Nonprofits, like other businesses, sometimes need a little extra cash to fund their activities. However, the rules governing loans to nonprofits vary from those for for-profit businesses. Nonprofit loans tend to be tougher to get than those for for-profits. If you need an infusion of cash for your charity, start with a basic understanding of the types of loans out there to find one that could potentially work for your organization.
Community development financial institutions (CDFIs)
Lenders that specialize in offering financial assistance to nonprofits are known as Community Development Financial Institutions, or CDFIs. These institutions are usually nonprofits themselves, although some may be banks or credit unions. CDFIs often charge high interest rates for small loan amounts, usually offering loans of $50K or less.
Note that not only do CDFIs charge higher interest rates than banks, but they also require extensive documentation and can take longer to approve a loan than a typical bank lender. You can find CDFIs in your area using this locator tool.
Nonprofit loan funds
Some CDFIs overlap with nonprofit loan funds, which fulfill a similar goal of providing financing to charities and other nonprofits. Nonprofit loan funds offer lower interest rates than CDFIs; in some cases, the loan may be interest-free. Some options to explore include Nonprofit Finance Fund, Open Road Ventures, and Propel Nonprofits, as well as resources like Growth Partners Arizona and New Mexico’s The Loan Fund. Note that many nonprofit loan funds require applicants to submit an operating history. Startups, therefore, are not eligible.
Traditional bank lenders
While it’s less common for nonprofits to get loans through banks and credit unions, it is possible.
“Big corporations—banks included—often like to flex their philanthropic muscles via nonprofit grants or loan programs,” wrote Merchant Maverick. “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 are more likely to offer loans to new nonprofits, as credit unions themselves are nonprofit organizations. And, since they don’t pay taxes, credit unions can offer competitive interest rates. For both banks and credit unions, you will need to submit extensive paperwork to demonstrate your ability to make on-time payments.
[Read more: Small Business Funding: A Breakdown of Business Loan Types]
Corporate giving programs
Banks and other for-profit companies often have corporate giving programs that can support nonprofits with grants, loans, and in-kind donations. Companies like Hilton, Google, and General Mills have extensive giving programs that support nonprofits and small businesses. Contributions can vary, and not every giving program will offer loans. Some may provide in-kind gifts, event sponsorships, cash donations, or grants. Do some research to understand what these programs can offer your organization.
Nonprofit grants
Grants are not loans, technically, but they are a common source of funding for nonprofits. Federal, state-level, and corporate grants provide free funding (e.g., money you don’t have to repay) to nonprofits that meet certain criteria. Many grants have a lengthy application and approval process, so be discerning about which opportunities you apply for. However, grants are often offered year after year. Once you secure the grant once, you have a good chance of applying for it again after the grant period ends.
[Read more: What's the Difference Between a Grant and a Loan?]
Some CDFIs overlap with nonprofit loan funds, which fulfill a similar goal of providing financing to charities and other nonprofits.
Business credit cards
A business credit card allows your nonprofit to draw against a line of credit that will be repaid over time. This is a good source of funding for daily and fixed expenses, like utilities and office supplies. “It can be used in a similar way to a business line of credit—funding purchases to be paid back, partially or fully, at a later time,” wrote NerdWallet.
The best credit cards for nonprofits may be slightly different than those for enterprises. Explore your options to learn what perks are included, from cash back to low APRs. You will also want to be judicious around accounting for your credit card. Set up a system that helps track your credit card spending and saves receipts in case of an IRS audit.
Eligibility requirements for nonprofit business loans
Nonprofit business loans are so difficult to get because eligibility requirements are strict. “A nonprofit that has consistent and solid cash flow is more likely to pay upon its debts and less likely to default in the future. Nonprofits that are operating at a loss may find it especially hard to qualify for some loans,” wrote SoFi.
Each loan requires different paperwork. Expect to be required to submit:
- Documentation about your organization’s mission and fundraising.
- Proof of nonprofit status.
- Recent tax returns and bank statements.
- Other financial documents (income reports, cash flow projections).
- Proof of collateral.
As with other types of business loans, you will likely also need a business plan that details how your organization operates and what you need the loan for. Lenders also look for evidence that your nonprofit fundraises successfully.
How to strengthen your loan application
There’s a reason why lenders are wary of approving loans for nonprofits. “Unlike for-profit businesses, lenders know a nonprofit can’t simply sell more products or services to make a profit and pay back the loan. Most nonprofit organizations depend on grants and donations, neither of which is ever a sure thing,” wrote Financing Solutions.
Consider ways to address some of these concerns in your loan application. A strong nonprofit loan application demonstrates financial stability, clear planning, and mission alignment. Prepare detailed cash flow statements, balance sheets, and reports of pledges, receivables, accounts payable, and outstanding debt.
Self-Help Credit Union, a nonprofit lender that has provided more than $11 billion in financing to help over 172,000 borrowers, primarily uses financial criteria to make lending decisions. Loan applications are evaluated in six areas, five of which are financial in nature: creditworthiness, capital, cash flow, collateral, and personal debt-to-income ratio. Use their criteria as a benchmark for what other lenders are likely assessing.
Of course, different lenders have their own requirements. Make sure you read the application carefully to make sure your organization is eligible.
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