Nonprofits rely on funding to operate and grow, but sometimes fundraising and grants don't provide enough resources to cover all costs. In that case, a business loan can augment traditional fundraising and grants with other avenues of funding.
We’ll run through the options for business loans for nonprofits and help you prepare to apply for the right one.
A Nonprofit Defined
A nonprofit is an organization that serves a socially beneficial or charitable purpose. It is, as its name indicates, not in operation to make a profit. Nonprofits do, however, earn revenues, and the money they bring in could pay salaries and operational expenses, or be reinvested for growth. It could also be used to carry on tax-exempt activities.
A nonprofit might offer religious or educational services, health and wellness programs, humanitarian aid and relief, environmental conservation, social services, animal welfare, or arts and culture activities, among others.
Like any business, a nonprofit has a range of expenses, including:
- Operating expenses
- Program costs
- Technology
- Payroll
- Marketing and advertising
Many nonprofits rely on fundraising and grants, but these don't always fully cover the costs an organization incurs. When charitable giving is down, nonprofits must find other funding sources.
Why Consider Business Loans for Nonprofits
When a nonprofit is overly focused on where to find funding, it may not beputting energy into the right place: serving its audience. A business loan can eliminate much of the stress over finances. It can also stabilize cash flow so the organization has access to capital throughout the year, even after fundraising season.
And if fundraising fails to hit the mark, a business loan can fill in the gaps.
Business loans also allow a nonprofit to expand its operations. That might mean offering new programs with different services or servicing different demographics. It might also allow your organization to open new locations.
How Can Business Loans for Nonprofits Be Used?
Nonprofit business loans can generally be used for many expenses, including:
- Operating expenses
- Growth and expansion
- Purchasing property
- Marketing and advertising
- Project costs
- Equipment
- Staffing
Some loans may have stipulations about what expenses can be covered. Ask your lender about any potential limitations before applying.
Where Nonprofits Can Get Loans
If your nonprofit is interested in finding business financing, you have several places to find business loans for nonprofits.
Banks and Credit Unions
Established nonprofits with solid credit may find financing at traditional banks and credit unions. You’ll find term loans, lines of credit, and commercial real estate loans. You might start your search with the bank your organization already has a relationship with, but you aren’t limited to that institution. Search around for better rates if your bank can’t meet your needs.
Community Development Financial Institutions (CDFIs)
CDFIs provide low-interest loans to organizations, including nonprofits, that serve underserved communities. Some CDFI lenders focus on businesses in their immediate area, so yours would need to be located in those geographic confines. With a mandate of supporting underserved communities, a CDFI can serve organizations in other states and municipalities.
Online-Only Lenders
Nonprofits seeking business loans can also look online. Criteria to qualify for business loans online vary among lenders, but lenders exist for every level of revenue and creditworthiness.
Some marketplaces offer business loans specifically for nonprofits, such as LenDonate. These marketplaces may offer competitive rates and be more flexible with loan requirements for nonprofits.
Types of Loans Available for Nonprofits
Let's look at different types of loans for different purposes that your nonprofit might want to consider, as well as lenders to research.
Term Loans
Banks, credit unions, and online lenders offer both long-term and short-term business loans. Long-term loans typically have repayment terms of three to 30 years, while short-term loans have repayment periods of six to 18 months.
- US Bank
Lines of Credit
A business line of credit offers flexible funding, so you can borrow as needed. You'll be approved for a certain limit, and you can borrow up to that amount, repay it, and borrow it again.
- American Express
- Headway Capital
Commercial Real Estate Loans
Real estate loans are designed for nonprofits and businesses that plan to purchase or renovate real estate. They typically must be repaid over five to 20 years. You could use a real estate loan to purchase, renovate, or build.
- Rapid Finance
Equipment Loans
If your nonprofit needs to buy equipment like computers or a company vehicle, consider equipment loans. Equipment loans are secured. The equipment that you’re purchasing is the collateral that guarantees the loan. That could make this kind of loan easier to qualify for than other types of loans. Equipment loans generally must be repaid in one to 10 years.
- Kapitus
- Fora Financial
Business Credit Card
Another financial tool you might consider for your nonprofit is a business credit card. You can use it to make purchases for the organization, such as office supplies. And if you find a card with rewards, each purchase will help you accumulate points you can use for perks.
- American Express
Can a Nonprofit Get an SBA Loan?
The Small Business Administration guarantees business loans, but generally not to nonprofits. The only exception is a microloan, which provides up to $50,000. Nonprofits that qualify must meet certain criteria, such as operating a not-for-profit childcare center. Nonprofits may be eligible for other kinds of financial assistance from the SBA, such as disaster loans.
Other Funding Options
In addition to business loans for nonprofits, these alternatives can provide the capital you need.
Grants
Nonprofits often rely on grants from corporate, nonprofit, and government sources. Unlike business loans for nonprofits, grants don't need to be repaid.
Some grants focus on nonprofits in particular industries or geographic areas. Others support nonprofits that serve a particular community need. You can use some grants for business expenses, but other grant funds may need to be applied to specific project expenses.
Grants are competitive, and it’s virtually impossible to get every grant you apply for. Many nonprofits search for and apply for grants all year-round.
Crowdfunding
Crowdfunding platforms like GoFundMe are designed for nonprofit (and other types of) fundraising. Once you create a project on the platform, it's up to you to promote it and help more people find it who will donate to your project. The platforms sometimes charge a fee for each transaction, though there are some free crowdfunding tools like Zeffy.
What to Know Before Applying for Business Loans for Nonprofits
If you've decided that business loans for nonprofits are your organization's best option to find financing to help you operate and grow, here are a few things you need to do first.
Step 1: Get Approval
First, check with your Board of Directors. Some nonprofits may require approval by the Board before applying for a loan and taking on long-term debt.
Step 2: Do Your Research
Once you've got the Board's thumbs up, shop around for the best option available to your organization. When you decide on the type of loan that best fits your needs, compare offers from different lenders. BusinessLoans.com is a great option, because you can compare multiple offers with a single, quick application.
Step 3: Gather Documents
Once you find a lender with rates and terms that you like, review the documentation that the lender requires. You may need to provide proof of 501(c)(3) status, tax returns, and financial statements. You may also be asked for cash flow projections and/or a business plan. The more prepared you are with these documents, the easier the application process will be.
Step 4: Check Your Credit
Review your business and personal credit scores, since they may impact the rates and terms you’re offered. If your organization doesn't have a credit history, lenders will review the owners’ or principals’ credit standing. The higher your credit scores, the better the interest rates and terms your nonprofit could qualify for.
Step 5: See if Collateral Is Required
Find out if collateral is required. Collateral usually comes in the form of property or equipment and can help secure the loan. Offering collateral could improve your chances of approval because it lowers the financial risk for the lender.
Step 6: Time to Apply
You’ve done your homework to find the best business loan for your nonprofit. Now it’s time to apply. Some online applications are short and sweet, and will give you an instant answer on whether you’re approved. Others may take a few weeks to process. Sit tight and be patient.
Applying for a business loan could be just the thing for your nonprofit to stop stressing about how to finance growth. With a loan, you could expand the organization and help more people. By educating yourself about the loan options available, you can help your nonprofit choose the one that’s the best fit.
Ready to start your research? BusinessLoans.com can help. Answer a few questions and get offers from multiple lenders.
