Are Nonprofits Using Lines of Credit Instead of Grants to Even Out Cash Flow?
Nonprofits (501c3s) are a business like every other business and thus should have the same financing tools such as a line of credit. It just so happens that your customers are the people and the causes that need help. In providing this assistance, it’s easy to find yourself facing short term cash flow shortages due to the nature of your fixed expenses and delayed reimbursements. When this happens, you may look to donations and grants to get you out of a jam. However, you might want to also seek a line of credit to cover you during times of low cash flow.
Of course, all non-profit organizations (501c3s) are answerable to the donors and funding organizations that pay you and expect to see tangible results. However, this is not always feasible when you are struggling with cash flow issues that are difficult to explain and the public really wouldn’t understand anyway. A nonprofit line of credit can give you the cash you need to pay your expenses while you focus on fulfilling your mission.
In This Article
In this article, we are going to give you some crucial details about the nonprofit sector, including why nonprofit financing is more complicated than it might seem. After that, we are going to outline two of the more popular forms of nonprofit funding – lines of credit and grants. We will compare these two popular forms of financing so that you can decide which one is right for your business.
Why is Nonprofit Funding So Complicated?
Everyone believes that when you need money, a loan or a line of credit, you go to a bank or a similar financial institution. Many believe that if they know about your mission and your staff, a bank would be happy to give you a loan or a line of credit.
Unfortunately, nonprofits (501c3s) have been increasingly frustrated by traditional bank lendingand bank restrictions that other businesses have come to accept as a normal part of the small business loan process. The problem is that banks treat nonprofits with the same criteria as a for-profit companies, when nonprofits often have a different set of financials and mission.
For example, every bank will ask for collateral to back up a loan or line of credit that they grant. Collateral is the assets you pledge to guarantee repayment of a loan. If you default, the bank can take possession of that asset.
For this reason, most banks and even some alternative lenders will just not lend to nonprofits (501c3s). One of the key reasons banks don’t like to work with nonprofits is because if the nonprofit loan defaults, it is a PR nightmare for the bank.After all, a lender that seizes the assets of a nonprofit is not a good look.
What about Grants for Nonprofit Funding?
Grants are usually the next step for nonprofits. Of course, grants are excellent sources of funding if you can get them. A source of funding where you don’t have to worry about repayment is ideal for any business.
However, the grant process is notoriously tedious and complex. There are very specific rules regarding the application and goals. In addition, it can take months to get your money. This is not helpful when your nonprofit needs working capital right now to make payroll or to continue its services.
So while it is certainly a good idea to seek out grants and receive grant money when you can. You should know that it is not a reliable source of income. If you are planning to use grants to meet consistent financial obligations, then you should probably think again. Grants are excellent sources of revenue, but they are far from reliable.
Getting a personal loan from a board member or a donor may also not be the best idea. There are many restrictions in regard to personal loans to a nonprofit. Also, asking for a loan could alienate the people who sometimes donate the most money/time to your nonprofit. There are numerous considerations which do not make this a reliable strategy.
Lastly, if you are thinking of delaying paying your people until those funds come in that could be a big mistake. It is actually illegal to not pay your people on time and if the state/federal government finds out, there could be large penalties and even a forced closer.
Therefore, your best bet is to find a reliable source of working capital that you can use to make payments and meet other short-term obligations or unexpected expenses. But where can you find this source of capital? We explain some alternatives below.
Where Can Nonprofits (501C3s) Turn for Fast Business Financing
Nonprofits are just not used to modern financing. They are always looking to grants to fill the void left by their inability to qualify for 501c3 funding. Now, you can get a nonprofit line of credit instead that is inexpensive and easy to get set up.
Financing Solutions has been the leading financing company for nonprofits (501c3s) since 2012. They do not require collateral. What they look for is cash flow (revenue) running through the nonprofit and the trustworthiness of the executive/board.
Our most popular and beneficial product is a nonprofit line of credit. This allows a nonprofit to have a fallback when there is a delay in cash flow. It gives your nonprofit easy and immediate access to cash when you need it and it is inexpensive.
The line is not personally guaranteed by the executive director unless in case of fraud (i.e. if you use the line, take the money, and quit your nonprofit taking the funds).
The online application takes less than two minutes to fill out and within minutes, we will email you a free, no-obligation offer for you to consider.
If you decide you want to move forward with setting up the line we will ask for a few easy to get backup documents like a recent 990, bank statements, etc. and you will need a quorum from your board agreeing to move forward with setting up the line.
The line is not expensive. It costs nothing to get and keep in place and you are not charged when the line is not being used, making it an excellent back up plan. The Line also renews easily yearly.
Why a Nonprofit Line of Credit is Better than a Grant
Over the years almost 100 percent of our nonprofit clients have used their line to make payroll or to pay important expenses like rent during times when grants or funding is delayed. Payroll is often the first item on the chopping block when a nonprofit has to deal with uneven cash flow and if you have ever had to tell your staff that their paycheck will be delayed you learn quickly how many of your employees live paycheck to paycheck.
Additionally, what most nonprofits (501c3s) don’t know is that it is illegal to delay paying your staff. If the IRS or your state finds out that you delayed payroll you will receive fines and penalties because they want their payroll taxes on time.Plus, it will put an unwanted focus on your organization.
At Financing Solutions, we once had a not for profit client that delayed paying their staff due to a delayed grant. An employee of the organization decided to file a complaint with the IRS and the nonprofit was subsequently shut down. You can prevent this kind of tragedy at your organization by getting a line of credit.
A line of credit is simply a great “safety net” for when you need it. It is just the nature of the nonprofit sector that grants are sporadic and sometimes far between. Cash flow issues are the norm in this industry. To be successful, you need to have a plan in place to meet these obligations when cash flow is down, and a line of credit is a great option in this regard. Most short-term expenses are immediate by nature, so having an immediate source of funds is important.
The Process for Nonprofits (501C3s) to Get a Line of Credit from Financing Solutions
The process for getting a line of credit is easy and intuitive. Here is a step-by-step guide:
- You apply by completing the simple form on our website (only need to answer 10 questions)
- Your Financing Solutions account manager will call you to learn about your nonprofit and will send you a written offer letter
- If you decide to move forward, we will ask for 4 months of bank statements, proof of yearly revenue (most recent 990), a canceled check and a copy of your driver’s license
- You will need to provide proof of the board quorum, letting us know the board is aware of setting up the line
- Afterwards, we will send the final contract
- We will give you a web customer portal so you can request funds, pay off balance or see all your account information online
- When you need money you go to your portal and request funds for your same day or immediate funding
- We wire the funds to your account
What Happens After You Withdraw Funds from Your Line of Credit
Each week there is a minimum payment, and you can pay off your line at any time. The line stays in place for 12 months and you can renew it yearly.
Its a good idea to only use the line if you have cash coming in later, but there are no restrictions on how you use the money. Most of our clients use their line 1 or 2 times per year, often for about 3 weeks. Often the money is used due to a delay in your funding and most often, the money is used to make payroll.
The Best Ways for Nonprofits (501C3s) to Use Grants
Nonprofit grants are not easy to come by. The process is long and tedious and the competition for each grant is fierce. If you get one, it’s important to manage the funds correctly so your organization does not squander a unique opportunity.
- Reconsider how you see your finance director: Your nonprofit organization might see those in charge of finance as money police. Instead, you should bring them in at the beginning. Make them part of the decision-making process from the start. Their strategic financial perspective will lead to better project assessments and outcomes. In addition, their input will get everyone on your team thinking practically about your mission and goals.
- Understand the full cost of your programs and initiatives: Most nonprofits (501c3s) leave out important components when developing programs. As a result, they both under-budget and risk program failure or over-budget and misuse any surplus. It’s vital that you look at all areas, such as non-direct costs, other revenue streams and long-term expenses over the entire course of the grant or project. You should use grants to serve your customers or cause, not to pay for things like taxes or nonprofit payroll.
- Start planning before the dollars come in the door: This includes deciding which grants to apply for in the first place. Otherwise, all the work you put into applying for the wrong grants has stolen your focus away from better opportunities. Instead of making rash decisions, get your entire team involved in which grants are worth pursuing. You must look at each funding opportunity using comprehensive criteria, such as how much time and energy it will take to apply, the rules of the grant and whether you will be able to meet them and whether it aligns with your mission and objectives.
- Don’t be afraid to think outside the box for all the ways to use your grant: While most grants come with a variety of stipulations and conditions for how you can use the money, there is typically some wiggle room if you are willing to get creative. For example, you can ask for matching donations.Getting a grant is proof that your organization is a valuable asset to your community and cause. You can use this fact to leverage your standing and spur the public into action to support you and be a part of a winning program.Additionally, it’s possible to review the rules of a grant and see where your needs can still apply. For instance, if your grant allows for program development or research, you can use it to train staff members in areas that support this initiative. Also, by looking for grants with a matching donations clause, you can instantly double your efforts.
- Be transparent about spending the money: Once you put a plan in place for using the grant money, it is often a great idea to be transparent with your donors about where that money is going. If you are using it to advance your cause, or invest in new technology or assets that will make your work more efficient, you should let them in on the process.It has consistently been shown that donors are more likely to donate if they are engaged in your cause. By being open about how their money is used effectively, they will feel a sense of ownership over the cause, as they have seen how they can make a direct impact. So be open with donors, and you can expect to see more donations.
- Think strategically: When you run a nonprofit, you know that anything can happen and funding resources can dry up in an instant. Also, emergencies and unexpected events can come along to derail all your plans, such as replacing capital equipment that has become obsolete or you could be faced with an organizational shake up. It’s imperative to build a buffer against this uncertainty by getting a line of credit from Financing Solutions. Every nonprofit should have a line in place. It costs nothing until used and when you need it, you will be glad you have it.
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.
Grants are an excellent source of funding for a nonprofit. However, the competitive and arduous applications process makes them very difficult to rely on as a consistent source of revenue. If you are looking for a more reliable source of funding for when cash flow is down, then Financing Solutions can help. We will work with you to create a custom source of funding that matches your business needs, and provides you a safety net for meeting your obligations consistently.