Many nonprofits do valuable work for people and causes that are important to their communities, however, sometimes nonprofits need extra cash flow to keep the organization running.
Like any small business, nonprofits must pay their employees, rent office space, and buy equipment they need to operate. Since most nonprofit organizations are dependent on grants, fundraisers and donations, sometimes there’s a gap in funding or they lack a reliable revenue stream to cover these costs. While this makes them less desirable candidates for loans, it also shows that there are times when nonprofits may need them.
The biggest difference between a for-profit business and a nonprofit is simple: A for-profit can simply sell more products and services to offset cash flow problems, whereas when a nonprofit provides more services it could potentially cost the organization more money.
That’s why loans for nonprofits are more difficult to obtain; lenders see them as a high risk for repayment. Nonprofit organizations lack the financial assets that for-profit companies have, so if a nonprofit can get a loan it will often have a higher interest rate or a short-term loan.
This is not to say that it’s impossible to get loans for nonprofits, there are a few ways to finance a nonprofit outside of donations and grants.
How to get a loan for a nonprofit
As with any small business, nonprofits may encounter a time where they need extra funds right away. Donors can be fickle and grants can take months to process and receive, but rent and salaries are always due. Loans for nonprofits are tricky, but if the organization has a plan set in place to repay a loan, they’re more likely to convince a lender they’re able to borrow and repay a short-term loan.
Nonprofit organizations must be prepared to show how they can make their scheduled monthly payments through fundraising, marketing, and other methods.
If they’ve applied for grants or they have a record of prior fundraisers from the year before, a lender may be inclined to approve a loan if they believe the nonprofit will earn back enough money to repay the loan.
Nonprofits may also offer collateral to qualify for a loan. Collateral is an asset of value that the organization could use to pay back debt in the event that they’re unable to pay with cash. If a nonprofit owns real estate, vehicles, or equipment of value that it could sell to repay a loan, the nonprofit can use it as collateral.
Collateral is an important asset to remember because it factors into the types of loans a nonprofit can receive.
What types of loans are allowed for a nonprofit organization?
There are a few types of loans nonprofits can use. Not all banks can offer these loans, but here are the types of loans to consider:
Working capital loan: A smaller loan amount used to cover short-term expenses like covering payroll. The repayment terms are also very short. These are sometimes called a “bridge loan,” as well. It’s a way to cover costs until promised funds like grants come in. These have much lower amounts than traditional business loans.
Short term facility loans: Funds that are used to fix or renovate a nonprofit’s property, or to buy or repair equipment.
Real estate loans or mortgages: Loans used to purchase a building, office, facility, or other property type for the nonprofit organization.
Can you get a loan to start a nonprofit?
A nonprofit can get a loan to start a nonprofit, but you will often need collateral and someone with good credit to guarantee the loan. With a line of credit, board members can form a quorum to guarantee the line of credit, but they must have good credit history.
The best way to get a loan is to show that your organization fills a need in the market. Like a business, if you can show that your nonprofit will supply a need, it will be clearer that funding will come to you later so that you can repay your loan.
For example, let’s say a nonprofit provides a form of alternative energy or health care. The government has a lot of government grants for those types of organizations. If the organization has a clear business plan, accurate records and estimates for the fundraising plans and operating budget, a lender will be more likely to provide a loan to this type of organization.
Nonprofits can also get personal loans from individuals like employees and board members of the organization. Rarely is this practice recommended because it can lead to legal issues and other employee problems.
Government grants, private endowments and donations from individuals and institutions are other ways to gain funds to start a nonprofit, and these do not need to be paid back.
How to find the best nonprofit loan for your needs
Before applying for a loan, nonprofits must consider what they’re trying to finance. Is it for a short-term or long-term need? Is it related to operational costs, the facility, or equipment? Given the restricted access to loans for nonprofits, organizations must focus on the need to determine which type of loan would work best.
Once there’s an understanding of exactly what the money is for, a lender can find a loan that suits those needs directly. For example, let’s say a nonprofit cannot afford local rent prices. With a down payment, the organization may qualify for a mortgage that is less expensive than the local rental rates and fits into the nonprofit’s monthly budget.
In another example, let’s say a nonprofit needs equipment to build houses for homeless people. The organization may be able to ask for donations of tools, but they’ll also need funds to buy the full range of supplies and materials to get started. With a line of credit or other working capital loan, they’re able to show donors what they’re capable of doing for the community, and in turn collect donations to repay they loan.
How to apply for a loan as a nonprofit organization.
In order to apply for a loan, nonprofits must provide a clear mission, business plan and set of financial records. A lender will need current tax returns, bank statements, budget and operating costs. A projection of future fundraising and marketing efforts can also help.