Business Loans for Nonprofits: Best Financing Options

If you run a non-profit organization that doesn’t rely on fundraising, you may be looking for a solution to your business funding needs. Is your association eligible for a commercial loan? Where should you look? What types of terms and rates are you eligible for?

What to know about business loans for nonprofits

Nonprofits are notorious for dealing with a mountain of financial hardship. Many use fundraising and apply for grants to get the capital they need to increase their cash flow and cover their expenses.

But because these funds are limited (and sometimes completely dry up during economic downturns), nonprofits may seek other sources of funding, such as business loans. The problem is that these can sometimes be difficult to get approved. Non-profit organizations, unlike for-profit businesses, do not sell products or services for profit. They are therefore often considered risky investments for lenders, as they may not receive stable money to repay the loan. Loans that are available may have strict criteria to qualify.

Top Funding Options for Nonprofits

That being said, non-profit organizations do have options when it comes to small business financing. It’s all about looking in the right place. Here are some options to explore.

Term loans

Nonprofits can benefit from small business loans, which are offered by banks, credit unions, and online lenders. Banks tend to offer long-term loans with low interest rates to eligible borrowers.

Online lenders may have less stringent criteria to qualify for long-term or short-term loans, although they may charge higher interest rates for working capital loans. Start your search with these lenders:

Lines of credit

If your nonprofit organization needs money now and the rest later, consider a business line of credit, which will give you access to cash. Borrow what you need and pay it back, and you can continue to borrow on the line over time.

Commercial real estate loans

If your nonprofit wants to purchase commercial real estate, perhaps for an office or event space, there are business loans specifically for this purpose. The property you buy serves as collateral for the loan.

Business credit cards

Access to business credit cards ensures your nonprofit can always buy the office supplies, printer cartridges, and other items it needs to thrive. Look for a credit card that offers rewards so you can earn for what you spend.

Community Development Financial Institutions

CDFIs are lenders and banks that support economic growth in underserved and low-income communities. If your nonprofit organization operates in such a community, you may qualify for low-interest loans through a CDFI. Find a CDFI in your area.

Subsidies

Another source of funding for nonprofit organizations comes from grants. There are corporate, nonprofit, and government grants your organization may qualify for. Some are available to all businesses, while others focus specifically on certain industries.

How to Qualify for Business Loans as a Nonprofit

Review the requirements to qualify for a business loan before applying, as some are not open to nonprofit organizations. Those who are may have specific requirements regarding personal and/or business credit scores, time spent in business, and annual income. Nonprofit startups may have difficulty qualifying for a loan from a bank or the SBA, as they typically want you to be in business for at least two years.

The loan funds you qualify for may depend on your qualifications. The higher your qualifications, the more you can borrow.

Many lenders look at your credit scores to determine the risk of lending money to your nonprofit. The lower your scores, the greater the risk in their eyes. If you haven’t reviewed them, see where your scores are at so you know what you’ll qualify for. You may need to look for a lender that has lower credit score requirements.

Things to Consider When Choosing Funding for a Nonprofit

Nonprofit business loans all have different loan applications and eligibility requirements to qualify, so spend some time researching all of the loan programs that interest you. Make a list of which ones you are eligible for, then find out what is required to apply.

You may be asked to provide tax returns, financial statements, and proof of your 501c3 status. You may also be required to post collateral for a loan. This reduces the risk to the lender because if your nonprofit is unable to repay the loan, the lender can take collateral to cover what you owe. Also, you may be asked for personal guarantees for business loans. This is standard practice: if your nonprofit cannot repay the loan, you will be held personally responsible for the debt.

Another tip: only borrow what you can afford to repay. A common mistake small business owners and nonprofit owners make is biting off more than they can chew. If your monthly repayment amount exceeds your budget, you will quickly default on the loan.

Apply for a loan for a non-profit organization

Each loan application process will be different, but generally you can expect to be asked to provide details about your nonprofit, including its location, industry, and income. You may be asked to provide proof of your 501c3 status and any business licenses you may hold, along with tax returns and financial statements.

Once you have applied, it may take weeks for you to get a response if you are applying for a loan through a bank. If you apply online, you can get an instant response. Once you’re approved, sign the loan agreement, which lists your repayment terms and interest rate. Once this is processed, the funds will be deposited into your nonprofit’s business bank account.

Can a nonprofit get an SBA loan?

The Small Business Administration guarantees low-interest loans for businesses, but unfortunately its SBA loan options don’t extend to nonprofits.

Nav’s Verdict: Business Loans for Nonprofits

If your nonprofit needs money and can’t find it through fundraising, you have funding options to explore. Know how much you need and what you want to spend it on before applying for a loan.

This article was originally written on March 25, 2022.

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