Updated on April 19th, 2023
If a nonprofit organization requires capital for its operations, a nonprofit loan is a great option. However, the owner of the organization should carefully consider the terms of repayment and how the process of repayment will affect the business. It is a good idea to first explore applying for a grant or raising money prior to looking for a loan.
Brad Nakase, Attorney
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A native of Los Angeles, Gina runs a soup kitchen for her fellow Angelenos who are in need of a good, hot meal. Her nonprofit small business provides nutritious lunches and dinners to the local community, including the homeless, lower income neighbors, and those down on their luck. While Gina’s business is well-regarded, she has trouble funding it. After all, fresh ingredients cost money, and she needs to pay the cooks who make the meals. Gina is interested in applying for a loan, but she has heard that it is difficult for non-profits to receive them. After raising several thousand dollars from the local community, Gina knows she will have to try to get the loan for a longer-term solution. Because it is the holiday season, and the business is flushed with donors all eager to help those in need, Gina predicts that she will have the necessary cash flow to repay her loan on time. She applies for the loan, offering her car as collateral. When she succeeds in getting the money, she sets about ordering fresh vegetables and fruit for her neighbors in need.
Most Non Profit Businesses Rely on Donations
Although there are not many lenders for giving a non-profit a loan, a non-profit business can get a loan. Generally, a non-profit may secure a line of credit from a bank. A line of credit requires that the company has revenues. Additionally, a non-profit organization can get a credit card like a regular business. Most non-profit organizations obtain a loan from government grants.
While the goal of nonprofit organizations is not to make a profit, these companies still require money to maintain operations. Small business owners who run nonprofits need funding to grow their programs and cover other necessary costs. Business loans are a great source of capital, but there are associated costs, which include fees and interest rates.
Nonprofit organizations actually share many of the same qualities as for-profit businesses. A nonprofit organization will need to afford similar costs, such as the following:
As is the case with any business, a nonprofit organization must make revenue, whether this comes from individual donors or from collecting fees in exchange for services.
Also, similar to a for-profit business, a nonprofit’s success depends largely on execution. Are the services that a business owner provides effective? Is cash flow being managed wisely?
And, like for-profit businesses, nonprofits can also benefit from loans, which provide the company with much-needed financing.
A nonprofit business loan is a form of financing that is available specifically for organizations that do not seek to make a profit. A loan can have a major impact on a business owner’s operations. Funds will be available to invest in services, though they will also create financial obligations that need to be paid off.
Terms loans, lines of credit, and cash advances are excellent options for funding, but nonprofits often have a difficult time securing these types of financing. Because of this difficulty, there are some negatives associated with taking out nonprofit loans.
The next sections will review information related to applying for and receiving nonprofit business loans. Armed with this information, a small business owner may decide whether this is the right financial course of action for his or her company.
As mentioned previously, unfortunately, it can be difficult for nonprofit organization owners to secure business loans. This is because few lenders offer this type of loan. Lenders may believe that lending money to nonprofits is riskier than lending to traditional businesses.
In general, when reviewing a nonprofit organization’s loan application, a lender will study the following elements:
A lot of nonprofit organizations rely on government agency grants and big donations. However, these sources of revenue tend not to last very long, since donors often change their priorities. This factor increases liability for lenders, which can result in a nonprofit suffering higher interest rates or rejected loan applications.
Also, many nonprofits cannot simply increase sales as a traditional business might. Indeed, if a nonprofit increased its services, this might result in higher costs while not increasing revenue. Generally, the only method by which nonprofits can increase their revenue is through capital campaigns or by applying for funding through the government. This makes up another reason why lenders are hesitant to provide loans to nonprofits, or at least to charge steep interest rates.
The nonprofit loan application process will vary depending on the specific vendor. In general, the owner of a nonprofit organization will need to provide accurate and specific financial information that lists revenues, assets, and spending. Because of this, an owner should put together these documents prior to applying for nonprofit financing.
The Small Business Administration (SBA) provides loans as well as other resources to assist small businesses and nonprofits in the United States. Specifically, it can help them identify potential lenders. It is important to seek lenders with experience related to nonprofits or the support of economic development. These individuals or firms may be more likely to accept a nonprofit application and will better understand the needs of one’s organization.
It is also possible to seek funding from Community Development Financial Institutions. These groups attend to businesses that affect low-income areas, which often includes nonprofits. It is quite possible that a SDFI will want to invest in a nonprofit’s cause.
A nonprofit organization will be held liable for any loan that it taken out in its name. This means that an organization’s owner will need to submit collateral, and this asset may be repossessed if the owner fails to repay the loan. Should this happen, the business’ operations would face disruption, putting the nonprofit’s future at risk.
Repayment plans can cause financial difficulties by cutting into cash flow. This, in turn, can create problems regarding liquidity. For this reason, it is important to only take out loans that are essential.
Furthermore, a nonprofit owner should examine the impact that repayment will have on the business’ finances. It is better to take out a short-term loan, rather than a long-term one, if the owner is concerned about repaying. With a short-term loan, it is easier to pay back quickly before donor shifts or market changes.
Prior to applying for a term loan, it is crucial to read all the details of the agreement. An owner should fully understand the interest rates, repayment terms, and fees. One should remember that longer repayment terms have lower monthly payments. However, these plans often end up costing more in the long run due to interest.
It can certainly be frustrating for a business not to be approved for a loan, especially when it is a nonprofit doing good work for the community. However, there are other ways for a company to receive secure funding. For instance, a nonprofit can apply for a business credit card or line of credit, both of which provide access to working capital.
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