Whether you’re the leader of a for-profit business or a nonprofit organization, the question of money is never far from your mind. For nonprofits, the challenges are unique. Not only does a steady stream of cash determine if the organization can cover its operating costs, but without adequate funding, the organization’s entire mission is uncertain. Cash flow questions such as how much money is needed, where to get more funding, and how to handle emergencies are particularly stressful—especially if you have low cash reserves. Without sufficient funding, nonprofit leaders are in the precarious position of deciding which programs to continue, which to cut, and what personnel may need to be let go.
Although some nonprofits may receive funding from membership fees and by selling specific products and services, the three critical types of funding for nonprofits include fundraising, grants, and nonprofit loans or nonprofit lines of credit.
How Nonprofits Can Spend and Allocate Funds
Nonprofit organizations exist, by definition, to provide for and support the organization’s charitable goals and not to benefit the private interests of any individual or business. In exchange, the nonprofit does not pay taxes on its income and may receive an exemption from property taxes in some states. To keep its nonprofit status, the organization must account for its expenses by allocating spending into three categories:
- Program expenses. These are expenses directly connected to supporting the organization’s mission and goals, such as holding a workshop, making or delivering food and clothing, transportation, etc.
- Administrative expenses. Like for-profit businesses, nonprofits need staff to run their operations. These expenses include payroll, legal and accounting services, utilities, meeting expenses, cleaning, and more.
- Fundraising expenses. No matter how many volunteers you have, there are always expenses involved in fundraisings such as marketing, printing, and other costs related to publicizing a fundraising campaign.
As you can see, a lot of money is needed to keep a nonprofit going. When donations and grants aren’t enough, nonprofit leaders need to seek alternative funding sources such as a nonprofit line of credit.
Nonprofit Funding Isn’t Just About Fundraising
While it’s true fundraising is the heart and soul of the nonprofit, it’s also accurate nonprofit funding isn’t just about fundraising. Solely depending on fundraising as a funding source can put nonprofit organizations in a bind, especially when the economy is unstable and consumer and corporate donations are decreasing.
Still, the need for funds is real. Before turning to other funding sources, take a minute to assess the organization’s current funding models. What works well, and what funding sources don’t seem to be worth the time and effort you’re exerting for the return you’re getting (or not getting)? Have you created a plan for each source? Has the organization pursued other new funding sources? What other funding resources have other nonprofit organizations succeeded in getting? Talk to your team before undertaking anything new and meet with the organization’s accountant for ideas.
As previously stated, the three top sources of funding for nonprofits include:
Fundraising: To keep its 501(c)(3) status, a nonprofit organization must acquire at least one-third of its revenue from public support, such as individual donors, businesses, and other public charities. Fundraising events are the biggest supplier of public donations, although many nonprofit businesses receive significant contributions from beneficiaries of deceased supporters.
Grants: Grants for nonprofit organizations fall into two primary classifications: federal government grants and nonfederal grants. Federal grants are divided into two main types: categorical and block grants. Categorical grants are set aside to fund a specific purpose or specific programs, while block grants have broader objectives, such as community growth. Nonfederal grants are typically sponsored by state and local governments, corporations, community organizations, and private foundations.
Federal grants are listed on the government website Sam.gov and in the Grants.gov database. Because of the large number of grants listed on these websites, the more specific you are in your search terms, the easier it will be to find the proper grants for nonprofits.
Nonprofit line of credit and/or nonprofit loans: A nonprofit line of credit gives a nonprofit organization another funding source to meet specific demands for necessary operating expenses. Like a credit card line, a nonprofit line of credit is a revolving credit line, which means the funds can be used for any cash flow shortfall, such as building repairs, equipment replacement, or meeting payroll. Think of a nonprofit line of credit as having extra cash on hand in case of an emergency. A nonprofit line of credit is there when the organization needs it, and fees are usually only charged on the money that has been withdrawn. Then, when you repay the money, the funds are available again.
Nonprofit loans to nonprofits typically provide financing for specific purposes such as real estate, building improvements, major equipment purchases, working capital, and more. Nonprofit loans, like bank loans, are term loans requiring fixed monthly payments, which can take many months or even years to pay off, depending on the loan amount. Additionally, nonprofit loans typically require some form of collateral or personal guarantee to back the loan in case of default.
Because financial institutions offering bank loans usually deal with for-profit companies, many nonprofits may discover it challenging to find a bank or credit union willing to make loans to nonprofits. Still, some lenders like Financing Solutions, a leading provider of business loans for nonprofits in the form of a 501c3/not-for-profit line of credit, helps nonprofit to maintain a steady cash flow to finance their numerous projects.
Key Resources to Consider When Obtaining Funding for Your Nonprofit
Think outside the box when dealing with funding resources; your bank, accountant, and lender may have more to offer than just money.
Your Bank: Although your organization may not be able to procure a nonprofit line of credit or loan from your bank, many banks offer nonprofits exclusive resources and services. Ask your bank about fee-free bank cards and accounts for nonprofits. There may also be networking opportunities or money management training your organization can take advantage of.
Your Accounting Firm: A nonprofit business requires a particular skill set of financial expertise to stay on the right side of the law. If you can’t afford an expert in-house, consider outsourcing financial management to an accountant with specific knowledge about nonprofits. Ask the accountant what size organizations they have helped before and the type of nonprofits they have expertise in. Then use the expert to help decide on funding resources and find the best rates, etc.
Your Lender: Your lender is a good place to start researching funding sources. If your organization has obtained a previous loan, the lender knows you are a sound financial risk. Explain what the funding is needed for and see what options are available. Be prepared before meeting with the lender by having the following documents ready to show:
- Last three years of financials, including income statements and balance sheets
- Number of giving units (groups, family members, recurring supporters of the organization)
- Total organization membership numbers
- Present property value (if there is a property)
- Projected construction budget
- Organization’s fundraising efforts and the amount to be raised
- Information about previous fundraising efforts
- Organization’s history
- Background of the organization’s leadership and all key personnel
- Organization’s current and proposed locations
- Mission statement and primary ministries
- Community contributions
- Articles of Incorporation; bylaws; resolutions
- IRS Form 990
- Breakdown of Usage of Funds
- Website or Company Information
- Financial Projections
- 501(c)(3) Document/IRS Acknowledgement of Non-Profit Status
Securing a nonprofit line of credit is usually uncomplicated and involves less documentation and preparation. Of course, the process and requirements depend on the lender. Banks tend to be the strictest and have the most constraints for all lending products, including lines of credit. Credit unions are nonprofit organizations and may be more flexible with their documentation requirements. Although interest rates vary widely, the most flexible lenders with the least documentation required are online alternative lenders such as Financing Solutions.
For nonprofit lines of credit, lenders will usually want to see tax returns, bank statements, income statements, and a good credit score which shows years of sound financial behavior. Because lines of credit tend to be for lesser amounts of money with less risk to the lender, the application and approval process is much shorter.
Why Financing Solutions is a Call You Should Make Today!
With the Financing Solutions Nonprofit Line of Credit, nonprofit organizations always have the benefit of a more straightforward application process, plus:
- There are no costs to set it up or keep it in place
- There’s an easy 2-minute application online application
- If approved, you’ll receive a same-day, no-obligation offer letter
- The fastest setup, 48-72 hours
- Once you get the line of credit, requests for funds are wired to your bank in minutes
- You can use your line of credit whenever needed
- Inexpensive when used (low fees)
- There are no restrictions in place or collateral required
- No personal guarantee is required, either
- Financing Solutions is a leading provider of lines of credit
- We are a reputable company with an A+ & 5-star rating
- You can pay off the line whenever you are ready
- The credit line renews yearly and is easy to renew
- You have a secured account portal access 24 x 7
A nonprofit line of credit is a good funding resource that’s available whenever your nonprofit needs it, without the heavy burden of term loan requirements. If you want to see if your nonprofit organization would be approved and for how much, please fill out the no-obligation, 2-minute line of credit application here.