Why Nonprofits Can’t (Usually) Get Business Loans — & How To Get The Financing Your Organization Needs Anyway
So, you’ve started a nonprofit. You’re passionate about your cause and have put together an inspiring team, united by your shared mission to make a positive difference in the world. But you need some money to help finance your venture. Unfortunately, in our profit-motivated society, it can be extremely difficult to find a lender or other party who has financial incentive to extend you some capital. Whether you need an infusion of capital to maintain your existing nonprofit, or you want to secure financing to get your fledgling nonprofit off the ground, you may have to turn over a lot of stones before you find an interested lender. However, obtaining financing as a nonprofit is not entirely impossible, as long as you know where to look.
Is a business loan a viable option for a nonprofit organization? Where else can nonprofit businesses get financing? Read on to learn the answers to these questions.
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Why Nonprofits Have Trouble Getting Business Loans
Nonprofit organizations are, of course, not about turning a profit. Any money they make—if they bring in any money at all—is meant to be reinvested in the organization. Banks, which are all about profits, have little to no interest in helping nonprofit organizations. Lenders consider nonprofit organizations to be “high-risk borrowers,” because they do not trust that you will make enough money to repay a loan. If they do not receive any additional financial incentive to do so—for example, a government subsidy or a “corporate giving” PR campaign—banks typically will not lend to a nonprofit that is not bringing in significant revenues. Such is capitalism.
7 Ways To Get Financing For Your Organization
Fundraising, donations, and member fees are typically the main sources of funds that drive a nonprofit organization. If you need additional money on top of what your organization is able to bring in through these channels, you’ll face a pretty steep climb. However, while it’s not easy, there are ways to finance your nonprofit, even if you can’t get a loan. Also, a loan is not necessarily out of the question, particularly for a more established nonprofit. The appropriate type of funding for your organization will depend on various factors, which I’ll describe in more detail in the sections below.
1) Community Development Financial Institutions (CDFIs)
Short for “Community Development Financial Institution,” a CDFI is a financial institution with a mission to facilitate community growth by providing financial assistance to businesses and consumers in low-income or disadvantaged areas. CDFIs are typically not-for-profit or nonprofit organizations, but may take the form of traditional banks/credit unions or venture capitalists. Usually, they do not operate on a national scale, so you will need to seek out CDFI opportunities in your local area.
CDFIs may be microlenders offering loans of $50K or less, while some CDFIs also issue larger loans to more established businesses. City First Bank in Washington D.C. is an example of a CDFI that offers loans to nonprofits.
While CDFIs can be a viable source of capital to nonprofit organizations, particularly to those that operate in disadvantaged regions, there are some downsides. CDFIs usually charge higher rates than banks do (though lower than you’d get with short-term or payday loans) and typically require you to submit a lot of documentation. It can also take a long time for the funds to come through.
2) Banks & Credit Unions
Though it’s much harder to qualify a loan from a traditional bank, there are some banks that offer loans to nonprofits. Big corporations — banks included — often like to flex their philanthropic muscles via nonprofit grants or loans programs. However, banks may charge higher interest rates on loans to nonprofits due to the higher risk involved, and you will likely have to have an established nonprofit with documentation to show your revenue, expenses, fundraising plans, and other financial information.
Credit unions, being nonprofit themselves, are more likely than traditional banks to offer nonprofit loan or grant programs (or serve as CDFIs). As nonprofits, credit unions do not have to pay taxes and can offer very competitive interest rates. A credit union may also be more likely than a bank to extend a loan to a newer or smaller nonprofit. Credit union loans are typically offered in smaller amounts than bank loans and you may have to have a checking or savings account with that credit union in order to qualify.
It’s important to only apply for funding to banks and credit unions that specifically advertise that they work with nonprofits/have a lending program for nonprofits. These institutions will better understand your needs as a nonprofit, and will be more likely to accept your application.
Learn more about credit union loans for businesses (including nonprofit businesses) and how they differ from bank loans.
3) Crowdfunding Platforms
For startup nonprofit organizations that are less likely to qualify for bank loans, crowdfunding can be a good option. There are various types of crowdfunding, but charitable/donation lending is the one most suited to nonprofit businesses. Depending on the crowdfunding platform you use, you may be able to obtain free capital for your nonprofit, in the form of online donations you do not have to repay. Or, you may qualify for a no-interest crowdfunded loan, and you’ll only have to repay the principal on the loan.
It is extremely important to familiarize yourself with the laws regulating nonprofit fundraising in the state or states in which you will be operating. You may have to register your charitable nonprofit with the state before you begin soliciting donations.
If you’re ready to explore fundraising online, start by looking at these 6 platforms that do crowdfunding for nonprofits.
4) Nonprofit Grants
Business grants are another form of funding that nonprofits may be eligible for. Grant money for nonprofits can come from government sources, business associations, corporations, or other nonprofit organizations. Typically, grant money is intended for very specific purposes, and government grants, in particular, require a rigorous vetting and application process. Additionally, they will want to see what you’ve achieved with your nonprofit thus far. Most non-government grants are for smaller amounts (less than $50K) and may resemble a contest or competition in which you’re competing with other organizations. Make sure you check that the grant you’re interested in is open to nonprofit businesses; some grants only apply to for-profit businesses.
When searching for grants, you can check grants.gov, the centralized source for all U.S. government grants. You should also do a more targeted search for grants in your particular region, as many grants only apply to applicants living in a certain state, city, or municipality. For example, the state of Maryland has a lot of business financing programs including grants, many of which apply only to applicants in certain counties. If you operate in an economically distressed region or serve a disadvantaged demographic, you might also be eligible for special grant opportunities. For example, there are business grants for women, business grants for minorities, and business grants for veterans.
You can learn more about business grants for nonprofit organizations by reading our nonprofit grants article.
5) Nonprofit Loan Funds
Nonprofit loan funds are another viable source of capital for nonprofit organizations to investigate when looking for funding opportunities. These institutions, often nonprofits themselves, offer loans to nonprofits in need of funding, and especially to nonprofits in underserved communities. Typically, nonprofit loan funds charge less interest than do traditional lending institutions; in some scenarios, the loans may be interest-free.
Some nonprofit loan funds include:
- Nonprofit Finance Fund
- Growth Partners Arizona (formerly the Nonprofit Loan Fund of Tucson and Southern Arizona)
- The Loan Fund (New Mexico)
- Open Road Ventures
- Propel Nonprofits (created from the 2017 merger of Nonprofits Assistance Fund and MAP for Nonprofits)
Nonprofit loan funds differ from nonprofit grants in that you will have to repay whatever you borrow. Nonprofit loan funds may also be CDFIs. As with other loans, nonprofit loan funds typically require an operating history—meaning your nonprofit startup may not be eligible.
6) Online Loans
There are various types of online business loans that your nonprofit may be eligible for. Generally, online loans have higher rates and more relaxed requirements compared to loans from banks or credit unions. More established nonprofits may be eligible for a medium-term online loan with a decent interest rate, while newer organizations may have to settle for short-term, high-interest loans. Despite their higher price tags, one benefit of online loans is their speed and convenience; often, an online loan’s time-to-funding—the amount of time from when you apply to when you receive the funds in your account—is only a few days.
For nonprofit startups without any track record, a personal loan could be an appropriate online loan option. You can apply for this type of loan from a personal lender, and the only thing the lender will typically care about is your personal credit score. Personal loans are usually for $50K or less. As these loans come with high interest rates and a short repayment schedule, you might only turn to this type of loan as a last resort. Still, if you choose a reputable personal lender, you will get a better deal than you would from a payday loan or from a cash advance on your credit card.
Some, but not many, online lenders have special loan programs for nonprofits. Accion is an example of one online lender (also a CDFI) that lends to nonprofits.
Note that online loans may require you to sign a personal guarantee which states that you—not your organization—are personally responsible to repay the loan balance.
7) Corporate Giving Programs
Even if you cannot secure a sizable loan or grant, you can benefit from contributions from corporations and even smaller businesses in your community. Whether motivated by generosity or just good PR, it doesn’t really matter: businesses increasingly want to “give back” to their community, and that includes helping nonprofits. Companies in your city or county may have various programs or policies you can benefit from as a nonprofit:
- Sponsorship of fundraising events (dinners, dances, 5Ks, etc.)
- Non-cash donations (food, clothing, office supplies, etc.)
- Paid-release days (days employees are paid to volunteer for a charity)
Taking advantage of corporate giving programs requires some creativity and hard work, as you will have to work together with local businesses to figure out how they can best serve you, typically in combination with your own fundraising efforts. You will also have to generate awareness in your organization about corporate giving programs in your region and frequently reach out to local businesses. The good thing is that businesses are generally happy to display their generosity to the community, as this benefits their organization as well.
How To Improve Your Chances Of Getting Approved
Once you decide to apply for financing, it’s time to find a potential lender and start putting together your application package. If you take the time to properly prepare for the application process, there is a much higher probability that a lender will decide to take a chance on your nonprofit. Here are a few important tips to keep in mind.
Make Sure You Meet The Borrower Requirements
Nonprofit loans are a very specific type of financing, and if you bark up the wrong tree, you’ll just be wasting everyone’s time. Make sure that your organization meets all the minimum borrower requirements for whichever loan you’re considering before you apply. Or if you’re applying for a personal loan, check your credit score to make sure you meet their minimum accepted score. A lender will not make a special exception for you, no matter how awesome your nonprofit sounds.
Choose The Right Type Of Financing
In addition to meeting the minimum requirements for a loan, you also need to choose a loan that will work best for your needs. For example, maybe a line of credit will better meet your organization’s needs than a term loan. Even if you are pre-approved for a loan offer, you must also consider whether you can reasonably afford the loan repayments and are comfortable with the repayment timeframe. If not, you should apply for a smaller loan or consider applying for grants, ramping up your fundraising efforts, etc.
Have A Strong Business Plan
Just like a for-profit business, a nonprofit business needs to have a solid business plan in place, especially when applying for financing. The lender will want to see a specific plan detailing both how your nonprofit organization meets a need in the community and how you plan to use proceeds from a loan, all supported by thoughtful research and strong financial documentation. They’ll also want to see that your organization can successfully raise funds.
Have Your Documents Ready
Whether you’re applying for a loan or a grant, you will be asked to submit certain documents. It is best to have all of these materials on-hand when you apply so you are ready to supply them when asked. Some items you might need include:
- Driver’s license or other government issued ID
- Your organization’s fundraising case statement
- Proof of 501(c)(3) (nonprofit/tax-exempt) status
- Recent tax returns
- Recent bank statements
- Other financial documents such as income reports and cash flow projections
- Proof of collateral
Keeping strong records, particularly of your organization’s financial information, will make you better-prepared to supply documentation that supports your nonprofit’s need and eligibility for financing.
Need more loan application help? While we wrote the following articles mainly with for-profit businesses in mind, the same tips for business loan applications generally apply to nonprofit business loan applicants as well:
- How To Get A Small Business Loan: The Step-By-Step Guide
- 20 Tips To Improve Your Business Loan Application
Although the nonprofit’s business model is in some ways very different from that of a for-profit business, nonprofits operate similarly to regular businesses in many respects. Working capital, operational expenses, and expansion of services are valid reasons to seek financing, regardless of an organization’s business model. While your financing options as a nonprofit are somewhat limited, you may actually have an advantage over for-profit businesses when applying with organizations such as CDFIs, microlenders, and nonprofit loan funds, and also when applying for government grants.
Has your nonprofit been successful in obtaining financing? Have a favorite nonprofit lender? Sound off in the comments!