How To Get a Loan For Nonprofits
If you are now investigating how to get a loan for nonprofits, more than likely there is an immediate need. You will be happy to know there are more options for both a non profit loan and a non profit line of credit than in the past. Some loans are fast to get in place and some take some time.
Summary of article:
- Different types of loans and their uses
- Why would a Nonprofit need a loan or line of credit?
- What would a local or commercial bank look for to approve your nonprofit?
- Why is Financing Solutions Nonprofit Line of Credit so popular?
- Are there other online financing companies that loan to nonprofits?
- Is it a good idea to get a loan from a donor or board member?
- What are Community Development Financial Institutions (CDFIs)?
- What are Crowdfunding Platforms Options for nonprofits?
Different types of loans & their uses
There are really two types of loans available for non-profits to consider. A fixed non profit loan and a non-profit line of credit.
A nonprofit loan provides a fixed amount of money all at once. It is paid back over a longer period of time than a line of credit with terms usually ranging from 3-5 years. There is usually a fixed interest rate. A non profit typically would use a fixed loan to start or expand new programs.
A non-profit line of credit provides a nonprofit with a preapproved amount of money. The nonprofit uses the money as needed for short term expenses or to take advantage of opportunities. The only time you are charged any fees is when you use the line or if the line has a balance. The line is paid back when you like or a minimal payment is made. The payments replenish the line to be used over and over. A non profit line of credit is very useful to help even out cash flow and typically very inexpensive.
Most nonprofits use their credit line to make payroll, pay rent, continue important programs, etc. due to a temporary decrease in cash flow. The line is often accessed when you know the funds have just been delayed. There usually no restrictions on what the line can be used for.
What would a local or commercial bank look for to approve your nonprofit?
A local or commercial bank will approve you for a nonprofit loan or a non profit line of credit if you have collateral and a personal guarantee. The person signing for the PG will have to have a credit score typically better than a 680. That person will be personally responsible for the loan, should you default. These two conditions are one of the key reasons why nonprofits have typically in the past not set up a nonprofit loan or line of credit with a bank.
Contrary to popular belief, banks do not provide start-up capital to businesses or non-profits based on a good business plan. Banks are extremely conservative and if you can not provide collateral or a PG than your chances of getting a loan or line of credit with a bank is next to zero.
If you are applying for a loan or line of credit for your nonprofit then expect the process to take a few months.
Why is Financing Solutions Nonprofit Line of Credit so popular?
Financing Solutions Nonprofit Line of Credit has become extremely popular with nonprofits whose yearly revenue is greater than $200,000 because there is no collateral or personal guarantees required. It takes between 48-72 hours to set up a line of credit.
The non profit line of credit program costs nothing to set up and nothing until used. The line is inexpensive when used and you can pay the balance off when you are ready.
It isn’t unusual for nonprofits to have uneven cash flow due to seasonality of donations, delays in reimbursement checks, or other unforeseen expenses. A not for profit line of credit is a great cash backup plan.
Unlike a commercial bank, the FS application process is easy and fast. The application is online and takes less than two minutes to fill out. There are no documents required for the offer letter which is sent out within 24 hours.
About 90% of nonprofits over $200,000 in yearly revenue qualify for the nonprofit line of credit of up to $100,000. The amount you qualify for is based on the yearly revenue of your nonprofit organization. There are no restrictions on the use of the funds and the line of credit is renewed yearly.
If you wish to move forward with the offer letter, you will be asked for:
- recent 990
- 4 months of bank statements
- a voided check
- a driver license
- and a few other simple easy to get documents.
Your board members will approve a board resolution document stating that they are aware of the line of credit being taken out. That document can be signed electronically through email individually or at a board meeting.
Once you sign a final agreement, Financing Solutions will set up your account online in a secure customer portal. You can request a draw on your line, pay off your line or see important information. Financing Solutions can ACH or wire your funds the same day. The whole process is easy, fast and seamless.
Are there other online financing companies that loan to nonprofits?
Large commercial banks back most online lenders. As a result, most online lenders do not loan money to nonprofits.
You also want to stay away from payday loans which are very expensive.
It is important when looking at online lenders to look at reviews and approvals by the Better Business Bureau. Financing Solutions, for example, is 5 star and A+ rated by the BBB and has been serving nonprofits since 2012.
Is it a good idea to get a loan from a donor or board member?
One option many nonprofits turn to is to get a loan from a board member or wealthy donor. There are certain IRS restrictions that do apply which you will want to review with your legal and accounting advisors. Here are some general highlights.
Your board should have a formal meeting without that person loaning the money in attendance to approve the conditions of the loan. The person loaning the funds should not be over or under compensate. That loan should also not benefit any one person in the nonprofit. There should be a documented payback schedule and terms.
One of the key reasons for an Executive Director wanting to set up a line of credit with a financial institution is that it is hard, and sometimes embarrassing, to go back to the same donor for additional loans when needed. A line of credit is an important business tool and one which is inexpensive especially in regards to the problem it typing solves.
Community Development Financial Institutions (CDFIs)
Short for “Community Development Financial Institution,” a CDFI is a financial institution whose mission is to facilitate community growth by providing financial assistance to businesses and consumers in low-income or disadvantaged areas. CDFIs are typically not-for-profit or nonprofit organizations but may take the form of traditional banks/credit unions or venture capitalists. Usually, they do not operate on a national scale, so you will need to seek out CDFI opportunities in your local area.
CDFIs may be microlenders offering loans of $50K or less, while some CDFIs also issue larger loans to more established businesses.
While CDFIs can be a good source of capital to nonprofit organizations, particularly to those that operate in disadvantaged regions, there are some downsides. Because CDFI;s are based by the state it is a good idea to do some research in your state to see who works in your area. CDFIs charge higher rates than banks do and typically require you to submit a lot of documentation. It can also take a long time for the funds to come through.
To search for CDFIs in your region on the CDFI Fund website.
Crowdfunding Platforms Options for nonprofits
Crowdfunding is when a large number of people provide a smaller amount of funding often through an online platform. For nonprofit organizations that are less likely to qualify for bank loans, crowdfunding can be a good option for a small amount of money. There are various crowdfunding options, but charitable/donation lending is the one most suited to nonprofit businesses. Depending on the crowdfunding platform you use, you may be able to obtain free capital for your nonprofit, in the form of online donations you do not have to repay. Or, you may qualify for a no-interest crowdfunded loan, and you’ll only have to repay the principal on the loan.
It is extremely important to familiarize yourself with the laws regulating nonprofit fundraising in the state or states in which you will be operating. You may have to register your charitable nonprofit with the state before you begin soliciting donations.
Your nonprofit is a business
You are in the business of helping people and as such you should consider getting the same tools that a for-profit business has had for centuries. There are a lot of options available for a nonprofit loan or a nonprofit line of credit. It might be time for you to move forward with setting up a loan that can help make your nonprofit easier and better.