One of the most valuable (and flexible) financial tools organizations in the nonprofit sector have at their disposal is the nonprofit line of credit. Where once nonprofit organizations had challenges getting lenders to approve their institutions for a nonprofit line of credit, today loans to nonprofits are as routine as loans to for-profit businesses.
A nonprofit line of credit is one funding option for organizations when they need extra working capital, and short-term business loans are too time-consuming to obtain. Financing solutions for nonprofit organizations typically depend on how much money is required to fund a project.
Summary
The top three funding resources for nonprofits include:
Fundraising: A nonprofit organization must acquire at least one-third of its revenue from public support to keep its 501(c)(3) status. Therefore, specific projects typically request funding from individual donors, businesses, and other public charities.
Grants: There are two primary classifications for grants: federal government grants and nonfederal grants. “Categorical” federal grants are set aside for nonprofits to fund a specific purpose or specific programs, while “block” federal grants have broader objectives, such as community growth. Nonfederal grants are sponsored by state and local governments, corporations, community organizations, and private foundations.
Nonprofit line of credit/loans to nonprofits: Like a credit card, a nonprofit line of credit is a revolving credit line, which means the funds can be withdrawn, used for any cash flow shortfall, and when the money is repaid, the funds are available again. Loans to nonprofits usually provide funding for significant purposes such as building upgrades and essential equipment purchases.
Loans to nonprofits are term loans involving a lengthy application process, where, if approved, the loan is given in one lump sum. Businesses and nonprofits then pay back the loan (with interest) by making fixed monthly payments until the bank loan is paid off. Additionally, term loans typically necessitate some form of collateral or personal guarantee in case of default.
A nonprofit line of credit is a preapproved fixed sum of money a nonprofit has access to whenever they need it and for whatever purposes they want to use it. The credit line frequently remains available for 12 months and is renewed annually. Nonprofits are charged only when they withdraw money from the credit line. However, some lenders charge setup and maintenance fees. When borrowers use funds from their nonprofit line of credit, they are charged a modest fee (or daily interest) each day the nonprofit line of credit is used and not repaid.
The Purpose of a Business Line of Credit
A nonprofit line of credit is typically tapped to cover operating expenses or make repeated purchases over time. The line of credit for nonprofits works like a credit card line—there is a preset interest rate and a credit limit. However, the advantage of the nonprofit line of credit is that it usually has a lower interest rate than credit cards and is paid off quicker, so there are fewer fees involved.
There are no fees once the nonprofit line of credit has been “reimbursed” or paid off. It is not unusual for nonprofit organizations to use their line of credit for a limited time to solve a problem, repay the account, and then draw on it again later. Organizations tend to use their nonprofit line of credit for cash flow emergencies and unexpected opportunities. During times of economic uncertainty, the nonprofit line of credit comes in handy to cover expenses like payroll and utilities. In addition, nonprofit organizations are often waiting for a reimbursement check from the government. For this reason, it’s helpful to have a nonprofit line of credit to help with temporary cash flow problems when bills are due for payment.
3 Benefits of Having a Line of Credit for Your Nonprofit
Interest rates on nonprofit lines of credit are generally lower than credit cards charge, depending on the organization’s credit scores. But that’s not the only benefit to having a credit line.
Nonprofit lines of credit:
Help Build Credit
Credit agencies classify nonprofit lines of credit similarly to credit cards—as revolving credit accounts. Because lines of credit are considered revolving debt, the amount of the credit line and the credit line’s balance impact the organization’s credit utilization ratio. The credit report also considers payment history, which helps (or hurts) credit scores depending on how responsible your organization is for meeting payment due dates.
The length of your organization’s credit history also affects your credit score, so when you first open a nonprofit line of credit, the average age of accounts may drop your credit score slightly. On the other hand, if the credit line is used to pay off high-interest credit cards and you make your payments on time, your score could go up.
Provide Flexibility
As previously discussed, while traditional bank loans require a specific purpose for the loan, a nonprofit line of credit allows the borrower to use the funds for whatever purpose they see fit. A line of credit allows the flexibility to use the funds for debt consolidation, building repairs, payroll, utilities, office supplies, or any other unexpected expense. Think of the line of credit as a security net during cash flow concerns.
Offer Easy and Immediate Access to Cash
The primary benefit of a nonprofit line of credit is the power to borrow only the amount your organization needs and avoid paying more interest on a big loan. In addition, once the borrowed money has been repaid, the money is available again to borrow for a small fee until the amount is paid back. With a traditional loan, once a loan is repaid, the organization needs to reapply for another loan to gain access to more money. With a line of credit, the money is available to use during the entire length of the loan’s term.
Speak With a Nonprofit Line of Credit Expert
Budgeting for nonprofit organizations is always challenging because circumstances often change. However, a nonprofit credit line from Financing Solutions, a leading provider of business loans for nonprofits in the form of a 501c3/not-for-profit line of credit, offers you flexibility and freedom.
Financing Solutions works with nonprofits every day to give organization leaders peace of mind when cash flow’s natural ups and downs disrupt normal operations.
With the Financing Solutions Nonprofit Line of Credit, nonprofit organizations always have the benefits of a more straightforward 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
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 our no-obligation, 2-minute line of credit application here.
