A nonprofit organization is a legal entity developed and operated for social and public benefits. However, building a nonprofit organization is a complicated venture due to financing needs. For-profit businesses and nonprofit ones share some similar characteristics. Both of them have to buy equipment and real estate. Moreover, they need to pay salaries to employees every month.
A nonprofit entity generates revenue, especially from individual donors. However, the present society is profit-motivated, and lenders do not easily lend money to nonprofit business owners.
Still, there are ways to get a nonprofit business loan. The loan will have a significant effect on the operations of the NPOs. Although cash advances, lines of credit, and term loans are the common financing options, several NPOs face obstacles while obtaining them. Thus, nonprofit business owners have to look for other alternatives to apply for funding.
Ways of using nonprofit loans
Some lenders set terms on how the applicant can use the nonprofit loans. A nonprofit borrower may use the loan for closing a cash-flow gap, consolidating debts, funding an opportunity, and making a big deal.
Different options for financing a nonprofit organization
- Nonprofit Loan Funds
One of the best financing options is the nonprofit loan funds. Some nonprofit institutions offer loans to NPOs. The loan is available to a nonprofit organization, especially in underserved communities. The interest rate for this loan is very low. For instance, Open Road Ventures and Growth Partners Arizona are popular sources to get nonprofit loan funds.
- Nonprofit grants
Another way of financing the NPO is the business grant. In most cases, business associations, corporations, and government authorities are the source of the grant money. The nonprofit organization needs to use the grant money for a particular purpose. The grant application process is slightly complicated. Moreover, the chosen source of the grant will like to see the achievements of the NPO. The grant may be less than $50K. But, some grants are applicable for the standard for-profit businesses.
Visit the official website to find the available government grants in the U.S.
NPOs operating businesses in an economically affected zone and serving a disadvantaged sector of society can apply for special grants. For instance, business grants are available for minorities, women, and veterans.
- Crowdfunding Platforms
Startups in the nonprofit business sector may not easily secure bank loans. That is why crowdfunding is the smartest solution for them. Crowdfunding can be of different types. However, charitable lending is something, which is best for nonprofit businesses. Based on the chosen crowdfunding platform, free capital may be available to the nonprofit entity. The fund may be secured as online donations, and thus, there is no need to repay the amount. There is also a no-interest crowdfunded loan available for nonprofit entities.
But, the applicant must learn about the laws related to the nonprofit fundraising process.
- Community Development Financial Institutions
Financial institutions like CDFI have a goal to promote community development by assisting businesses financially. Although CDFIs are nonprofit organizations, they work like banks and credit unions. Their operations are not at the national level, and thus, the NPO owner can find CDFIs in the locality.
CDFIs are microlenders providing a loan of up to $50K. Some CDFIs have the potentials to offer bigger loans to established organizations. For instance, in Washington D.C., City First Bank is a CDFI offering loans to nonprofit businesses.
There is one disadvantage of choosing CDFI for funding. Its charges are higher compared to that of banks. Still, the rate is lower than what we find with payday loans. The applicant needs to submit documents, and it takes time to get approval.
- Online business loans
These loans are available to nonprofit organizations at a higher interest rate. That is why nonprofit startups can avoid applying for this loan. The established nonprofit organizations may qualify for the medium-term online business loan at a reasonable interest rate. On the contrary, newer businesses have to choose short-term loans, and their interest rates are high.
Any private lender may also provide the loan after checking the personal credit score of the applicant. The repayment period is shorter with this loan.
How to increase the chance of securing a loan for a nonprofit business
After deciding on the loan financing option, the NPO owner needs to look for a lender. Check some tips on how to get approval from lenders.
- Learn about the rules set by the lender
To get nonprofit loans, borrowers have to strictly fulfill the requirements. It is important to check your credit score before applying for a loan. Moreover, the lender may set the minimum credit score acceptable for the loan approval.
- Select for the right option for funding
The applicant must choose the loan, which is perfect for his business needs. For instance, in some cases, the line of credit is better than a term loan. Although the applicant has received pre-approval for the loan offer, he should know about its affordability. Moreover, the loan repayment period is another relevant factor for the applicant. Make sure that it will be easy to repay the loan within the given period.
- Create a solid business model
Like other businesses, a nonprofit entity must make a business model to apply for a loan. The lender will like to know how a nonprofit agency serves the community and how it will get proceeds. Financial documentation is highly important for obtaining this type of loan.
- Documents needed for the nonprofit business loan
Like other financing programs, nonprofit business loans need some relevant documents for approval.
- Government-issued I.D.s like driver license
- Fundraising case statement of the NPO
- Current tax returns
- Latest bank statements
- Proof of collateral
- Financial documents like cash flow and income report
The loan application process varies with lenders. But, every lender asks for financial details that outline the revenues of the nonprofit business entity. Compile the necessary documents to apply for a nonprofit loan. The brief guide will be useful for financing nonprofit organizations in the US.