Loans for Nonprofit: Why A Line of Credit Is A Good Idea

Financing solutions for nonprofits is often limited. The general unwillingness of banks and credit unions to lend money or make loans to nonprofits reduces the options available to those organizations. As a direct result, many nonprofits are forced to choose between carrying large cash balances to ensure sufficient cash flow in lean times and risking late payment of obligations by foregoing that cash.

There are other options available, however. Keep reading to find out what they are and how they can help your nonprofit thrive.

For For-Profit Firms, A World of Options

For-profit firms have it great. They can choose from a world of financing options. Traditional loans, peer-to-peer lending, lines of credit, short-term financing, and equity financing are just a handful of the ways that for-profit firms can access and raise money.

Non-profit firms, on the other hand, are more limited when it comes to financing options. Because they have no prospect of profit, traditional and non-traditional lenders alike are often hesitant to extend credit to them.

Debt-Phobic

Non-profit firms and the lenders who could potentially extend credit to them are debt-phobic and for good reason. Because they don’t seek profitable growth, non-profits generally shouldn’t need to carry debt. It’s too risky and leaves them vulnerable.

At the same time, access to credit opens up options that are otherwise unavailable to non-profit firms. Options that increase flexibility and improve their ability to respond to unforeseen financial events.

Cash-Rich, Opportunity-Poor

For many non-profits, the only way to prepare for unanticipated financial hardships is to stockpile cash. A lot of it. While there are benefits to having lots of cash on hand, there are plenty of drawbacks.

First, carrying excess cash reduces the benefits you can give the communities you serve. Every dollar that sits in a savings account is a dollar that isn’t being put to use by the people whose lives you hope to improve.

Second, even if the money wouldn’t go out in the form of grants, donations, or other contributions, it could potentially be invested in some form of financial instrument that brings a return greater than a typical savings account.

Finally, it can take a prohibitively large amount of cash to pay your expenses for even a single month. This will come as no surprise to those who have run even a moderately sized non-profit but large cash reserves are quickly depleted when they’re really needed.

Cash-Poor

Some non-profits would carry a large cash balance to protect against unforeseen events if they could but they simply don’t have the resources, funding, or donors to do that. Many are struggling to meet the needs of the communities they serve while bringing in enough revenue or grants to keep the lights on. For these non-profits, having extra cash to pay the bills when revenues are poorly timed or late is a fantasy.

Alternatives to Cash

As we discussed, many lending institutions don’t provide non-profits with a lot of alternatives to holding tons of cash. They don’t loan or extend lines of credit to non-profits with any regularity and, if they do, they require collateral or personal guarantees that can increase the risk to the borrower and the guarantor.

There are, however, some financial products that allow a non-profit to avoid excessive debt while still achieving the increased flexibility they desire.

Credit Lines to the Rescue

A credit line is a revolving form of credit used to help people and organizations meet short-term financial needs without imposing too many costs in the form of interest or fees. They operate like credit cards. Each credit line has a maximum limit that you can borrow. You can take as much or as little as you need up to the limit and pay it back whenever you choose.

Credit lines are perfect to help smooth a non-profit organization’s cash flow. So, for example, let’s say that a non-profit’s anticipated revenue is late on a particular month and that payroll is due. Without a credit line, the non-profit would have to find some other way to satisfy payroll (perhaps by foregoing some other obligation) until the revenue is realized.

With a credit line, though, the non-profit can use the credit line to make payroll and pay back the line once the revenue comes in. Expenses can be paid before revenue is realized and vice versa.

You’ll notice that the non-profit in the above example was not required to carry a large amount of cash to protect against expenses coming due before revenues come in. One of the beautiful features of affordable, revolving credit is that it frees up your organization’s cash to be put to productive use.

Financing Solutions

Can a non-profit access products like a revolving line of credit? They can now! Financing Solutions, a leading provider of business loans for nonprofits in the form of a 501c3/not-for-profit line of credit,  has been offering non-profit lines of credit to qualifying organizations for years. They apply their extensive experience with and knowledge of non-profit lending to simplify and accelerate the process of obtaining credit for nonprofits all across America.

Unlike many of the banks and credit unions that offer credit to nonprofits (which is not many), Financing Solutions doesn’t require collateral or a personal guarantee to cover the line. They don’t even charge interest on the balance, opting instead for a small, manageable weekly fee while the line is in use.

So give them a call at 862.207.4118 and let them know what you’re looking for. They’d love to chat with you. Or, better yet, access their credit line application online to access a quote in just a few minutes.