For many companies, business lending is pretty straightforward: Apply for a loan and get a decision. Nonprofit business loans, however, have a few more moving parts. As you’re looking for business loans for nonprofits, it’s important to be educated on the lender’s perspective, which is particularly important in obtaining a decision and figuring out where to apply in the first place.
There are, of course, a lot of reasons why you might want funding as a nonprofit: building out infrastructure, paying employees, marketing yourself, investing in development, and more. Here, we’ll walk through the nuances of applying for a business loan as a nonprofit organization, and everything you should be aware of as you identify sources of funding.
Things to Keep in Mind About Nonprofit Business Loans
As we started to explain, business loans for nonprofits and charities may be tougher to obtain than loans for other types of for-profit businesses. Here’s an overview as to why you might find the process slightly more challenging.
They Are Tough to Obtain
As a nonprofit organization, one of the key elements of your charity is that you invest all of your profits back into the organization. You might even be operating at a loss, which many nonprofit corporations do.
As you might expect, business lenders look for candidates with strong revenue and cash flow, which makes them more likely to pay off their business loans. And that’s what they’re in business for—making sure candidates pay off their loans with interest, which is where these companies generate profit.
Lenders See Nonprofits as Risky
To lenders, nonprofits are “risky” candidates for business loans. What’s behind this designation?
Well, without the profits and consistent revenue to assuredly pay back their loans, nonprofits are seen as more likely to default on their loans. That’s especially true with nonprofit organizations that are operating at a loss, which many do. In that case, the lender loses money—so nonprofit corporations are seen as risky bets.
On the flip side, for-profit businesses have revenue streams that lead to profit. They don’t always get approved for business loans, but for-profits with strong revenue and cash flow pose a lower risk in the eyes of a lender.
This doesn’t necessarily mean that you can’t get capital from traditional sources, but if you do, it often translates to higher interest rates on any loans for your nonprofit organization.
Assessing Your Liability as a Nonprofit Business Loan Candidate
As a nonprofit or charity, it’s likely that a lender will request collateral to secure the loan (assets they’ll seize to recoup their money in case you can’t pay back the loan). This could be in the form of physical assets or cash reserves. Make sure you think about this since the seizure of collateral could put your nonprofit at risk.
Top Funding Options for Nonprofits and Charities
Don’t worry: Funding options for nonprofits aren’t all doom and gloom. There are plenty of options to explore and different avenues to obtain capital. Here are some business loan options to consider as well as some alternatives, including grants and government capital.
Grants and Corporate Giving for Nonprofits
You might already be aware, but grants are a huge source of funding for nonprofit organizations. Many charities run almost exclusively on donations and grants—and many hours are spent in development to raise these funds. The best part about grant awards, of course, is that they’re not loans at all: You don’t have to pay back these funds.
In your search for nonprofit funding options, don’t forget to apply to an array of grants. Make certain that you explore several different sources of grant funding—federal, state, and corporate, too. (Many large companies set aside funds for corporate social responsibility, which includes investing in and providing grants for nonprofits.) Look for grants that are applicable to the kind of work you do and influence you have on communities as well as any personal characteristics you might have (for instance, your organization being run by a woman, person of color, or veteran).
It’s worth noting that applying for grants is a time-consuming process, so consider creating a tiered system for the grants to which you want to apply. For instance, pick a few that you think you’re most likely to win and spend your time working on those applications. Then, when those priority grant applications are in, get to the second tier when you and your team have time to work on applications. You shouldn’t be spending so much time on applications that your day-to-day operations suffer as a result.
Nonprofit Loan Funds
There are a few organizations that offer loans exclusively to nonprofits and charities. Oftentimes, these are nonprofits themselves, whose mission is to better their communities. Although these nonprofit loan funds are not plentiful, those that do offer nonprofit funding often provide preferable terms—or even zero-interest loans.
Consider starting with the Nonprofit Finance Fund and Propel Nonprofits to get some information on organizations like these, and to figure out if they might be the right fit for your nonprofit business loan needs.
SBA Loans and Grants
Guaranteed by the SBA and offered by traditional lenders such as banks, SBA loans may be an option for nonprofit candidates. Although most approved candidates are for-profit businesses, the SBA does have resources for nonprofit organizations to identify lenders that may be willing to work with them.
The SBA also issues grants to nonprofits dedicated to helping underprivileged individuals or communities through their Program for Investment in Micro-Entrepreneurs (PRIME). Last year, 100 organizations in 44 states received a total of $8 million in funding—so the resources are out there. Keep in mind that looking into SBA resources and funding might take a bit of time, but don’t hesitate to reach out to them to get more information.
Community Development Financial Institutions (CDFIs)
In a similar vein, CDFIs are lenders that specialize in offering financial assistance to nonprofit businesses. This includes loans for charities and other nonprofit organizations. Note that loan amounts may be small—though, on occasion, some do offer higher capital amounts—and interest rates might be high. Still, if you’re having trouble finding a loan for your nonprofit, researching CDFIs could be a viable option.
CDFIs are generally nonprofits themselves, or some might be financial institutions including banks or credit unions. Be sure to look locally for CDFIs, since they often operate within local or state jurisdiction.
Banks and Credit Unions
Speaking of banks and credit unions, you can look into applying for a “traditional” business loan, such as a business term loan or business line of credit, through these types of lenders. Make sure you have the correct expectations, however: Not only are bank loans very difficult for even for-profit business owners to obtain, but it’s even more difficult for nonprofits. In general, candidates must present a strong financial profile, since bank loans only go to the most qualified candidates.
If, however, you have a very strong credit history and your nonprofit is generating revenue, it might be worth the inquiry to see if your bank would be willing to work with you. You will want to look for language in their materials that says that the bank or credit union lends to nonprofits. (You might have more luck with credit unions than large banks, which are often set up to serve a community or group specifically, and might be more friendly to nonprofits as a result.) You also will want to expect that your interest rate will be quite a bit higher on bank loans—remember, it all comes down to how they evaluate your risk.
For these loan applications, prepare to have a lot of documentation on hand. This includes financial statements, revenue history, incorporation documentation, plans for development, and more. It’s better to over-prepare than under-prepare, since having the right paperwork on hand will speed up your loan approval process.
Business Credit Card
You might not think of a business credit card as a loan, but it can be. After all, you’re drawing against a credit line that you need to pay back later. With a little bit of research, you can find business credit cards that have low interest rates, which is beneficial to your bottom line if you’re unable to pay your bills on time.
There is also the option of applying for a 0% introductory APR business credit card. These cards are different than other business credit cards because they offer a fixed period during which you won’t have to pay interest on the balance you carry. These fixed periods are relatively long, often up to a year, which will enable you to generate the revenue to pay off the balance and create a payment plan to do so.
It’s worth noting that paying off your 0% intro APR credit card by the end of the introductory period is crucial for minding your organization’s money. After the introductory period ends, a variable interest rate will set in based on your creditworthiness and the market Prime Rate.
Even with this in mind, many nonprofits and for-profits alike rely on business credit cards to help them build and grow their businesses.
Successfully Finding Loans for Nonprofit Businesses
We won’t sugarcoat it: Finding nonprofit business loans isn’t the easiest process. Because of your unique circumstances surrounding the way you are required to reinvest your profits back into your organization, and your potentially low revenue or tight cash flow, you might be ruled out as a candidate for many business loans.
However, that doesn’t mean you’re without options. It’s important to do the legwork to look into grants, funds from other nonprofits and community development organizations, corporate giving programs, and more. While it may be more time-consuming than a for-profit business’s loan search, it will be worth it to get the funding that your nonprofit is looking for.