Business loans for nonprofit organizations may sound like something that a nonprofit shouldn’t concern itself with but certain types of loans can be a great asset for non-profit organizations. If you are a nonprofit, don’t let the word “loan” scare you. The right loan could be just what your nonprofit needs.
Because many commercial banks have not been willing to approve business loans for nonprofit organizations in the past, nonprofits have stopped looking. The good news is that, over the past five years, some of this has changed in the favor of nonprofits.
Business Loan Options
There are quite a few financing options for nonprofits but some are better suited for nonprofits than others.
Term Loans
Term loans are used to finance a business, individual, or even a nonprofit. After you’re approved for a term loan, you get a lump sum of cash which you must pay back according to the agreed-upon terms. The total amount of money a lender is willing to give you depends on your nonprofit’s current financial condition and yearly revenue.
The main problem with non-profit organizations getting term loans is that banks are very picky about who they deal with. Commercial and local banks rarely approve loans for nonprofits because they want collateral and personal guarantees which most nonprofits can’t provide.
Not to mention, banks just do not understand the cash flow of a nonprofit so it usually takes months for them to come back with a denied term loan application.
Lines Of Credit
A business line of credit is a versatile option that gives the borrower more freedom and is usually inexpensive. This is a capped loan with a set amount that you can borrow, though you are not required to use the full amount. Draw funds only when you need to and pay them back when you like.
The cap on a line of credit is determined by the same factors used to approve business loans, including your yearly revenue.
For nonprofits, a business line of credit is a great option. All nonprofits have times of the year when funding is delayed but important expenses like payroll must get paid. (Note: In the past, most businesses and nonprofits have delayed employee payroll due to low cash reserves but delaying payroll is illegal and can result in state audits and fines.)
If you want a good line of credit for your nonprofit, look for lenders that know and work specifically with nonprofits. One great example is the nonprofit line of credit offered by Financing Solutions.
Financing Solution’s line of credit was designed with nonprofits in mind. Getting an offer only takes two minutes with their online application. Financing Solutions doesn’t require collateral or personal guarantees as a bank would and because they are the leading provider of lines of credit in the US, they understand nonprofit organizations. To qualify, your nonprofit must be doing at least $400,000 per year in revenue.
FS’s nonprofit line of credit product costs nothing when it isn’t being used, making it a great cash backup plan when cash flow is down but the nonprofit knows the money is coming in eventually.
Cash Advances or Merchant Cash Advance
A cash advance or merchant cash advance is like a term loan but offered by private financing companies. They look at your yearly revenue and, if approved, you receive a fixed amount of money all at once, much like a term loan, making daily or weekly payments based on a fixed schedule.
There are several problems with cash advances or MCAs. Not only are they very expensive, but you can also not pay them off early and you are personally liable for the loan. Not to mention most of these private financing companies may not work with nonprofits.
Angel Investors
An angel investor is a high-net-worth individual who invests in small businesses or individual entrepreneurs. These investors typically invest in a business. In exchange, they receive partial ownership of the company and eventually profit. Angel investors are also known as “private investors” or “seed investors”.
The main difference between this type of funding for a business and a non-profit is that an angel investor must truly be an angel to lend money to a nonprofit. The benefits just are not the same as investing in a for-profit business. While this option might be harder to secure for a nonprofit than most business financing options, it’s still worth a look.
You might be surprised that most angel investors want a substantial return on their money, even though you are a nonprofit and there are IRS rules relating to loans given to nonprofits, regardless of whether the funds came from an angel funder, board member, or someone else.
Credit Cards
Business credit cards can be used as business loans for nonprofit organizations; however, there are three main problems with this approach.
The first is that credit card companies often do not issue an account without a personal guarantee. This means that if your nonprofit fails to pay the bill, whoever applied for the card is liable. That person’s credit score is affected and, ultimately, if the bill is never paid, that person is on the hook.
The second biggest problem with credit cards is that the approved credit limit is often very small when compared to what you can get with a line of credit. This can result in multiple credit cards being used. Applying for multiple credit cards also has a big effect on the personal credit score of the person filling out the application.
Lastly, using credit cards can be very expensive and should not be seen as a long-term fix.
Mortgages
If your nonprofit is looking to buy a building, there are two options to consider. Commercial banks have been known to work with nonprofits since the building can be used as collateral.
Over the years, another option has entered the market. Semble is a company that works specifically with nonprofits to help them buy a building or to refinance existing mortgages at a lower rate. Your nonprofit has to do at least $5 million in revenue per year to be considered and most Sembles mortgages are more than $500,000.
Which Option Is Best for Business Loans For Nonprofit Organizations?
If your nonprofit is doing over $400,000 per year in revenue then your best bet is to set up a line of credit with Financing Solutions. Financing Solutions, a leading provider of business loans for nonprofits in the form of a 501c3/not-for-profit line of credit, has designed its line of credit to be the perfect cash backup plan for nonprofits and it is very easy to get the line in place.
If your nonprofit is looking to buy a building, talk to your local bank and contact Semble.
Avoid using cash advances from either credit cards or merchant cash advance companies. These loan options are very expensive and the companies offering them can be sketchy.
