What’s The Difference Between Nonprofit Loans and Nonprofit Lines of Credit?
Like all businesses, nonprofit organizations need money to keep operating. And, like most businesses, nonprofits eventually seek nonprofit loans to fund an expansion or handle an unexpected emergency. But is this their best option? Beyond fundraising and sponsorship, many nonprofits don’t realize other funding options are available to meet their financing needs, such as a nonprofit line of credit.
So, when is it better to apply for a nonprofit line of credit instead of nonprofit loans? Read on to find out.
What Is a Nonprofit Loan?
Like regular business loans, nonprofit loans provide financing to nonprofit organizations for various purposes such as buying real estate, building improvements, working capital, and more. Nonprofit loans are typically term loans requiring predetermined monthly payments over several months to years depending on the loan amount. In addition, nonprofit loans often require you to put up some form of collateral to back the loan in case of default.
Because financial institutions offering loans usually make business loans to for-profit businesses, many nonprofits may find it challenging to locate a bank or credit union willing to offer nonprofit loans.
What Is a Nonprofit Line of Credit?
Like nonprofit loans, a nonprofit line of credit provides a nonprofit organization much-needed funding for the specific demands an organization requires to continue serving their community and to meet their goals. While nonprofit loans often dictate what purposes the loan funds can be used for, a nonprofit line of credit is more open. A nonprofit line of credit is a revolving credit line, similar to a credit card line. That means the loan funds can be used for any cash flow deficit, such as making minor repairs, meeting payroll, or while waiting for capital campaign funds to come in.
Nonprofit organizations receive nonprofit funding from many sources, including donations, government grants, and fundraising campaigns. However, unlike for-profit businesses that have more certain revenue cycles, nonprofits depend on a sometimes fickle public’s mood for charitable giving. As a result, the times that money flows in and those when money is tight are less predictable. For that reason, having extra cash on hand can be crucial to support an organization’s goals and stability. A nonprofit line of credit is there when the organization needs it, and fees are usually only charged on the money that has been withdrawn. Then, when the money is repaid, the funds are available again.
Is the Process of Obtaining Loans and Lines of Credit Different?
Like most business loans, getting a nonprofit loan requires a lengthy application and approval process. By the time the application and paperwork are submitted, weeks may have already passed, and then it’s a waiting game to see if the organization has been approved. Being prepared with the proper documentation helps cut some of the time down. Most nonprofit loans ask for the following backup documentation:
- Last three years of financials, including income statements and balance sheets
- Number of giving units (groups, family members, recurring supporters of the organization)
- Total organization membership numbers
- Present property value (if there is a property)
- Projected construction budget
- Organization’s fundraising efforts and amount to be raised
- Information about previous fundraising efforts
- Organization’s history
- Background of the organization’s leadership and all key personnel
- Organization’s current and proposed locations
- Mission statement and primary ministries
- Community contributions
- Articles of Incorporation; bylaws; resolutions
- IRS Form 990
- Breakdown of Usage of Funds
- Website or Company Information
- Financial Projections
- 501(c)(3) Document/IRS Acknowledgement of Non-Profit Status
Again, expect collateral or a personal guarantee from nonprofit board members to be part of the loan requirements. Collateral is an asset of the organization that has value. Lenders prefer collateral that can be liquidated quickly for cash, such as real estate, equipment, inventory, and vehicles. To speed up the process, prepare before applying for nonprofit loans by appraising your organization’s assets.
Securing a nonprofit line of credit is typically much more straightforward and involves less documentation and preparation. Of course, the process and requirements depend on the lender. Banks tend to be the strictest and have the most constraints for all lending products, including lines of credit. Credit unions are nonprofit organizations and may be more flexible with their documentation requirements. Although interest rates vary widely, the most flexible lenders with the least documentation requirements are online alternative lenders, such as Financing Solutions.
For nonprofit lines of credit, lenders typically want to see your tax returns, bank statements, income statements, and a good credit score which shows years of sound financial behavior. In addition, because lines of credit tend to be for less money, exposing the lender to less risk, the application and approval process is much shorter.
Where to Go for a Nonprofit Loan
Most large financial institutions and credit unions offer nonprofit loan packages, although the organization may need to declare a specific use for the loan funds. Many financial institutions are dedicated explicitly to nonprofit lending—many are nonprofits themselves. Community Development Financial Institutions (CDFIs) are a group of banks, credit unions, loan funds, microloan funds, and venture capital providers that give nonprofits the economic opportunity to help revitalize neighborhoods across the country. Certified by the U.S. Department of the Treasury, the CDFI website maintains a current list of CDFI lenders to search.
All nonprofit loans carry some interest rate, fees, and penalties. Before committing to any nonprofit loan, make sure you know all the costs involved. Check with other nonprofits to find out where they have had luck, and also, the Small Business Administration has resources to help nonprofits seeking financing.
Where to Go for a Nonprofit Line of Credit
If your organization has a good relationship with your bank, you can start with their loan officer to inquire about a nonprofit line of credit. Be sure to ask about fees and documentation requirements before comparing lenders. As we mentioned, alternative online lenders also offer nonprofit lines of credit, and you may be approved much quicker. Still, again, it’s crucial to compare rates and fees before committing your nonprofit to a new financial obligation.
Call Financing Solutions for your Nonprofit Line of Credit
Before applying for a nonprofit loan, you need to consider whether a loan is the correct choice for your organization. Term loans can put an extra strain on your monthly budget for a long time, so make sure you consider other avenues of financing such as fundraising, sponsorship, or a nonprofit line of credit. Before entering into a financial commitment, create a budget so you know the exact amount of money you need and how you plan to pay the loan back. For everyday funding needs, a nonprofit line of credit may make more financial sense than getting a burdensome nonprofit loan.
In many cases, nonprofit organizations prefer getting a nonprofit line of credit over a nonprofit loan for the following reasons:
- Lower interest rates. Compared to credit card financing (which some nonprofits turn to in an emergency), interest rates for lines of credit are typically lower.
- Unsecured vs. secured. A secured loan or line of credit requires collateral or a personal guarantee. Most banks require collateral because they get funding from the government. Collateral may be in the form of real estate, accounts receivable, inventory, or equity in the nonprofit’s building. An unsecured line of credit does not require collateral or a personal guarantee.
- Cash flow. As previously mentioned, a nonprofit line of credit helps during the ebbs and flows of cash flow and can get your organization out of a tight spot, such as paying wages or fixing an unexpected catastrophe.
- Middle-of-the-road purchases. There are some purchases a nonprofit must make that are too small to warrant taking out a traditional term loan but too big to put on a credit card. A nonprofit line of credit can be a better solution.
- Revolving credit. Applying for a bank loan is a lengthy and involved process. Having a nonprofit line of credit available to borrow, repay, and borrow again without reapplying for the loan is an efficient way to manage money.
With the Financing Solutions Nonprofit Line of Credit, nonprofit organizations always receive the benefits of a simpler application process, plus:
- There are no costs to set it up or keep it in place
- There’s an easy 2-minute application online application
- If approved, you’ll receive a same-day, no-obligation offer letter
- The fastest setup, 48-72 hours
- Once you get the line of credit, requests for funds are wired to your bank in minutes
- You can use your line of credit whenever needed
- Inexpensive when used (low fees)
- There are no restrictions in place or collateral required
- No personal guarantee is required, either
- Financing Solutions is a leading provider of lines of credit
- We are a reputable company with an A+ & 5-star rating
- You can pay off the line whenever you are ready
- The credit line renews yearly and is easy to renew
- You have a secured account portal access 24 x 7
Summing up, a nonprofit line of credit is a good funding resource that’s available whenever your nonprofit needs it, without the heavy burden of term loan requirements. If you want to see if your nonprofit organization would be approved and for how much, please fill out the no-obligation, 2-minute line of credit application here.