Organizations in the nonprofit sector share many of the same characteristics as for-profit businesses. Your nonprofit organization will likely need to afford costs such as:
- Equipment (i.e. computers)
- Real estate or office space
- Employee salaries
Still, like any business, your nonprofit must generate revenue, perhaps from individual donors or collecting fees for services.
In addition, like a for-profit 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?
In this post, we'll explain what a non-profit business loan is and how loan funds could help you achieve your goals.
What is a Non-Profit Business Loan?
A non-profit business loan is additional financing that’s available to a non-profit organization. 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, cash advances, and lines of credit are great funding options, many nonprofits face
difficulties securing them. Due to this, there are some notable downsides that come with them.
In the next section, 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 pursuing additional financing is 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 the following components:
- Your company’s annual revenues
- Fundraising plans and costs
- Other financial data
Many nonprofits rely on government agency grants and large donations. Unfortunately, these revenue streams can dry up quickly as donors’ priorities can 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 capital campaigns or applying for government funding. 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'll most likely 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 in the United States identify potential lenders. You should seek 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 nonprofit's 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 that repayment will have on your finances. If you're concerned about your ability to repay a loan for a long time, it may be prudent to take out a short term loan. That way, you can quickly fulfill your obligations prior to donor shifts or other market changes.
Before applying for a term 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 Financing Options Available
Of course, it can be frustrating if you
aren’t approved for a business loan when you're in need of additional working capital. However, there are other ways to secure nonprofit funding. 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 isn't available, then you could apply for loans for nonprofit organizations.
Editor’s Note: This post was updated for accuracy and comprehensiveness in August 2021.