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.
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.
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:
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:
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.
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.
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.
Here are some of the most common places a nonprofit may be able to inquire for funding:
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.
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.
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 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 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.
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.
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:
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:
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.
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.
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.
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.
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:
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.
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:
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:
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.
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.
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.
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.)
Nonprofit organizations are eligible for most types of small business loans. This includes traditional loans, short-term financing, and opening lines of credit.