Business Loans for Nonprofit Organizations: Common Mistakes
Business loans for nonprofit organizations are hugely advantageous financial tools. They allow nonprofits to take on opportunities and challenges that are otherwise out of reach plus they can increase a nonprofit’s financial flexibility and credit score when used in the right circumstances.
But some non-profit organizations make mistakes when they take out business loans from commercial or local banks. From failing to adequately plan for the interest or fee expenses or neglecting to optimize their credit scores, nonprofits can fall prey to a number of common errors.
However, most Nonprofits don’t take out “business loans” but what is more common is that they take out a Line of Credit and Financing Solutions is one of the leading providers of Lines of Credit to nonprofits.
Loans to Cover Consistent Cash Flow Problems
Business loans from banks for nonprofit organizations can be useful for any number of reasons. They may wish to take advantage of an opportunity for increased impact but the financial timing isn’t quite right. They may face a financial challenge at an inopportune time and need some credit to bridge the operational gap.
Many of these are perfectly reasonable and prudent circumstances in which someone might require a loan for funding. That said, nonprofits should be wary of taking out business loans if they have a long term problem and can’t pay back the loan. However, if you occasionally have a cash flow issue due to a delayed reimbursement or check, then a Line of Credit is an excellent tool.
If your nonprofit is consistently spending more money than its taking in, a loan isn’t going to fix the underlying problem. It must be addressed at its root. You have to find a way to either increase your revenue or decrease your expenses. If you rely on a loan to temporarily alleviate the financial pressure, you’ll soon find yourself overwhelmed.
That’s because an additional loan will only add expenses in the form of interest that you need to cover. In the long run, It will make your situation worse, not better. Which brings us to our next point.
Failing to Account for Interest Costs
When taking out a business loan from a bank, nonprofits must be careful to account for the added cost of interest expenses. Interest expenses, particularly on larger loans, can be significant for nonprofits. Your firm has to account for the reduced cash flow in the nonprofit organization and the additional financial pressure and time required to pay off the loan. A Loan is a long term solution whereas a Line of Credit is for short term issues. A Line of Credit is not expensive at all as long as you pay it back within a reasonable amount of time. (think weeks or months)
Failing to Pay Off the Loan as Fast as Possible
In almost all circumstances, business loans for nonprofit organizations should be paid off as soon as is reasonably possible. While there are exceptions to this rule (which we’ll get to in a moment), the added interest expense is rarely something the average nonprofit can afford to take on long-term.
Nonprofits should be well-educated about any early payment incentives or penalties that exist in the repayment terms and conditions of their loan so they can make an educated decision about whether, and how, to pay off even low-interest loans earlier than scheduled.
For nonprofit financing, though, these kinds of investment opportunities are rare and it almost always makes sense to pay off the loan as fast as possible.
Failing to Optimize Their Credit Score First
One of the most important behaviors when shopping for business financing for a nonprofit organization is to ensure that the borrower’s credit score is optimized. By this, we mean that every step that could increase the credit score of the borrower has been taken before applying for the loan.
There are a number of different steps a private non-profit can take. They can refrain from opening or closing any credit just before making the application. They can ensure they pay all bills and make all payments to any lender on time. Most importantly, they should take all reasonable steps to reduce their credit utilization rate to as low as humanly possible before making the loan application.
Failing to optimize your credit score before you make the loan application can result in higher interest rates, increased security requirements for secured loans, and introduce the possibility that one or more guarantors will be necessary.
While an increase of one or two percentage points on your loan might not seem like a big deal at first, large and lengthy loan amounts can actually become substantially more expensive when they’re rates are slightly increased. It’s better to take every possible step to increase your credit score just before taking out the loan than to pay the financial consequences of a suboptimal score later on.
So you’ve covered all your bases. You’ve ensured that you’ve got sufficient cash flow to pay the interest expenses, you’ve got a plan to pay off the loan as fast as possible, and you’ve polished up your credit score. What do you do next?
Why not take a look at the the Line of Credit offered by Financing Solutions? Financing Solutions offers a Line of Credit specifically built for Nonprofits which costs nothing to set up and nothing until used making it a great cash backup plan so you can make payroll, pay an unexpected bill, etc.
Our Line of Credit is perfect for short term cash flow issues. We offer a low-Fee, unsecured, and guarantor-free Line of Credit for nonprofit organizations looking to help them during an unusual cash crunch.
Please don’t hesitate to apply online for a simple, no-obligation offer to consider or email us today if you have any questions. Or call us at 862.207.4118 and have a chat with one of our skilled representatives. We’d love to make your acquaintance!