Everything You Need to Know About Nonprofit Business Loans
Nonprofit organizations 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 organization’s operations, providing funds that you can invest in your services, while also creating financial obligations.
While loans are a great option, many nonprofits face difficulties securing them, and 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, so that you can determine if it’s right for your organization.
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 organization’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 this documentation before applying for a nonprofit loan.
The Small Business Administration (SBA) offers informational resources to help nonprofits and other organizations identify potential lenders. You should look for lenders with experience lending to nonprofits. They may be more likely to accept your application and will have a better understanding of your organization’s needs.
Consider the Liabilities
Your nonprofit organization 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. You should only take out money that you genuinely need and should closely consider the impact repayment will have on your finances.
Before applying for a loan, it’s important to read all of the fine print. You should know the repayment terms, interest rates, and fees. Keep in mind that while longer repayment terms carry lower monthly payments, they often cost more in the long run as interest accrues.
Conclusion: Nonprofit Loans Aren’t Your Only Option
If your nonprofit needs additional financing, 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.
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.