One of the most frequently searched keywords on Google for nonprofits regarding financing is ‘business loans for nonprofits,’ and almost none of the google search responses include commercial banks. Indeed, commercial banks and credit unions do not like providing financing to non-profits. In this article, we aim to explore why commercial banks are hesitant to lend to nonprofits and why Financing Solutions lends to them.
Summary
Commercial Banks Want Collateral and Personal Guarantees
Commercial banks are extremely conservative and risk-averse because the federal government regulates them, and for a good reason. Local banks, commercial banks, and credit unions loan out depositors funds, and throughout American history, almost every financial crisis has occurred because banks took too big a risk. As a result, banks need to ensure that if a loan defaults, they have the means to recover their money, which is why banks require collateral (such as property) and personal guarantees, regardless of whether the borrower is a business, religious institution, or nonprofit.
Why Does Financing Solutions Not Require Collateral and PGs
Financing Solutions is privately funded, and as a result, we can take more risks. We have been in business since 2012, specializing in nonprofit lending, and we are the largest provider of lines of credit to small nonprofits in the US. Because of all that experience, we have learned the risks associated with lines of credit to nonprofits and can offer an unsecured line of credit without a PG. What we have learned over the years is that nonprofits can be trusted to pay back what they owe. A commercial bank could never use trust as a lending criteria.
Commercial Banks Are Worried About Bad Public Relations
Banks are apprehensive about the bad publicity that might happen if a nonprofit defaults on a loan or line of credit. Can you imagine the outcry if a commercial bank were to default on a charity that provides services to, say, disabled children? The bank would have to do everything it can to stay out of the press. Considering that banks are some of the most risk-averse businesses out there, one can imagine what goes through a bank loans officers mind when they think of working with a nonprofit.
Financing Solutions Is Very Hands-On. Banks Are Not.
One of the advantages Financing Solutions has is that we have worked with so many nonprofits over the years that we completely understand how their cash flow and funding work. We designed our nonprofit credit line to fit well into how a nonprofits cash flows and our underwriting criteria reflects that. A commercial bank would never be able to loan money to a nonprofits based on a trust factor.
It’s Hard To Be Approved for a Commercial Line of Credit or Business Loan
Over the last 30 years, I have had to apply numerous times for a business loan or line of credit at a commercial bank, and I would tell you from first-hand experience that getting approved is hard and laborious. Most people believe that getting a business line of credit is easy.
A banks application process always take forever, and I have been amazed at why banks didn’t always approve my successful businesses for a bank line of credit, business loan, or SBA loan. I often learned that a commercial banks underwriting approach for loan approval was so much different than the way I looked at my business. You should know that even successful companies have difficulty working and being approved for financing by commercial banks.
Financing Solutions’ Easy Application and Approval Process
The Financing Solutions application and approval process for a nonprofit line of credit is easy. You fill out the online application, which will take 2 minutes. A live person will review each application, and if we believe we can help you, we will schedule a live telephone call.
If we can’t help you now, we will email you and tell you exactly why. We do not run any credit checks until after you have signed a no-obligation offer letter. The offer letter is easy to understand, and we cover every word of it in a telephone call.
Once the offer letter is signed and the credit check is completed, we will send you a short list of documents we need to review. These typically include your most recent 990, four months of recent bank statements, a drivers license, and a voided check from your organization.
Once we review that information, we will send you a final contract. After the offer letter is signed, we require board approval from the majority of the board, saying they are aware of the line of credit being set up. The whole process of getting a nonprofit credit line in place can be as fast as 48 hours, but typically, it takes 10 days for our clients to get everything we need before the line is ready to be used.
Is a Bank Cheaper For a Line of Credit than Financing Solutions
It depends. Banks charge many different expenses whereas Financing Solutions’ line of credit is streamlined. Commercial banks often have a set-up fee and yearly maintenance fee, and will require you to use your credit line at least once per year for 30 days. The bank might also require yearly audited financials from a CPA and will also require strict covenants. A covenant are specific measurements and restrictions that a bank will put in place to ensure that your organization is liquid. If a covenant is out of compliance and bank can cancel your credit line at any time and ask for the balance to be paid back immediately.
Financing Solutions has no set-up or maintenance fees, and you are not required to use the credit line.
If you plan on using your credit line a lot or for very long periods, a bank line of credit might be a cheaper solution. However, from what I have seen over the years, nonprofit organizations use their credit lines for a very short time for cases of emergency, like making payroll, and then pay off the credit line when their delayed funds come in. Financing Solutions is usually the cheaper and easier solution in cases like this.
At the end of the day, if you can be approved for a bank line of credit or bank loan for your nonprofit and you plan on using the credit line often, then a bank might be a cheaper way to go.
Nonprofit Bank Loan or Line of Credit: What’s The Difference?
A bank loan for nonprofits is used for the long term, whereas a line of credit is used for short-term expenses. A longer-term loan must be used all at once, and the payback is monthly over a 3-5-year period. If you pay the loan back early, the costs will be the same as if you paid it back over the full term, so it is never worth paying back a loan early. In the case of a line of credit, you can use all or some of the approved amount, which can be paid back in full at any time. When it is paid back, you are just paying back the principal.
A Line of Credit or Business Loan for Your Nonprofit is A Tool
Don’t be afraid to get a line of credit or business loan for your nonprofit. Many nonprofits are afraid of the costs and believe that those costs are taking away from their cause but the value of a credit line or loan is a popular tool to even out cash flow. From my experience, Nonprofits are so much better at budgeting than businesses, and because of that I have always found that nonprofits are very strategic about using their financing wisely.
If you think your nonprofit organization is unusual because of its ups and downs in cash flow, think again. Due to reimbursable grants, delayed federal or state funding, and donation fluctuations, it is so common for nonprofits to have a line of credit. It is a perfect solution for nonprofit organizations with uneven cash flow and I hear daily from our clients about the reduced stress they have when getting a credit line.
About the Author
Stephen Halasnik is a Managing Partner at Financing Solutions. Mr. Halasnik and his business partner, Keith Giovannoli, started Financing Solutions in 2012 and were the first to recognize that smaller nonprofits would benefit from a line of credit. Both Stephen and Keith interact with every prospect or client. Financing Solutions is proud that it is A+ BBB and 5-star Google rated indicating that we treat people will respect.
Mr. Halasnik is also the host of the popular podcast The Nonprofit MBA Podcast.
