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Business lending is pretty straightforward for most companies: Apply for a loan and get a decision. Nonprofit business loans, however, have more moving parts. As you’re looking for business loans for nonprofits, learning where to apply for financing and what criteria lenders use to approve applications is essential.
After all, nonprofits will use these funds to build infrastructure, pay employees, market their cause and more. We’ll walk through the nuances of applying for a business loan as a nonprofit organization, as well as your available sources of funding.
Why are nonprofit business loans hard to obtain?
Business loans for a nonprofit organization or charity tend to 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.
As you might expect, lenders have strong business loan requirements. They typically seek 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.
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.
Risky investment for lenders
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. Since the lender loses money, nonprofits are risky investments.
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 a lender's eyes.
This doesn’t necessarily mean that you can’t get capital from traditional sources—it just often translates into higher interest rates on any loans you secure for your nonprofit organization.
Collateral is likely necessary
As a nonprofit or charity, the lender will likely request collateral to secure the loan (assets they’ll seize to recoup their money if 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.
How Much Do You Need?
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 and some alternatives, including grants and government capital.
1. SBA loans and grants
What it is: Financing solutions for nonprofits backed by the U.S. Small Business Administration.
Guaranteed by the SBA and offered by traditional lenders such as banks, SBA loans may be an option for nonprofit candidates. 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 for more information.
Getting started: Review this list of SBA resources for nonprofit organizations to identify available government financing programs. You can also use grants.gov, an online database that helps nonprofits connect with government grant opportunities.
2. Nonprofit loan funds
What it is: Obtain nonprofit financing from lenders that work exclusively with nonprofits and charities.
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 who offer nonprofit funding often provide preferable terms—or even zero-interest loans.
Getting started: 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.
3. Nonprofit grants
What it is: Free funding available to nonprofits that meet certain criteria, obtained from grantmaking agencies.
You might already be aware, but grants are a significant source of free 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.
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.
Getting started: Visit various nonprofit grant agencies, like the 3M Foundation and The Carnegie Foundation, and research their requirements to see if you qualify.
4. Community development financial institutions (CDFIs)
What it is: Financing generally in lower amounts from lenders that specialize in financially assisting nonprofits and charities.
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 jurisdictions.
Getting started: To kickstart your research, check out the CDFI locator. The Connect2Capital platform is another option connecting small business owners with a network of nonprofit CDFI lenders that want to support organizations with a worthy vision and cause.
5. Banks and credit unions
What it is: Traditional business loan options obtained from banks.
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. Please note that bank loans are challenging to secure for nonprofits. In general, candidates must present a strong financial profile, since bank loans only go to the most qualified candidates.
If you have a very strong credit history and your nonprofit is generating revenue, it's worth applying for a loan through your bank. 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.) Also, expect higher than normal interest rates—remember, it depends on how they evaluate your risk.
You'll need to provide extensive documentation when applying—financial statements, revenue history, incorporation documentation, development plans and more. It’s better to over-prepare than to under-prepare since having the right paperwork on hand will speed up your loan approval process.
Getting started: As we’ve mentioned, securing a loan for a nonprofit is challenging. To kickstart your research, the following guides break down the process and available options:
6. Corporate giving programs
What it is: Collecting contributions, either monetary donations or physical gifts or time spent volunteering, from local businesses and large corporations.
While corporate giving programs may not secure the bulk of capital that a grant or loan might, every amount helps. If you’re a nonprofit with a worthy cause, you can appeal to local small businesses and corporations who want to give back to their community.
Contributions in corporate giving programs can vary:
Physical gifts (e.g., free tickets if the small business is an entertainment venue).
Sponsorships for fundraising events.
If you take the time, you might be surprised to see how many local businesses are willing to support your nonprofit. In fact, socially responsible companies, like The Walt Disney Company, partner with organizations like The Make a Wish Foundation to create positive change in the world.
Getting started: View the websites of local businesses and big corporations to see if they offer any charity or nonprofit organizations. Also, consider calling local businesses and pitch your nonprofit cause to their marketing or PR team.
7. Business credit card
What it is: Draw against a line of credit that will be repaid over time—ideal for daily and fixed expenses.
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 some research, you can find business credit cards with low interest rates, which is beneficial if you cannot 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.
Getting started: The best credit cards for nonprofit organizations are often the same as for other small businesses. Consider the options and perks including cashback, sign-up bonuses and low APRs.
8. Crowdfunding sites
What it is: Fundraise small amounts of capital from numerous people using crowdfunding sites like GoFundMe.
Crowdfunding has now an increasingly popular 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.
There are many crowdfunding sites—Kickstarter, Indiegogo, GoFundMe—which do you choose? Typically, GoFundMe resonates with many nonprofits and is ideal at fundraising for worthwhile causes. Many nonprofits and individuals have created GoFundMe campaigns to raise relief funds for natural disasters, fund diversity programs for schools and even pay for pets' medical procedures.
If you’re willing to devote resources to marketing your campaign, crowdfunding can be a viable funding source for your nonprofit.
Getting started: Check out our GoFundMe guide to learn how to start a campaign and start raising funds for your nonprofit organization.
The bottom line
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 left 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'll be worth it to get the funding for which your nonprofit is looking.
This article originally appeared on Fundera, a subsidiary of NerdWallet.