan.
• Fund an opportunity. Loans can finance an event or program that a nonprofit may be trying to kickstart. For instance, if a business is hoping to throw a fundraising gala, a loan can be used to pay for venue costs, furnishings, decorations, equipment, and catering.
• Consolidate debts. If a nonprofit has multiple loan repayments, taking out a consolidation loan may help minimize the chance of accidentally overlooking a payment or defaulting on a loan. Additionally, consolidating debts may reduce your interest rates, making repayments more manageable.

Note that what you can use a particular loan for depends on the nonprofit lender's terms. For instance, a bank lender might approve credit for acquiring new property or working capital, while a PPP loan can only be used for payroll costs.

Obtaining a business loan for your nonprofit organization can be a bumpy road. But, if you've determined that you would like to pursue a nonprofit loan, consider the following steps:

Know What Lenders Look For

First, understand what lenders are looking for in the approval process. That way, you can tailor your pitch to their needs. Nonprofits often have some additional hurdles in proving financial dependency. Because of a lack of steady revenue, lenders may ask for additional documentation, such as tax forms and financial reports.

Additionally, a bank and credit unions will look at the nonprofit’s revenue. Financing can be rejected outright if the nonprofit doesn’t make enough working capital. This is because lenders want to be confident that the organization can repay the debt within the loan term.

Create a Budget

Having a budget mapped out before applying for a business loan can be another smart way of demonstrating financial stability. Not only will a budget allow you to visualize the financial state of your organization, but it will also help you prepare for future expenditures. Most importantly, a budget will help you determine whether you can afford loan financing.

Create a Business Plan

A business loan provider will ask about your financial goal and how you plan to repay a loan. Organizations must show how they could benefit from some additional funds by defining the reason for the nonprofit loan and how they intend to repay it in a business plan.

Because there will be less of a financial guarantee in a nonprofit business plan, supplemental information is often included. This can include competitive analyses, market statistics, and information on the mission behind the organization.

Your business plan can also highlight your past successes and detail where your organization gets its revenue. It should also include your organization's budget. Note that it may be more challenging to get funding for risky ventures like a new initiative if you can't demonstrate that a loan is essential to your operations or that it will be a worthy financial investment.

Consult a Nonprofit Advisor

Before submitting a loan application, consult a financial advisor that specializes in nonprofits. Nonprofit advisors specialize in identifying areas of strength and weakness in nonprofit business models. Consulting could provide valuable insight into the pitfalls of your company and potentially redirect your efforts toward more effective choices. A fresh, outside perspective may also alert you to funding opportunities you were unaware of or hadn't considered before.

Apply for the Nonprofit Loan

Borrowing money can either help a nonprofit thrive or threaten its stability, depending on the company’s circumstances. Before borrowing a nonprofit loan, weigh the following factors:

• High-interest rates: if your nonprofit does not have enough capital or a steady stream of income, the lender may impose a higher interest rate. This can make it more difficult to repay the loan.
• Collateral: in other cases, the lender may also require collateral to secure the loan. They often accept business assets and equipment as collateral. In the event of a default, the lender may repossess the collateral to recoup losses.
• Prepayment penalties and other fees: in addition to higher interest rates, the lender may also impose added fees for missed payments, late payments, or early repayments.
• Repayment period: some lenders may offer long repayment periods while others may offer shorter ones. Depending on your financial circumstances, it may be difficult to repay a high-interest nonprofit loan in a short period of time.

If you are approved and offered a nonprofit loan, the lender will present you with a loan agreement. This document will outline the terms and conditions of the loan, including the total repayment amount, payment due dates, the interest rate, additional fees, late repayment penalties, and default consequences. Thoroughly review this information to ensure you can meet the repayment requirements.

While loans can be helpful, if borrowing money isn’t feasible, there are still other options to pursue.

Instead, nonprofits can consider the following alternatives to taking out a loan:

• Re-budget: Nonprofits can consider reworking their finances to accommodate new goals. If there is a large expense that your company needs to pay, temporarily scaling back can help to minimize the need for a loan.

• Explore New Grants: Nonprofits often rely on crowdfunding, fundraising, and grants to supplement their need for more revenue sources. While the concept of grant financing is likely familiar to a nonprofit, it can be helpful to search for new grants that your nonprofit previously hasn’t applied for. For instance, some nonprofits may be more inclined to apply for competitive grants if their mission involves product development. Others may be more inclined toward movement-based grants such as social justice grants. 

• Loan forgiveness: If the goal of taking a loan is to manage a pre-existing debt, consider applying for loan forgiveness. Loan forgiveness can be requested any time after the initial loan has been spent and until the loan is fully repaid. However, keep in mind that the requirements for loan forgiveness may be difficult to meet. For instance, some lenders require a portion of the existing loan to be paid before applying for forgiveness.