How Nonprofits (501C3s) Are Using Lines of Credit Instead of Grants to Even Out Cash Flow
Nonprofits (501c3s) are a business like every other business and thus should have the same financing tools such as a line of credit. It just so happens that your customers are the people and causes that need help. In providing this assistance, it’s easy to find yourself facing short term cash flow shortages due to the nature of your fixed expenses but delayed reimbursements. When this happens, you may look to donations and grants to get you out of a jam but instead, you might want to seek a line of credit to cover you during times of low cash flow.
Of course, all nonprofits (501c3s) are answerable to the donors and funding organizations that pay you and expect to see tangible results. This is not always feasible when you are struggling with cash flow issues that are difficult to explain and the public really wouldn’t understand anyway. A nonprofit line of credit can give you the cash you need to pay your expenses while you focus on fulfilling your mission.
Why is Nonprofit Funding So Complicated?
Everyone believes that when you need money, a loan or a line of credit, you go to a bank. If they believe and trust you, they will give you money.
Unfortunately, nonprofits (501c3s) have been increasingly frustrated by traditional bank financing and bank restrictions that other businesses have come to accept as a normal part of the small business loan process. Also, banks treat nonprofits with the same criteria as a for profit business when nonprofits often have a different set of financials and mission.
For example, every bank will ask for collateral to back up the instant business loans they grant. Collateral is the assets you pledge to guarantee repayment of a loan. If you default, the bank can take possession of that asset.
For this reason, most banks and even some alternative lenders will just not lend to nonprofits (501c3s). One of the key reasons banks don’t like to work with nonprofits is because if the nonprofit loan defaults, it is a PR nightmare for the bank so a bank wants to be assured it has collateral in case of default.
Grants are usually the next step for nonprofits. However, the grant process is notoriously tedious and complex. There are very specific rules regarding the application and goals. In addition, it can take months to get your money. This is not helpful when your nonprofit needs money right now to make payroll or to continue its services.
Where Can Nonprofits (501C3s) Turn for Fast Business Financing
Nonprofits are just not used to modern financing. They are always looking to grants to fill the void left by their inability to qualify for 501c3 funding. Now you can get a nonprofit line of credit instead that is inexpensive and easy to get set up.
Financing Solutions has been the leading financing company to nonprofits (501c3s) for since 2012. They do not require collateral. What they look for is cash flow (revenue) running through the nonprofit and the trustworthiness of the executive/board.
Our most popular and beneficial product is a nonprofit line of credit. This allows a nonprofit to have a fallback when there is a delay in cash flow. It gives your nonprofit easy and immediate access to cash when you need it and it is inexpensive.
The line is not personally guaranteed by the executive director unless in case of fraud (i.e. moving your bank account to avoid paying us back) but you will need a quorum from your board agreeing to move forward with the line. The line is not expensive. It costs nothing to get and keep in place and you are not charged until you use it so it is excellent as a backup plan. It renews easily yearly.
Why a Nonprofit Line of Credit is Better than a Grant
Over the years almost 100 percent of our nonprofit clients have used their line to make payroll or to pay important expenses like rent during times when grants or funding is delayed. Payroll is often the first item on the chopping block when a nonprofit has to deal with uneven cash flow and if you have ever had to tell your staff that their paycheck will be delayed you learn quickly how many of your employees live pay check to pay check.
Additionally, what most nonprofits (501c3s) don’t know is that it is illegal to delay paying your staff. If the IRS or your state finds out that you delayed payroll you will receive fines and penalties because they want their payroll taxes on time plus it will put unwanted focus on your organization.
At Financing Solutions, we once had a not for profit client that delayed paying their staff due to a delayed grant. An employee of the organization decided to file a complaint with the IRS and the nonprofit was subsequently shut down. You can prevent this kind of tragedy at your organization by getting a line of credit.
The Process for Nonprofits (501C3s) to Get a Line of Credit from Financing Solutions
The process for getting a line of credit is easy:
- You apply by completing the simple form on our website (only need to answer 10 questions)
- Your Financing Solutions account manager will call you to learn about your nonprofit and will send you a written offer letter
- If you decide to move forward we will ask for 4 months of bank statements, proof of yearly revenue, a canceled check and a copy of your driver’s license
- You will need to provide proof of the board quorum responsible for approving the line
- Afterwards, we will send the final contract
- We will give you a web customer portal so you can request funds, pay off balance or see all your account information online
- When you need money you go to your portal and request funds for your same day or immediate funding.
- We wire the funds to your account
What Happens After You Withdraw Funds from Your Line of Credit
Each week there is a minimum payment and you can pay off your line at any time. The line stays in place for 12 months and you can renew it yearly.
Its a good idea to only use the line if you have cash coming in later but there are no restrictions on how you use the money. Most of our clients use their line 1 or 2 times per year, often for about 3 weeks. Often the money is used due to a delay in your funding and most often, the money is used to make payroll.
The Best Ways for Nonprofits (501C3s) to Use Grants
Nonprofit grants are not easy to come by. The process is long and tedious and the competition for each grant is fierce. If you get one, it’s important to manage the funds correctly so your organization does not squander a unique opportunity.
- Reconsider how you see your finance director. Your nonprofit organization might see those in charge of finance as money police. Instead, you should bring them in at the beginning. Make them part of the decision-making process from the start. Their strategic financial perspective will lead to better project assessments and outcomes. In addition, their input will get everyone on your team thinking practically about your mission and goals.
- Understand the full cost of your programs and initiatives. Most nonprofits (501c3s) leave out important components when developing programs. As a result, they both under-budget and risk program failure or over-budget and misuse any surplus. It’s vital that you look at all areas, such as non-direct costs, other revenue streams and long-term expenses over the entire course of the grant or project. You should use grants to serve your customers or cause, not to pay for things like taxes or nonprofit payroll.
- Start planning before the dollars come in the door. This includes deciding which grants to apply for in the first place. Otherwise, all the work you put into applying for the wrong grants has stolen your focus away from better opportunities. Instead of making rash decisions, get your entire team involved in which grants are worth pursuing. You must look at each funding opportunity using comprehensive criteria, such as how much time and energy it will take to apply, the rules of the grant and whether you will be able to meet them and whether it aligns with your mission and objectives.
- Don’t be afraid to think outside the box for all the ways to use your grant. While most grants come with a variety of stipulations and conditions for how you can use the money, there is typically some wiggle room if you are willing to get creative. For example, you can ask for matching donations. Getting a grant is proof that your organization is a valuable asset to your community and cause. You can use this fact to leverage your standing and spur the public into action to support you and be a part of a winning program. Additionally, it’s possible to review the rules of a grant and see where your needs can still apply. For instance, if your grant allows for program development or research, you can use it to train staff members in areas that support this initiative. Also, by looking for grants with a matching donations clause, you can instantly double your efforts.
- Think strategically. When you run a nonprofit, you know that anything can happen and funding resources can dry up in an instant. Also, emergencies and unexpected events can come along to derail all your plans, such as replacing capital equipment that has become obsolete or you could be faced with an organizational shake up. It’s imperative to build a buffer against this uncertainty by getting a line of credit from Financing Solutions. Every nonprofit should have a line in place. It costs nothing until used and when you need it, you will be glad you have it.
If your nonprofit would like a line of credit that you can use when cash flow is down please visit www.fscreditline.com/np to learn more, to apply and to receive a written offer. A Line of Credit for your nonprofit costs zero to set up and zero until you use it, making it an excellent backup plan.