While funding your business can be a challenge, financing a for-profit business can be a straightforward and often hassle-free process. On the other hand, nonprofit organizations may have a more difficult time obtaining the cash flow they need to pay their employees, market their cause, and pay their bills. Many loans require a business to be a for-profit endeavor to ensure that the loan will be paid back on time; nonprofits are often deemed too risky.
If you are a charity or another type of nonprofit business, it’s important to understand your options for financing your venture, from traditional bank loans and SBA loans to government grants and corporate giving programs.
Why is it Hard to Get a Loan as a Nonprofit Organization?
Starting a charity or nonprofit organization is a noble cause – you are working to make a difference in the world without getting anything back in terms of finances, or at least that of what for-profit businesses would receive.
However, funding a nonprofit can be difficult, especially if you try to go the traditional route through bank loans. This is due to several reasons, including strict requirements imposed by lenders to protect themselves from taking on a high-risk client.
Loan requirements
One of the biggest issues a nonprofit will face when obtaining a bank loan is the strict requirements needed to be approved. Lending money is risky, and financial institutions have rules in place to help prevent a loss. For example, they often want candidates who show strong revenue and cash flow, which would allow loans to be paid off. Nonprofits invest their money back into the cause and organization, often operating at a loss.
Increased risk
As nonprofits often operate at a loss or with very little cash flow, many banks don’t want to risk lending to them, as there is a good chance the nonprofit may not be able to pay them back. Some banks may take a nonprofit up on the risk, but the loan will ultimately have higher interest rates to make it a safer investment for the bank.
Type of organization
Beyond just being considered more of a risk than for-profit businesses, nonprofits may not be approved for a loan unless they are a specific type of organization, such as an LLC. Many lenders generally may not consider nonprofits for loans at all.
Where to Find Loans for Nonprofits
Although finding a loan for a nonprofit organization can be difficult, there are a few options if you want to stick with traditional loans.
Banks and credit unions
The first place most people think of when looking for a loan is the bank or a local credit union. For nonprofits, banks, and credit unions can be an option, especially if you are generating revenue, but it can be challenging to secure a loan with them.
It’s often better to start with a local bank, such as SouthEast Bank, which will be able to work with you to find the right type of funding and loans for your nonprofit organization. Look for a bank or credit union that specifically states they work with nonprofits to ensure you won’t waste your time.
When applying for a bank loan, either through a local bank or a national one, be sure to have all financial documents ready, including past year’s revenue–if you have any–as well as personal finances. They will need to look at both personal and business credit scores, incorporation documentation, development plans, and more. The more information you bring to the table, the better, so the lender can get a good picture of your nonprofit’s financial status.
Non-traditional financial lenders
Although banks and credit unions are often the most reputable and safest option when looking for loans for a business, there have been a few companies started in recent years that will loan money specifically to nonprofit organizations. This is referred to as community development financial institutions.
These companies understand they are funding nonprofits that may not make a strong revenue but are interested in building communities and helping improve social causes. They will often overlook lower revenue in hopes of creating a better community through the nonprofits. Community development financial lenders are generally either nonprofits themselves but can be banks and credit unions.
Before applying to one of these lenders, research and review them to get the best loan terms possible while avoiding any scams. It should also be noted that community development financial institutions tend to give out smaller loans due to their size, and their interest rates are similar to that of traditional banks.
Are There SBA Loans for Nonprofits?
One of the most popular resources for businesses to get a loan is the SBA or Small Business Administration. SBA loans are backed by the Small Business Administration and often have lower interest rates because of the guarantee by the SBA.
While many small businesses qualify for SBA loans, nonprofits may have difficulty getting approval. Both SBA 7(a) loans and 504 loans are only eligible to businesses that offer on a for-profit basis, making them impossible for nonprofits to obtain.
Certain nonprofits can apply for microloans through the SBA, but they have specific rules for what they may be used for, and it can still be challenging to get approved if your nonprofit is low on cash flow. Microloans through the SBA can provide up to $50,000 in funding and are available through community-based organizations, often nonprofits. Requirements will be different for each lender because of this.
If you qualify for a microloan, they are a great source of financing and can be used for anything from inventory and supplies to working capital and overall improvements of your business.
SBA disaster loans for nonprofits
During the 2020 COVID-19 pandemic, the SBA offered several programs to help keep both nonprofits and for-profit small businesses afloat. One of their biggest programs that approved funding for nonprofits was through their Paycheck Protection Program or PPP. All types of businesses could apply for these SBA loans, including nonprofits, and were meant to help businesses get through the difficult time of business closures and shut-downs.
The SBA also offered COVID-19 Economic Injury Disaster loans for nonprofit organizations, which were low-interest rate loans that were to help businesses with cash flow that was interrupted due to a disaster, such as the pandemic.
The third program that the SBA offered, which many are now starting to pay back, was the COVID-19 EIDL loan. The EIDL loan, or Economic Injury Disaster Loan, allowed not only for small business owners to apply and agricultural businesses and nonprofit organizations to receive up to $2 million in financing. The loan term was for 30 years, with a 2.75% interest rate for nonprofit organizations.
Unfortunately, these programs have ended, leaving SBA microloans as the only SBA loan option for certain nonprofits.
SBA grants for nonprofits
Loans are not the only source of financing that the SBA provides; they also offer grants to nonprofits and select educational organizations. These grants are designed to help research, technology, and management for nonprofits. They are specifically not for starting or expanding a business, however.
The SBA offers many different grants to a wide variety of nonprofits, including organizations for veterans, innovation, entrepreneurs, and more. You can apply for an SBA grant here.
Alternative Financing Options for Nonprofits
Although there aren’t many options when it comes to SBA loans for nonprofits, there are alternatives available for financing a nonprofit. These alternatives are often better options for nonprofits, especially those that are just beginning, as they offer low or even no interest rates and faster access to new cash flow.
Business credit cards – Similar to your own personal credit card, a business credit card allows you to draw from a line of credit that you can pay back over time to purchase what you need for your business. Business credit cards are good options to help nonprofits grow, and they often have introductory APRs, which means you won’t have to pay interest on what you spend for a period of time.
Giving programs – Many corporations and small businesses will donate to nonprofits for either goodwill or tax reasons. Giving programs can provide nonprofits with cash, fundraising events, and even gifts. Although you can’t run a nonprofit fully on giving programs, every little bit helps to keep your cause going.
Nonprofit grants – Aside from SBA grants, many other institutions offer grants for nonprofits, including the government and other nonprofits. Grants are one of the best ways to secure a large amount of funding for your nonprofit, and the best part is that it’s money that you do not have to pay back nor have interest incurred on it, as with loans. While they are excellent funding sources, grants have time-consuming applications and can be hard to reward. Doing thorough research before applying for any grant is an important step.
Crowdfunding sites – Increasingly popular, crowdfunding can be a good way to increase funding with little effort, especially for nonprofit organizations. GoFundMe, Kickstarter, and more are all available to start a campaign to raise money for specific causes or companies. Many nonprofits utilize crowdfunding for an event or disaster that might have occurred or even just for raising money for something as simple as school supplies. While a crowdfunding campaign might not create consistent revenue for your nonprofit organization, it’s a great way to help spread the word about your cause while raising some funds.
Finding the Best Financing for Your Nonprofit
At the end of the day, finding funding for your nonprofit organization is often quite difficult and can be frustrating. As you pour most of your money back into the cause you are fighting for, generating a profit is almost impossible, making it all the more challenging to apply for loans that could help keep your organization running. Even the SBA, known for being an excellent source of funding for small businesses, has little to offer nonprofits in terms of loans.
However, with some creativity and careful planning, there are ways to finance your nonprofit, from government grants to crowdfunding and giving programs. Many local banks and credit unions are also happy to work with nonprofits, either with a loan or a business credit card, to help improve their community.
At SouthEast Bank, we help guide you to the best financial solution for your organization, with our expert lenders here to answer all your questions.
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Information contained in this blog is for educational and informational purposes only. Nothing contained in this blog should be construed as legal or tax advice. An attorney or tax advisor should be consulted for advice on specific issues.
