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Guide to Getting Loans for Nonprofit Organizations

Date modified: May 12, 2023
Learn more about loans for nonprofit organizations and the alternatives. Find financing options, steps to get a loan, and tips on how to use the funding.
Loan Advice

Generating cash flow for a nonprofit is no small task. No matter the type of organization you run, you need money to make the wheels turn. Nonprofits, however, have a unique financial structure because they rely so heavily on community support as a source of cash flow. Almost every public or private nonprofit organization conducts fundraising efforts for this reason.

Fundraising isn’t the only option for nonprofit financing. Below, we'll walk you through your options and how to begin setting up your nonprofit for financial success.

Group of employees at a meeting.

Please note that the information provided in the blog post is for informational purposes only and should not be construed as professional financial advice. We recommend consulting with a legal expert to ensure full compliance.

When Nonprofits Might Need a Loan

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.

When Is It a Good Idea to Get a Nonprofit Loan?

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

Nonprofits operate like small businesses; thus, many options available to a small business may also be available to a nonprofit. However, be sure to check for additional requirements or rules on any of these types of financing for nonprofit organizations. Because nonprofits are often considered high-risk, thoroughly understand any stipulations or expectations of a lending agreement.

Non-profit organization meeting.

Here are some of the most common places a nonprofit may be able to inquire for funding:

Business Term Loans

You can apply for traditional loans and business lines of credit through banks and credit unions. While banks may offer lower interest rates, they often require more paperwork and have stricter eligibility requirements. Additionally, obtaining a loan through a bank typically takes longer. Some banks may even limit what the funds can be used for.

Nonprofit Loan Funds

Some organizations specialize in providing funding to nonprofit organizations. These loans can come with low-interest rates and favorable repayment periods. However, the loans are typically for smaller amounts and can be in short supply due to the high demand for nonprofit funding. These loans can be used for any business venture.

Grants for Nonprofits

Nonprofit organizations may benefit from looking into nonprofit-exclusive grant funding. Grants are funds dedicated to specific projects or areas of study. There may be restrictions on what grant funds can be used for, depending on the granting organization. However, grants do not need to be paid back. Grants can be difficult to secure because they are in high demand, especially for nonprofit organizations.

Microloans for Nonprofits

Microloans can be an alternative to traditional loans. Microloans are specifically dedicated to small businesses and eligible nonprofit organizations. Borrowers can request a small loan or up to $50,000. However, it’s common for micro-loans to require collateral and have stricter eligibility requirements.

SBA Economic Injury Disaster Loan (EIDL)

SBA EIDLs are loans designed to help small businesses, including nonprofit organizations, repair their business after a disaster. This can include physical repair costs, such as replacement costs for equipment lost to flood damage, or can be used to financially buffer a company that may have lost a significant amount of its typical revenue because of the impact of a natural disaster on regular operations.

Business Line of Credit

A business line of credit can provide short-term financing support to a nonprofit. Business lines of credit typically operate with short repayment periods, similar to a personal line of credit. Business credit lines can give nonprofits some flexibility with borrowing and pay for organizational expenses. Nonprofits should consider how opening a business line of credit will heavily factor into your business credit score.

How Can Nonprofit Loans Be Used?

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.

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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.

Steps to Getting a Nonprofit Loan

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.

Business financial plan documentsYour 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

The final step left is to apply for the loan. The application requirements may vary depending on the lender and the type of loan you are applying for, but it’s a good idea to have the following information on hand:

  • Tax statements from previous years
  • Company expense sheets
  • Loan spending breakdown
  • Payment plan

Once an application is submitted, processing a loan can take a few days to months. Repayment lengths can range between a few months to several years. However, the loan term will depend on the lender and your financed amount.

Borrow Smart

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.

Alternatives Loan for Nonprofits

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

Close up on grant application formInstead, 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.

Final Thoughts

As you look for a nonprofit loan or credit, remember to figure out the reason for the loan as early as possible. Then, when you are ready, begin working toward finding a provider with a history of working with nonprofits in your industry. If you have any questions, please contact us. One of our customer service experts will reach out to you.


Can Nonprofits Get Loans?

While nonprofits face an additional struggle of proving their financial reliability, it is still possible for nonprofits to get loans. Lenders primarily look for proof that the loan requester can afford to repay their loan, so going into a request with proof of viability and a repayment plan can help to assure lenders your nonprofit organization is reliable.

Does The SBA Offer Nonprofit Loans?

Yes. The SBA has two programs that nonprofit organizations may be eligible for. SBA microloans are the only broad-use loan that SBA offers for nonprofits. If you seek aid related to a natural disaster or extreme, unavoidable circumstances, your organization may also be eligible for an SBA disaster loan. If neither SBA loan seems right for your company, consider looking into government nonprofit loans or other grants intended to financially support nonprofits.

What Other Types of Financing Programs Are Available for Nonprofit Organizations?

There are many government funding options available for nonprofit organizations. Check for state-specific funding that applies to your nonprofit and look into federal relief programs. The CARES Act offers programs like PPP loans, and it could be helpful to look into which programs are available for nonprofits. (Note that the PPP loan program was available during the COVID-19 pandemic and is now closed.)

Which Form of Financing Is Allowed for A Nonprofit Organization?

Nonprofit organizations are eligible for most types of small business loans. This includes traditional loans, short-term financing, and opening lines of credit.

Ethan James   Lead Writer
Ethan James is an experienced Financial Writer at Lendza with over a decade of experience.