What Are Non-Profit Loans?
Creating and running a non-profit business or charity organization requires the same kinds of investments and comes with the same kinds of costs that a normal business does. Equipment like computers and vehicles still need to be purchased, a space needs to be leased, and employees need to be paid. On top of that, there are the costs of marketing, legal fees, and day-to-day operating expenses that need to be paid for as well.
A non-profit loan is a special type of business loan that non-profit organizations can apply for to get the funding they need to cover all of these types of expenses and more. Non-profit loans through traditional lending institutions like banks and credit unions are rare and often much more difficult for a non-profit organization to qualify for. Traditional lenders may see non-profit organizations as risky when it comes to lending because often the main revenue streams for non-profit organizations are government grants, large donations from corporations, and community fundraising efforts. These revenue streams are often seen as more inconsistent and not as reliable as a revenue stream generated from the sale of a product or service.
There are two main alternative sources of non-profit loans that a non-profit organization may want to consider.
First, the Small Business Administration may be able to help a non-profit organization identify lenders who have experience working with the non-profit sector, and who may also be more willing to take a risk while better understanding the needs and intricacies of non-profit organizations.
Second, there may be a path to financing through a Community Development Financial Institution that operates in your area. These CDFIs typically focus on lending money to businesses that operate to make a positive impact on low income areas looking to revitalize their communities.
Although the road to a non-profit loan may involve more application rejections and have higher bars to qualification, there are still a number of ways for a non-profit organization to get the funding they need to get up and running, to expand, and to make a difference in the world.
How Do Non-Profit Loans Work?
A non-profit loan works the same way a regular business loan would work, depending on the loan type. For example, an SBA or conventional business loan works by providing an upfront sum of money that is paid back over time through monthly installments. The amount you can qualify for, the interest rate that you need to pay, and all other terms and conditions of the loan are determined by your creditworthiness, revenue, business experience, and the amount of existing debt you already have.
For a non-profit organization, your revenue could be generated from the sale of a product or service where all the profits go to funding the operations of the non-profit organization, or you may rely on government grants and large donations from corporations and community funds. Either way, you are going to need to show where you get your money from, and how much you get, and then demonstrate how reliable these funding sources are to get an SBA or conventional business loan.
If you opt for a business line of credit or rely on business credit cards, then the fundamentals of how these financing options work are different. Based on revenue and creditworthiness, a company can open up a revolving line of credit for you to borrow against. As long as you make the minimum payments each month, you can then borrow as little or as much of the credit line as you need. Whatever amount you pay back, you can eventually borrow again.
Another non-profit loan type that an organization could consider is equipment financing. Equipment loans are loans that are used to purchase specific equipment that then is used as collateral to secure the loan. If for any reason an organization is unable to make payments on the loan, the lender can seize the equipment to recover the amount of the loan balance.
Why Are Non-Profit Loans Hard To Obtain?
Non-profit loans can be harder for non-profit organizations and charities to obtain for a number of reasons. The main reason is that no matter who approaches a lender looking for a business loan, they must meet some pretty strict requirements to qualify for financing. Lenders like to see borrowers who can demonstrate that they have strong revenue and a ready and available cash flow to make their loan payments and eventually pay off the loan within the designated amount of time.
It is then generally accepted by lenders that non-profit organizations and charities make risky investments. Often, the main source of funding for a non-profit organization comes from government grants, corporate donations, and fundraising drives, all types of funding that may look inconsistent or unstable to a lender.
This is why many lenders may require some form of collateral to secure the loan. Non-profit organizations can use physical assets like property or equipment to secure loans or non-physical assets like cash reserves or investment accounts. If for any reason the organization is unable to pay back the loan, then the lender has the right to seize the assets to cover the remaining loan balance.
What Types Of Non-Profit Loans Are Available?
Although conventional business loans through traditional lending institutions may be hard for non-profit organizations to qualify for, there are still a number of sources of financing that nonprofits can explore.
Here are some of the most common alternative types of non-profit loans and financing options to consider.
- SBA loans and/or grants: SBA loans could be an option for non-profit organizations that can qualify. Many lenders like SBA loans due to the fact that a large portion of the loan is backed by the Small Business Administration through the federal government. Also, the SBA sometimes issues grants through their Program for Investment in Micro-Entrepreneurs. These are grants provided to non-profit organizations that help underprivileged individuals and communities.
- Special non-profit funds: There are a number of non-profit funds available as well. These funds work by providing loans from money collected from grants and donations with the sole purpose of lending out the money to smaller non-profit organizations that may need funding.
- Government grants: Many non-profit organizations and charities operate only on the money they receive through government grant programs. Government grant writing takes a lot of time and skill, so you should have staff dedicated to this sole purpose to be able to apply for as many grants as possible.
- Community development financial institutions: CDFIs are a good source of funding for smaller amounts that can be used to boost working capital or to make smaller equipment and supply purchases.
- Corporate giving programs: Many companies choose to devote a percentage of their revenue to philanthropic causes. Donations from corporations could vary from cash donations to sponsorships for fundraising events, to physical gifts and volunteering. Many companies will partner with a non-profit organization and encourage their employees to make donations and volunteer their time.
- Crowd-funding sites: crowdfunding sites have recently emerged as a powerful tool to collect a large number of small donations from a large number of people from all over the world.
- Online lenders: Online lenders often have more lenient requirements, therefore, nonprofits may qualify. At PrimeRates you can explore business loans offered by online lenders with no credit impact.
When Should You Get A Non-Profit Loan?
A non-profit loan may be a good idea when you are first starting out to cover the costs of getting your organization up and running. You may need to use some assets as collateral to secure the loan, however, it may give you the cash you need to begin operating, fundraising, and writing government grant proposals. Non-profit organizations and charities can sometimes go through long periods of time where they are waiting on funds from a grant or from a corporate donation, a non-profit loan can help bridge those gaps when there isn’t money coming in.
What Things Should You Consider When Financing A Non-Profit?
Before seeking financing for a non-profit, you should consider the following.
- Budget: Nonprofits should have a well-defined budget to ensure they can afford financing.
- Qualifications: Nonprofits should determine if they can qualify for financing and if so, what kind.
- Needs: Nonprofits should determine what they need financing for.
- Business plan: Nonprofits should have a written business plan that will pave the way.
As with any business, nonprofits should diversify funding sources. They can seek government grants, corporate donations, non-profit loans, and crowdfunding.
Aside from having an accurate budget, a full understanding of your operating costs, and a diverse selection of funding sources, you may want to consider how hard it is for non-profit organizations to obtain traditional sources of funding like conventional business loans through banks and credit unions. Understanding this can help you to devote your time and energy toward other sources of funding that are more experience with working with non-profit organizations and charities.
How Do You Apply For A Non-Profit Loan?
The process to apply for a non-profit loan is the same as a regular business loan. You’ll first need to qualify and shop offers. Once you’ve found the offer that works best, you’ll need to complete the application process. To start the process, you can check personalized offers at PrimeRates with no credit impact. At PrimeRates you can skip false advertising and hope and replace it with real offers that are made just for you. Simply submit some basic information and access offers from a network of vetted and trusted lenders. With no credit impact, and minimal time investment you can be on your way to getting financing for your non-profit.
PrimeRates supports your mission. . . unlock business loan offers in minutes!
