Can Nonprofits Get SBA Loans?

 

During the Covid-19 pandemic, the Small Business Administration (SBA) stepped up and provided disaster loans to nonprofit organizations.

The 2020 CARES act granted loans to nonprofit organizations through the Economic Injury Disaster Loan (EIDL) program that were previously available only to small businesses. As well, the Paycheck Protection Program (PPP) was extended to nonprofit groups that were having trouble meeting their payroll obligations. 

As the Covid-19 pandemic waned, the SBA stopped providing those loans to nonprofit organizations at the end of 2021. So do nonprofits qualify for SBA loans? The short answer is no, though the SBA does still provide loans to nonprofits under certain specific conditions. 

But there are still traditional funding options available for nonprofit organizations, namely traditional bank loans, merchant cash advances, and business credit cards. Let’s take a closer look at each option.

 

Bank Loan: Lots of Paperwork

Traditional banks provide loans to nonprofit organizations, but just because the nonprofit is mission-driven or charitable does not mean that a bank won’t scrutinize the organization in the same way it would a small business.

Nonprofits applying to a bank for a loan will need to provide ample financial documentation, tax returns, and perhaps offer collateral to secure the loan. Even if the nonprofit is approved for a loan, the bank may charge the organization a higher interest rate. Why? Because the risk of default is greater with a nonprofit than a small business. 

There is another option in the traditional banking sector, however. Credit unions, which are nonprofit organizations established to serve a certain population or sector, offer loans to nonprofit organizations as well. But the size of a credit union loan will likely be smaller than a traditional bank loan and the organization may have to become a member of the credit union to qualify. Note that certain credit unions advertise that they provide nonprofit loans, so research those options first. 

 

Merchant Cash Advance: Quick Cash with High Interest 

A merchant cash advance (MCA) is not a loan, but an agreement with an alternative funder to pay a portion of your future credit card payments to the lender, often at a high interest rate. 

In fact, interest on the cash advance can reach the triple digits. 

An MCA is good for an organization that is facing an immediate financial shortfall. MCAs provide fast nonprofit funding: they can be received within days and with much less paperwork than a traditional bank loan. A nonprofit also is not required to offer collateral or possess an excellent credit rating to get an MCA. 

In return for a portion of future credit card sales, the MCA provider will send a lump sum payment to the borrower in anywhere from one to three days. This option is good for a nonprofit that either needs short-term nonprofit financing or plans to pay back the debt quickly. As noted, MCAs come with high interest rates, so consider your finances carefully before choosing this path. 

 

Business Credit Cards: a Prudent Choice

While nonprofit organizations don’t accrue profits like small businesses, they still have expenses and can use a credit card for everything from supplies to cash advances. 

In fact, some nonprofit organizations use a credit card as a line of credit when cash flow is tight. These credit cards come with all the perks of personal credit cards, from travel points to cash back and special rewards. 

Credit card payments also create a record of purchases that is useful for an organization minding its budget. There are numerous recommendations on the Web for the best credit card for non profit organizations. 

Like a personal credit card, those for nonprofit organizations also come with high interest rates on accumulated balances. Still, business credit cards are a good option for a nonprofit that wants some flexibility in spending. Here are some advantages of a business credit card:

• A nonprofit can set approval limits and set up notifications each time the card is used
• There is a firm credit limit, preventing the organization from going over budget
• There is no interest charged as long as the monthly balance is paid  

 

Lines of credit for nonprofits are always useful. The organization should just be careful not to overspend or get into further debt due to a high interest card.