Top Nonprofit Lenders Your Nonprofit Needs to Know
There are nonprofits lenders who provide loans specifically to nonprofit organizations. This article will serve as a guide to help you save time and money. Let’s put your nonprofit organization in a better position to get the desired business loan, mortgage, or Line of credit.
Nonprofit Financing Options: business loans, lines of credit or mortgages
As a nonprofit grows, it is financing needs will increase. Below are three types of nonprofit loans that you should know about.
Line of Credit
A Nonprofit line of credit is becoming more and more popular with all sizes of nonprofits. Nonprofit Credit lines should be utilized for working capital related to uneven cash flow. Due to fluctuations in reimbursements, fundraising, and donations, it is important that nonprofits have a stable cash backup plan to make payroll, pay rent, and continue everyday program functions while waiting for funding.
Nonprofits lenders that provide lines of credit are banks and alternative lenders like Financing Solutions. Financing Solutions is one of the leading providers for nonprofits lines of credit because they do not require collateral or personal guarantees. From beginning to end, the process for a line of credit with Financing Solutions’ only takes days compared to a commercial bank line of credit which usually takes months.
Nonprofit Business Loans
A Nonprofit business loan should be used for long term projects. It is typically a large sum of money with a payback spread out over a few years. A nonprofit organization might use a nonprofit commercial loan for infrastructure improvements, starting a new program, or to purchase expensive equipment.
The standard process for a nonprofit loan taken out through a local or commercial bank, requires collateral and a personal guarantee. The personal guarantee needs to be from someone who is creditworthy.
Interest rates for these small business loans, tend to be much higher than home mortgage. Not only are there set up fees associated with the loan, you can expect the interest rate to be two times higher than the interest rate on a 30-year fixed mortgage.
There is a growing trend in the nonprofit industry we are seeing more and more nonprofit organizations obtaining a bank mortgage to purchase commercial real estate. Down the line, not having to pay rent is beneficial, and in many regards, ensures that the mission of the nonprofit will continue for a very long time.
There are new now options, outside of banks, available to help nonprofits with real estate mortgages, refinancing, or bridge loans.
The company Semble works with banks that are willing to provide mortgages, refinancing, or bridge loans for nonprofits using donor commitments. Once enough donors have pledged their funds, they are directed to set up accounts as evidence of their commitment. Investors have the option of using taxable funds (cash from their checking, savings, or investment accounts) or self-directed retirement funds (such as an IRA or 401k rollover). The donor’s pledges are what the bank uses as collateral to cover the mortgage or bridge loan.
What Do Banks or Credit Unions Look for From Your Nonprofit Organization?
While nonprofit commercial term loans from banks or credit unions are available, most nonprofits have trouble getting approved. The bank approval is not based on the nonprofits any business plan, but on cash flow, collateral, and creditworthiness.
Banks and credit unions have rigorous lending requirements, which makes it very hard for a nonprofit organization (501c3) to be approved. Both require collateral, which are assets that can back up the term loan or business line of credit in the event of default.
Banks and credit unions also require a personal guarantee (PG) from someone that has a minimum credit score of 680. The personal guarantee ensures that if the loan goes into default, then the bank/credit union has the right to pursue that person’s assets as a means of repayment.
Alternative Lenders for Nonprofit Financing & Quick Nonprofit Loans
Alternative lenders, like Financing Solutions, have more lending flexibility because they use private and non-government/depositors’ funds. Financing Solutions offers a nonprofit line of credit up to $100,000, to nonprofits who have yearly revenue higher than $200,000.
Financing Solutions is not more expensive than a bank. While banks charge to have/use the credit line, Financing Solutions only charges when you use the credit line. There is no charge to have the line of credit in place. Because the credit line is often paid back quickly, the cost is very inexpensive, especially in comparison to the problem it usually solves low cash flow.
Most nonprofits use their Line to make payroll or pay an outstanding bill. They then pay the Line back when cash flow is positive again.
Microloans are available through specific nonprofit, community-based organizations that are experienced in lending and business management assistance. The Small Business Administration (SBA) Microloan Program provides direct loans and grants to eligible non-profit microlenders. They may give micro-level loans and business-based training and technical assistance to start-up, newly established and growing small businesses.
Loans from Board Members to Nonprofits
It is not unusual for a board member or donor to offer its nonprofit a loan, but there are IRS guidelines that could make this a more complicated matter. Many Executive Directors and donors themselves may have concerns regarding changes in the relationship and feel that by taking a loan from a board member or donor that the nonprofit appears mismanaged.
IRS Guidelines Relating to Board or Donor Loans to Nonprofit
Based on the article by Cullinane Law Group
The guidelines from the IRS have 3 important categories:
- Identify a potential conflict of interest
- Disclose material facts of the interest or relationship
- Participate (or not) in the decision involving the topic in question
Note: There are also state rules that apply
What Is Allowed:
Reasonable compensation for services permitted.
Interested director transactions may be permitted as long as specific steps are taken
- Ensure that the transaction is fair to the nonprofit
- Disclose material facts;
- Document the decision-making process
- No financial loans to board members or donors from the nonprofit
- No private inurement: No Private benefits may occur when the nonprofit pays more for goods and services than they are worth.
Tips for Handling Conflicts of Interest:
- Implement a conflict of interest policy
- Seek Bids
- Ask, Discuss, and Record without the person making the loan in the meeting
A good idea is to talk to your attorney about both IRS and State Guidelines as it relates to accepting a loan for your nonprofit from a board member, employee, or Donor.
Government Loans: Small Business Administration (SBA) nonprofit loans, PPP, and Coronavirus (COVID-19) Nonprofit loans
PPP (Paycheck Protection Program)
By the time this article is printed, the PPP (Payroll Protection Program) for nonprofits will have ended. The PPP for nonprofits was implemented due to the Covid-19 Coronavirus epidemic. The program provided a loan to nonprofits, which does not have to be paid back if 75% of the funds were used to pay staff over 2.5 months.
It is unlikely that there will be a continuation of the PPP for nonprofits or any other federal government loan, or grants to nonprofits program moving forward, due to the almost $1 trillion in stimulus packages that were implemented in April of 2020.
The Small Business Administration (SBA) is working directly with states to provide targeted, low-interest Economic Injury Disaster Loans to businesses and nonprofits that have been severely impacted by the COVID-19 pandemic and to help overcome the temporary loss of revenue.
Small businesses and nonprofit organizations can receive up to $2 million in disaster assistance loans in some eligible fields.
Small Business Administration (SBA) government loans
Keep in mind that the SBA doesn’t provide nonprofit or small business loans. The SBA works with SBA certified banks who have a specific SBA application process to approve bank loans.
The loan application process will still be lengthy and complicated, but your nonprofit might receive a loan it otherwise might not qualify for if you applied outside of the SBA program.
Community Development Financial Institution (CDFI) for Nonprofit Businesses
Community development financial institutions (CDFI’s) are private financial institutions that are 100% dedicated to delivering responsible, affordable lending to help low-income, disadvantaged people and communities join the economic mainstream. CDFI’s can provide lending to nonprofit organizations for economic development to carry out their missions.
There are four types of CDFI’s:
- Banks or Bank Holding Companies
- Credit Unions
- Loan funds
- Venture Capital Funds
As of March 31, 2014, there are 831 certified CDFIs, 84 community development banks, 51 depository institution holding companies, 190 credit unions, 493 loan funds, and 13 venture capital funds12.
Should My Nonprofit Use Credit Cards for Business Financing?
Credit card use with nonprofits is more common than in the past. The problem with a credit card is that a credit card company will not issue credit unless there is a personal guarantee.
- If the nonprofit fails to pay back the credit card or credit card advance, then the person who filled out the application is personally liable to pay back the balance
- Any use of the credit card, regardless if the balance is paid regularly, could produce a negative effect, because it is reported on the person’s credit report
- Credit card interest rates can have an APR as high as 25%
- The loan amount that a credit card offers with its cash advance feature is usually minimal.
Regardless of whether you are running a business or a nonprofit, obtaining financing can be challenging. Take the time to get a clear understanding of what you are trying to do, why you want to do it, and educate yourself on the many options that are available. In time, you will find the answers you are looking for, and your nonprofit will be in a stable place.
Can My Nonprofit Get A Loan from A Board Member or Donor?
There are both state and IRS guidelines related to a nonprofit receiving a loan from a board member or donor. Identify potential conflicts of interests, disclose facts of interest or relationship, and discuss the decision-making process. It is always a good idea to seek legal counsel. Financing Solutions provides a Nonprofit Line of Credit that is easy, fast, and inexpensive, avoiding any conflict of interest that may arise from accepting a loan from a board member or donor.
Who provides loans to nonprofits?
Banks will give loans to nonprofits providing the nonprofit has collateral, creditworthiness, and a personal guarantee to back up the loan or line of credit. There are now alternative lenders like Financing Solutions, that provide nonprofit credit lines, which require no collateral and no personal guarantees. The line of credit can be put in place in 48-72 hours.
What Are Nonprofit Lenders?
There are two types of nonprofit lenders. The first type is a lender who provides loans, lines of credit, and commercial mortgages to nonprofits. The second type is a nonprofit lender that offers loans to individuals or businesses to help them through a difficult time or start a business.