A Guide to Business Loans for Nonprofit Organizations
Because traditional business loans can be hard to get, nonprofit organizations should explore all funding options available to them.
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Nonprofit business loans can be harder to qualify for than traditional small-business loans. Nonprofits may need financing for payroll, marketing, equipment or real estate, yet lenders often view them as high risk because they don’t operate for profit.
That said, nonprofits can find business loans through banks, credit unions and community development lenders, along with alternative funding options.
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Nonprofits present unique challenges for lenders. Because these organizations don’t operate for profit, their financial profiles can look different from traditional businesses.
Limited or inconsistent revenue
Most lenders have minimum qualification requirements such as:
- A certain credit score.
- Time in business.
- Strong annual revenue.
- Consistent cash flow.
Nonprofits often rely on donations, grants or seasonal funding, which can result in inconsistent revenue. Some organizations may reinvest all their income into their mission — or even operate at a loss.
Because they can’t show a clear ability to repay, lenders often view nonprofit business loans as higher risk. As a result, some lenders may be unwilling to work with nonprofits and those who do may offer stricter terms and higher interest rates.
Collateral requirements
Lenders may require collateral, like equipment or real estate, to secure a nonprofit business loan. If the organization defaults, the lender can seize the assets to recover their losses. For nonprofits with limited assets or property, this requirement (and risk of losing your assets) can make getting funding difficult.
Best business loans for nonprofit organizations
Here are options to consider when looking for a business loan for your nonprofit.
Banks and credit unions
Best for: Established nonprofits with strong finances and steady revenue.
Banks and credit unions offer “traditional” business funding, such as business term loans, business lines of credit, real estate loans and equipment financing. To qualify, however, you’ll need:
- Good credit.
- Strong finances.
- Steady revenue.
- Detailed documentation.
Again, because nonprofits are considered high risk, lenders may offer higher interest rates than they would for a for-profit business.
Examples:
These banks and credit unions offer nonprofit business loans.
- U.S. Bank.
- Valley National Bancorp.
- Community Bank of the Bay.
- Verity Credit Union.
- Beneficial State Bank.
- Self-Help Credit Union.
SBA loans and grants
Best for: Nonprofits eligible for SBA microloans or disaster relief.
In general, you must be a for-profit business to get an SBA loan. There are, however, a few exceptions.
SBA microloans
These loans are available to certain not-for-profit child care centers. SBA microloans offer loan amounts up to $50,000 and competitive interest rates.
SBA disaster loans
Private nonprofit organizations can qualify for SBA disaster loans. These loans are available to help businesses recover from physical and economic damage in the wake of a declared disaster.
SBA grants
The SBA issues grants to nonprofits dedicated to helping disadvantaged microentrepreneurs through the Program for Investors in Microentrepreneurs (PRIME) program.
Keep in mind that looking into SBA loans and grants can take some time and won’t be the fastest funding option.
Community development financial institutions
Best for: Nonprofits that can’t qualify for traditional bank loans.
Community development financial institutions (CDFIs) are lenders that specialize in offering financial assistance to disadvantaged communities. CDFIs may be nonprofits themselves, or some might be financial institutions, like banks and credit unions.
Compared to traditional bank loans, however, CDFI loans may have smaller loan amounts and higher interest rates.
Examples:
These local CDFIs offer business loans for nonprofits.
- People Fund, operates in Texas.
- Propel Nonprofits, operates in Iowa, Minnesota, North Dakota, South Dakota and Wisconsin.
- Nonprofit Finance Fund, operates across the U.S.
The CDFI locator tool — offered by the Opportunity Finance Network, a national network of CDFIs — can be used to find lenders in your area.
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How to qualify for a nonprofit business loan
Providing organized and thorough documentation can strengthen your loan application and help you qualify. Here’s what you’ll want to include:
- Financial documentation that shows your revenue streams (e.g. donations, grants, contracts).
- Recent tax returns and bank statements.
- State registration paperwork and proof of nonprofit status.
- Documentation about your organization’s mission and fundraising.
- A business plan.
- Proof of collateral (if available).
When you submit your application, make sure you’ve answered every question as intended and include all required paperwork. This can help streamline the process and avoid automatic rejections from underwriting technology.
Alternatives to nonprofit business loans
If you can’t secure a loan for your nonprofit, here are some funding alternatives to consider:
Nonprofit grants
Best for: Free funding that doesn’t need to be repaid.
Nonprofit grants can be a source of free funding. Unlike loans, you don’t need to pay back these funds. Some nonprofits and charities run almost exclusively on donations and grants.
Because applying for grants is a time-consuming process, you may want to create a tiered application system for the grants of interest. For example, select grants with missions that best align with your nonprofit goals and complete applications for them first. If time permits, you can move onto a second tier of grants where you think winning may be more of a challenge, but still possible.
Nonprofit grants are available from a variety of sources, including the government, corporations and other nonprofits. Examples include:
- Bank of America Charitable Foundation.
- Wells Fargo Community Giving.
- 3M Foundation.
Corporate giving programs
Best for: Small or specific funding needs.
Nonprofits can appeal to local small businesses and corporations who want to give back to their community. Corporate giving programs will typically generate less funding than a loan or grant, but can still be helpful.
Contributions in corporate giving programs can vary as:
- Cash donations.
- Physical gifts such as products, services, event tickets, etc.
- Sponsorships for fundraising events.
- Volunteer work.
You can visit the websites of local businesses and large corporations to see if they have charity or nonprofit organizations. You might also try calling local businesses to pitch your nonprofit cause to their marketing or PR team.
Business credit card
Best for: Covering everyday purchases and earning rewards.
A business credit card can be an option when you can’t get a loan. It can be used similarly to business line of credit — funding purchases to be paid back, partially or fully, at a later time.
The best credit cards for nonprofit organizations are often the same as for other small businesses. In addition to interest rates and annual fees, consider available perks such as cash back, earned rewards, discounts and sign-up bonuses when reviewing credit card options.
Crowdfunding sites
Best for: Nonprofits with a strong following and internet presence.
Crowdfunding can be a fast way for nonprofits to raise capital. Instead of securing a large lump sum from a loan or grant, crowdfunding focuses on collecting small donations from a large number of people. You will need to devote time and resources to develop your marketing campaign for the site.
Before setting up your campaign, however, review the organization’s guidelines to identify any restrictions that may apply to your nonprofit.
For example, Kickstarter allows nonprofits and charitable organizations to raise funds for specific projects but not for general support of their cause. GoFundMe and Indiegogo, on the other hand, don’t appear to have such limitations.
Next steps to fund your nonprofit:
- If you can’t qualify for a bank or SBA loan: In addition to CDFIs, some online lenders lend to nonprofits or have partner resources to help nonprofit businesses, and may be more lenient when it comes to credit requirements.
- If you have poor credit and lack collateral:Small-business grants can be difficult to find and win, but they can help your nonprofit avoid taking on debt.
Frequently asked questions
Can nonprofits get business loans?
Yes, it’s possible for nonprofits to get business loans from banks, credit unions and CDFIs. It’s often more difficult to qualify, however, because lenders consider nonprofits to be a risky investment.
Do nonprofits qualify for SBA loans?
In general, nonprofits do not qualify for SBA loans. Certain not-for-profit child care centers may be eligible for SBA microloans, however. Private nonprofit organizations may also be eligible for SBA disaster loans in the case of a declared disaster.
Can a 501(c)(3) organization apply for a business loan?
Yes, 501(c)(3) organizations can apply for nonprofit business loans, although eligibility depends on the lender and the organization’s financial profile.
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