Loans For Nonprofits: Why Nonprofits Can’t (Usually) Get Business Loans & How To Get Your Nonprofit Financing Anyway
While not every lender offers loans to nonprofits, there are still plenty of funding options available. Learn about those options and where to find nonprofit-friendly funders.
Whether you want a loan to maintain an existing nonprofit organization or you need capital to launch your fledgling organization, you may have to turn over a lot of stones before you find any suitable funding options. However, finding financing is not impossible if 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, and be sure to take a look at our top recommendations for the best small business loans.
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What Are Loans For Nonprofits?
Loans for nonprofits are financing products that you can qualify for even if your business is not-for-profit.
While nonprofits can’t get SBA loans or bank loans (at least, not usually), they are eligible for other types of financing, such as grants, online loans, crowdfunding, and loans from CDFIs and credit unions.
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 “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.
7 Best Types Of Nonprofit Financing
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 organization, even if you can’t find any business loans for nonprofits. Also, a loan is not necessarily out of the question, particularly for a more established nonprofit. The appropriate type of nonprofit financing 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 for nonprofit organizations, particularly those operating 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 for a loan from a traditional bank, some banks offer loans to nonprofits. Big corporations — banks included — often like to flex their philanthropic muscles via nonprofit grants or loan 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 loans 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 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 business loans (including nonprofit businesses) and how they differ from bank loans.
3) Crowdfunding Platforms
For startup 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 where 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 nonprofit crowdfunding platforms.
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 US 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.
If you operate in an economically distressed region or serve a disadvantaged demographic, you might also be eligible for special business grant opportunities. For example, there are grants for women, grants for minorities, and grants for veterans to help with their businesses.
You can learn more about business grants for nonprofit organizations by reading our article on finding nonprofit grants.
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, especially to nonprofits in underserved communities. Typically, nonprofit loan funds charge less interest than traditional lending institutions; in some scenarios, the loans may be interest-free.
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 than 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 example, online loan marketplaces such as BusinessLoans.com offer various types of business financing, and the funds will hit your account in less than a week. Some online business lenders even offer next-day funding.
For nonprofit startups without any track record, personal loans for businesses 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 (but beware with credit card cash advances, as they can get expensive).
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 for repaying 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 For Nonprofit Financing
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 prepare properly 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, use a free credit score service to ensure you meet the 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 Nonprofit 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 vs. a loan will better meet your organization’s needs. Before you apply, though, learn about line of credit requirements so that you feel prepared.
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. It’s not as intimidating as it sounds, though; we have an article that can easily walk you through creating a one-page business plan.
The lender will want to see a specific plan detailing 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 these materials on hand when you apply so that 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.
FAQs About Nonprofit Loans
Final Thoughts On Loans For Nonprofits
Loans for nonprofits are not all that different from loans for other business types.
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 nonprofit financing options 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.
Have you been successful in obtaining nonprofit financing? Have a favorite nonprofit lender? Sound off in the comments!