A Loan or a Line of Credit. Which is Better for Your Nonprofit
The nonprofit world is full of choices and decisions.. Should you spend your resources on programming or fundraising? You may be wondering whether a loan or a line of credit is better for your nonprofit as a result, it’s important to learn the pros and cons of each so you can make the selection that is best for your business.
Right or wrong, when you run a nonprofit, it’s up to you to make the tough calls. One such selection might be choosing between a nonprofit business loan or a line of credit for your organization.
What is the Difference between a Loan and a Line of Credit?
Some people believe that a loan is synonymous with a business line of credit, but this is incorrect. One major difference between a loan and a line of credit is that a loan is for a set period of time.
A line of credit (LOC) is typically for short term cash flow issues or emergencies. You can draw on it easily by just logging into your account and requesting immediately funds.
In addition, if you have a revolving line of credit, the money replenishes. That means that you can borrow from your amount, pay it back and then borrow again in the future. As long as you remain in good standing by making your minimum payments, the money stays available.
A LOC is usually cheaper because a nonprofit will usually use it for a short period of time and then will quickly pay back the line back. With Financing Solutions (www.financingsolutionsnow.com), our line of credit for nonprofits costs nothing to set up and nothing until used, so it is perfect for emergencies.
Also, Financing Solutions works with nonprofits all the time. They are one of the top sources of funding for nonprofits because they understand the unique challenges you face and how to get you the financial help you need.
Best of all, you pay nothing until you actually use the money. Even then, you only pay on the amount you withdraw, not the whole business line. More importantly, you can repay the money quickly, once your check or grant comes in, and not worry about accruing additional debt.
Your line typically stays in place for up to 12 months. Then, you can renew it without hassle. Access to business capital is vital for any company. A line of credit is like having continuous, immediate approval to access money when you need it.
A line of credit works similar to a credit card in that if you take money out in a cash advance you only need to make minimum payments until you are ready to pay the full amount off.
The perfect time to apply for a line of credit is before you actually need it. That way, when you require emergency nonprofit financing, your line will already be in place.
Maybe the most beneficial aspect of a line of credit is that you can use it for any business purpose at any time. Whatever the issue, whether you are facing a cash shortage and can’t pay rent or you need to hire extra help for a big event. This is the kind of flexibility you need to run your business.
Financing Solutions doesn’t offer loans so if your nonprofit is looking for a loan then you will have to go to a bank. However, if you think you can try a commercial bank be aware that they will always require collateral which are assets that will back up the loan or line of credit.
Banks also have a history of not approving nonprofits. This is primarily because banks just don’t comprehend the nonprofit business model or how they work plus are fearful if the loan default.
As for not for profit loans from a bank, these work much differently. With this financial tool, you receive all your money right away. Unfortunately, you also start paying interest on the money right away as well, even if you never touch it.
Typically, there is a pre-set payment schedule that you must stick to. If you don’t the bank will repossess whatever collateral you put up as security for the loan.
Nonprofit 501c3 loans may be best for large, capital purchases. These include projects like purchasing a building or starting an earned income venture.
You should also be aware that banks impose strict restrictions on loans for nonprofits and, indeed, loans in general. For example, you can only use your business bank loan for the purpose you list on your application. Therefore, if you receive a loan for purchasing a new facility but in a few weeks a major piece of equipment breaks down, you will be out of luck. You’ll be in your fancy new building without the tools you need to do your job.
Collateral is also a concern. If you don’t have enough of it in your business (and most nonprofits don’t), you will need to pledge personal assets like your home. Banks may require this from both nonprofit executives and top board members.
Why a Nonprofit Might Need a Loan or Line of Credit
Not for profit businesses are something special. While for profit businesses exist to make their owners and shareholders richer, you work to make the world a better place.
Still, like for profit businesses, you also have bills, employees and facilities you must tend to. As a result, you shouldn’t feel troubled by getting some form of nonprofit financing.
Without the right funding resources for your nonprofit organization, you may have to delay or cancel programs. You might also be in danger of missing payroll and what most nonprofits don’t know is that it is actually illegal to not pay people on time potentially triggering an audit or heavy penalties. It’s possible that you may have to close your doors for good.
If you have to wait for government grants or private donations to come in before moving forward, you might never get anything done. This is harmful for some nonprofit since monies usually come in only a few times a year. While you are waiting, you could miss out on countless opportunities to grow your organization and expand your services.
Above all, you can’t rely exclusively on donations or government grants and loans to fund your nonprofit. All it takes is one government organization to cut their funding budget or losing one key donor to bring your nonprofit to its knees. It could leave such a huge hole in your budget that you might never recover from it. It takes time to find a new revenue stream or locate foundations that help fund nonprofits. Having a line of credit will help tide you over in the event of such a tragedy but you should never use your line if you don’t know that the funds will come in eventually.
There is also the risk that comes with uneven cash flow. That makes it next to impossible to plan ahead. It also leads to the buildup of debt, which may become too big for you to get out from under. In addition, if you are constantly focusing on your debt, you are certainly not dedicating as much time as possible to fulfilling your mission.
You need strategic projections to determine what will be needed to smooth everything out. Then, you need to acquire working capital which will help provide stability. For many nonprofits, the answer is a line of credit.
When Neither a Loan nor Line of Credit Will Help Your Nonprofit
If you are operating under perpetual debt – this signifies a larger financial management problem. Perhaps you need to scale back on programs or reduce your staff. You should get better control of your finances before seeking any type of extra debt.
When you don’t have the approval of your board – managing a nonprofit is a delicate balancing act. You must fulfill your mission while also answering to your key stakeholders. This is much more difficult if you have to do it while fighting your board of directors. Since many nonprofit organizations have rules that you cannot borrow from board members, they should at least be willing to work with you to obtain the financial tools you need for growth and survival. That requires that they understand the complexities of managing cash flow, paying debt and planning for the future. You may need to educate them before applying for a loan or line of credit.
Anytime there is uncertainty about how you will repay the money – no matter which option you choose, you must realize that the not for profit funding will need to be repaid. If you don’t have a solid plan for how you will make these payments, it is wiser to wait until you do.
You don’t have all your ducks in a row – don’t think you can just walk into any bank or financial organization and ask for money. Banks who provides finance for nonprofits will expect to see some kind of paperwork. This includes, but is not limited to, a mission statement, bylaws, documents about the history or your company and information on board members as well as a statement of their approval. You must also have all financial and legal records readily available.Financing Solutions is not a commercial bank so the process to set up a line of credit is much easier.
If your nonprofit would like a line of credit that you can use when cash flow is down please visit www.fscreditline.com/np to learn more, to apply and to receive a written offer. A line of credit for your nonprofit costs zero to set up and zero until you use it, making it an excellent backup plan.