When we talk about bank loans, most often we are referring to home or business loans.
But non-profit organizations occasionally need extra funding as well. Whether it’s to balance the books, expand operations, or pay off debt, loans for non-profit organizations are commonplace.
Most non-profit organizations generate operating expenses from fundraising or grant applications, but occasionally they may need an institutional source of funding, like a bank.
However, just because a non-profit organization is doing good in the world doesn’t mean a bank will provide a loan on less than ideal terms. Just like a small business, a non-profit will be evaluated on its ability to repay the loan.
In general, when a non-profit approaches a bank for a business loan, the bank will evaluate the organization using the following criteria:
Creditworthiness: Does the organization pay its suppliers and debt on time?
Capital: How much money has the nonprofit invested in services so far? And will it use this loan to invest in a particular project?
Cash flow: Is the organization capable of covering its expenses in addition to the loan payment?
Collateral: Do the nonprofit have assets like real estate, cash, or investments to secure the loan?
Let’s assume that you can fulfill the above requirements. The next question is, what are the different institutional choices for securing a nonprofit small business loan?
1. Nonprofit loan funds
These are lenders that specialize in loans for nonprofits. Most often, these entities are nonprofit organizations themselves. The upside to working with these organizations is the low interest rates they offer. The downside is that they specialize in making smaller loans for non profit organizations.
To get started, two suggestions are the Nonprofit Finance Fund and Propel Nonprofits.
2. SBA Loans and Grants
The US Small Business Administration is a government-funded agency that provides loans to individual entrepreneurs and small businesses. It also makes certain loans available to nonprofit organizations.
For instance, the CARE Act empowered the SBA to grant loans to nonprofit organizations affected by the Covid-19 pandemic. The SBA also issues grants to nonprofits that help underprivileged people or communities through their Program for Investment in Micro-Entrepreneurs (PRIME).
3. Banks and Credit Unions
As we previously mentioned, nonprofits can get a business loan but they will have to meet strict criteria. But if the organization is well funded and has a history of paying creditors on time, it is possible.
A first place to start is the organization’s bank. Credit unions, which were established to serve a specific community or group, is another option.
To apply for a nonprofit business loan you’ll need extensive documentation, including financial statements, tax returns, and annual reports.
4. Business Credit Card
A business credit card is an easy way to pay ongoing expenses. It’s not exactly a loan, but works like one by supplying a line of credit.
Of course, the disadvantage of using a credit card is the high interest rate you’ll pay if the monthly balance is not paid in full. Those extra dollars add up quickly, so don’t be seduced into a credit card spending binge.
One option is to find a 0% introductory rate card. These are often offered for a six- to 12- month period and will save you from transferring a debt load from one month to the next. A pro tip is to transfer balances from one zero percent card to the next, ensuring that you will never pay interest on accumulated balances.
The best time to take a loan is when your organization has a specific need. For instance, building a new wing of a building to provide services or taking on new employees to serve a specific population. Next, be sure that your organization has a reasonable plan for repayment and has the support of stakeholders in the organization.
There is also a wrong time to take out a loan for a nonprofit. If an organization consistently operates at a deficit and will use the loan to finance further debt, a loan will only perpetuate the debt cycle. Adding more debt to existing debt may threaten the financial foundations of the organization. Rather than take a loan, maybe it’s time to take a broad look at the organization’s mission and capabilities.