Everything You Need to Know About Nonprofit Business Loans
Nonprofits share many of the same characteristics as for-profit businesses. Your nonprofit organization will likely need to pay for equipment (i.e. computers), office space, and employee salaries. Still, like any business, your nonprofit must generate revenue, perhaps through donations or collecting fees for services.
Also, like a business, your nonprofit’s success or failure often comes down to execution. How effective are the services that you’re providing? How prudently are you managing your cash flow?
Taking out a loan can have a big impact on your operations. You’ll have funds that you can invest in your services, while also creating financial obligations.
While term loans are a great option, many nonprofits face difficulties securing them. Due to this, there are some notable downsides that come with them. In this post, we’ll review everything you need to know about applying for and receiving a nonprofit business loan. Once you understand this information, you can determine if it’s right for your organization.
What to Consider Before Applying for Nonprofit Financing:
Who Provides Nonprofit Business Loans?
Unfortunately, nonprofit business loans can be hard to obtain, as few lenders offer them. From a lender’s perspective, lending to a nonprofit is just as risky, if not riskier, as lending to a business. To consider your nonprofit, the lender will need to examine your company’s revenues, fundraising plans, costs, and other financial data.
Many nonprofits rely on government grants and large donations. Unfortunately, these revenue streams can dry up quickly as donors’ priorities change. This increases the liability for lenders, which may result in higher interest rates or increased application rejections.
Further, many nonprofits can’t simply sell more products or services like a business could. In fact, increasing your services could result in higher costs while not raising revenues. Often, the only way nonprofits can increase revenues is through fundraising drives or applying for grants. For these reasons, some lenders won’t lend to nonprofits or may charge higher interest rates if they do.
Where and How to Apply for a Nonprofit Loan
The application process will vary from lender to lender. However, you will almost certainly have to provide detailed and accurate financial information outlining your revenues, spending, and assets. Due to this, you should compile these documents before applying for nonprofit financing.
The Small Business Administration (SBA) offers loans and other resources to help nonprofits and small businesses identify potential lenders. You should look for lenders with experience lending to nonprofits or support economic development. They may be more likely to accept your application and will have a better understanding of your organization’s needs.
Another viable option is seeking financing from Community Development Financial Institutions. They focus on businesses that impact low income communities, which can include nonprofits. Hopefully, you’ll be able to find a CDFI that will want to invest in your nonprofit’s cause!
Review the Potential Liabilities
Your nonprofit will be liable for any loan taken out in its name. You may have to submit collateral, which could be possessed if you fail to make payments. This could disrupt your operations and put your nonprofits future at risk.
Repayment plans will also result in financial burdens, eating into your cash flow, which could create liquidity problems. That’s why you should only take out loan amounts that you genuinely need. In addition, you must closely consider the impact repayment will have on your finances.
Before applying for a loan, it’s important to read all the fine print. You should know the repayment terms, interest rates, and fees. Keep in mind that longer repayment terms carry lower monthly payments, but they often cost more in the long run as interest accrues.
Remember, There Are Other Options
Of course, it can be frustrating if you aren’t approved for a loan. However, there are other ways to secure nonprofit financing. For instance, you can apply for a business credit card or line of credit, which can help you gain access to working capital.
Conclusion: Nonprofit Loans Aren’t Your Only Option
If your nonprofit needs additional working capital, a loan might be the answer. However, it’s important to consider the terms of nonprofit business loans and how repayment will affect your organization. It’s advisable to first seek out a grant or to raise money before taking out a loan. If such funding is not available, then you could consider nonprofit business financing.
Editor’s Note: This post was updated for accuracy and comprehensiveness in July 2019.
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.