Loans for Nonprofits Now That Covid CARES Act is over
As the Executive Director of a nonprofit, you might be wondering what type of loans for nonprofits are there? You will be happy to know that there are many types of loans for nonprofits. However, approval will depend on where you apply and the type of loan that you need. While small businesses have been using loans and lines of credit for centuries, it hasn’t been until recently that nonprofit organizations have been able to take advantage of the same financing options.
The Various Types of Loans for Nonprofits
An Emergency Loan to Even Out Short-Term Cash Flow Issues
Many nonprofits believe that they are unique because their cash flow fluctuates so much throughout the year. In the nonprofit sector, vast changes in working capital are typical due to the timetable of donations, fundraising, and reimbursements. One of the major stumbling blocks that nonprofits face is payroll. It tends to be the largest fixed expense and also must be paid on time. These are the times where a nonprofit loan or more specifically a business line of credit will prove to be helpful.
A Line of Credit is an emergency loan, normally in place before it is needed so that it can be utilized to address short term cash flow issues. Nonprofits often use their line of credit when they know reimbursements or donations will be coming in, and an important expense, like payroll, must be met.
Stephen Halasnik, a Managing Partner at Financing Solutions, a leading provider of nonprofit lines of credit, says “nonprofits that contact our company, are ecstatic when they learn that we specialize in working with nonprofit organizations. While most nonprofit board members want the Executive Director to procure a line of credit, they are normally unaware of the challenges tax-exempt organizations face while seeking bank approval. In most instances, a nonprofit will use its line of credit to meet payroll when their funds are delayed”.
Term Loans for Capital Purchases or Expansions
A term loan is a single large amount of money that nonprofits tend to use for facility upgrades, building improvements, repairs, equipment purchases, or to bridge a capital campaign. A term loan is a set amount of money with interest that is paid back monthly over a few years.
Nonprofits can apply for term loans at most banks or community development financial institutions (CDFI). Term loans require collateral and a personal guarantee.
One current nonprofit financing option for larger term loans or real estate mortgages over the last few years is a company called Semble. Semble will assist a nonprofit organization in obtaining a lower interest rate bank loan by using its donor base commitments as the collateral.
Covid-19, Paycheck Protection Program (PPP), CARES ACT and Pandemic Government Loans for Nonprofits
Due to the Covid-19 coronavirus pandemic, there were government loan programs put in place through the CARES Act such as the PPP and the Economic Injury Disaster Loan that provided loans for nonprofits. However, the application deadline for those programs has passed.
There are Foundations that still continue to try and fill the void, by providing capital to nonprofits. According to Grant Writer Margit Brazda Poirier from Grants4Good on The Nonprofit MBA Podcast, “Foundations are required to give away at least 5% of their funds each year and 2019 proved to be a great year in foundation endowment portfolios”.
There are 87,000.00 Foundations that offer loan funds and according to Margit, the trick to being approved for grants is making sure the Foundation that you are applying to matches up with your mission statement. Keep in mind that there is a process to grant writing.
How Can a Nonprofit Get a Loan from a Bank or Credit Union?
Banks and credit unions are often the first places we all turn to when we are in need of money. It just makes sense because they have so much of it! Nonetheless, getting approval from a bank or credit union can be challenging for a nonprofit because they require three things, collateral, personal guarantees, and upfront fees.
Collateral is assets that the bank can use to back up the loan in the event of default. It can be assets belonging to the nonprofit, or personal assets. Because banks are funded by the government, collateral is one of their key requirements for loan approval.
Personal Guarantee (PG)
Banks require a personal guarantee (PG). Whoever signs the bank loan will be putting their own personal assets, such as their house at risk for the nonprofit. The bank will typically look for a personal credit score of 700 or better from the person signing the contract.
Points or Fees
To set up a loan or a credit line with a bank requires points or fees. These fees can range from 3-7% of the total loan amount. In the case of a line of credit, that same fee needs to be paid again when the line renews.
These three requirements, collateral, a personal guarantee, and fees are the primary reasons why banks have shown to not be the best place to turn to for 501c3 loans.
Financing Solutions Nonprofit Line of Credit
Since 2012, Financing Solutions has been the leading provider of lines of credit for nonprofit organizations with yearly revenue of over $200,000 or more. With Financing Solutions, there are no collateral or personal guarantees required. In addition, the credit line costs nothing to have in place, which makes it a great cash back up plan.
Financing Solutions has a 5-star and A+ rating from the Better Business Bureau, along with a lengthy list of satisfied nonprofit clients.
How Is Financing Solutions Able To Provide a Line of Credit?
Financing Solutions truly understands how nonprofits operate and the challenges that executive directors face on a daily basis.
Financing Solutions uses private funds in lieu of government money, so they do not require collateral or personal guarantees. Financing Solutions is fully aware that 99% of all nonprofits will pay back the funds borrowed and that is why we confidently approve 90% of all nonprofit applications.
The online nonprofit line of credit application is fast and easy and only takes a few minutes to complete. No credit report is run with the initial application. If you desire to move forward, you will be required to send in a few simple documents like a 990, recent bank statements, etc for review. The line of credit can be put in place within 48-72 hours.
Small Business Administration (SBA)
The mission of the Small Business Administrations is straightforward. They are mandated to assist in the economic recovery of communities after disasters and maintain and strengthen the nation’s economy by enabling the establishment of small businesses, and aide in their viability through small business loans.
The SBA does not directly make nonprofit loans or lines of credit available. The SBA works with certified SBA banks and other entities to help small businesses get business loans. Outside of the recent pandemic government CARES Act, nonprofits would not normally work with the SBA.
A Community Development Financial Institution, commonly referred to as a CDFI, is a non-profit lender that is funded by a group of investors to provide financing to nonprofits. The primary purpose of the CDFI, is to provide loans to businesses and nonprofits to further the economic development of what the investors believe in.
CDFI’s are nonprofits and they feel strongly about supporting the causes that their investors care about. A CDFI functions like a commercial bank with a similar loan application process. Your nonprofit organization will be asked to provide documentation showing that through your existing cash flow you can afford to pay back the loan or mortgage.
90% of all CDFI transactions are for the purchase of real estate.
National Council of Nonprofits
The National Council of Nonprofits (Council of Nonprofits) is a trusted resource and proven advocate for America’s charitable nonprofits. There are tools and resources that can help your nonprofit with a variety of cost-saving suggestions and financing options
Although nonprofits face daily obstacles, there are new nonprofit financing options available to help your organization thrive. Be clear about what you are trying to accomplish, and make sure that you understand the various nonprofit finance programs.