Loans For Nonprofits: How To Finance Your Nonprofit

Whether you want a loan to maintain an existing nonprofit organization or you need capital to launch your fledgling organization, you may have to turn over a lot of stones before you find any suitable funding options. However, finding financing is not impossible if you know where to look.

Is a business loan a viable option for a nonprofit organization? Where else can nonprofit businesses get financing? Read on to learn the answers to these questions, and be sure to take a look at our top recommendations for the best small business loans.

What Are Loans For Nonprofits?

Loans for nonprofits are financing products that you can qualify for even if your business is not-for-profit.

While most nonprofits can’t get SBA loans, nonprofit childcare centers are an exception and are eligible for SBA Microloans of up to $50,000.

Nonprofits are eligible for other types of funding, such as grants, online loans, crowdfunding, and loans from CDFIs and credit unions.

Why Nonprofits Have Trouble Getting Business Loans

Nonprofit organizations are, of course, not about turning a profit. Any money they make — if they bring in any money at all — is meant to be reinvested in the organization.

Banks, which are all about profits, have little to no interest in helping nonprofit organizations. Lenders consider nonprofit organizations “high-risk borrowers” because they do not trust that you will make enough money to repay a loan.

If they do not receive any additional financial incentive to do so — for example, a government subsidy or a “corporate giving” PR campaign — banks typically will not lend to a nonprofit that is not bringing in significant revenues.

Best Types Of Nonprofit Financing

Fundraising, donations, and member fees are typically the main sources of funds that drive a nonprofit organization. If you need additional money on top of what your organization can bring in through these channels, you’ll face a pretty steep climb.

However, while it’s not easy, there are ways to finance your nonprofit organization, even if you can’t find any business loans for nonprofits. Also, a loan is not necessarily out of the question, particularly for a more established nonprofit. The appropriate type of nonprofit financing will depend on various factors, which I’ll describe in more detail in the sections below.

1) Community Development Financial Institutions (CDFIs)

Short for “Community Development Financial Institution,” a CDFI is a financial institution with a mission to facilitate community growth by providing financial assistance to businesses and consumers in low-income or disadvantaged areas. CDFIs are typically not-for-profit or nonprofit organizations but may take the form of traditional banks/credit unions or venture capitalists. Usually, they do not operate on a national scale, so you will need to seek out CDFI opportunities in your local area.

CDFIs may be microlenders offering loans of $50K or less, while some CDFIs also issue larger loans to more established businesses.

Some CDFIs also participate in the New Markets Tax Credit (NMTC) program, a federal initiative that attracts private investment into low-income communities. If your nonprofit operates in a qualifying area, a CDFI that participates in the NMTC program may be able to offer you more favorable financing terms.

While CDFIs can be a viable source of capital for nonprofit organizations, particularly those operating in disadvantaged regions, there are some downsides. CDFIs usually charge higher rates than banks do (though lower than you’d get with short-term or payday loans) and typically require you to submit a lot of documentation. It can also take a long time for the funds to come through.

2) Banks & Credit Unions

Though it’s much harder to qualify for a loan from a traditional bank, some banks offer loans to nonprofits. Big corporations — banks included — often like to flex their philanthropic muscles via nonprofit grants or loan programs.

However, banks may charge higher interest rates on loans to nonprofits due to the higher risk involved, and you will likely have to have an established nonprofit with documentation to show your revenue, expenses, fundraising plans, and other financial information.

Credit unions, being nonprofit themselves, are more likely than traditional banks to offer nonprofit loans or grant programs (or serve as CDFIs). As nonprofits, credit unions do not have to pay taxes and can offer very competitive interest rates. A credit union may also be more likely than a bank to extend a loan to a newer or smaller nonprofit.

Credit union loans are typically offered in smaller amounts than bank loans, and you may have to have a checking or savings account with that credit union to qualify.

It’s important to only apply for funding to banks and credit unions that specifically advertise that they work with nonprofits/have a lending program for nonprofits. These institutions will better understand your needs as a nonprofit and will be more likely to accept your application.

Learn more about credit union business loans (including nonprofit businesses) and how they differ from bank loans.

3) Crowdfunding Platforms

For startup organizations that are less likely to qualify for bank loans, crowdfunding can be a good option.

There are various types of crowdfunding, but charitable/donation lending is the one most suited to nonprofit businesses.

Depending on the crowdfunding platform you use, you may be able to obtain free capital for your nonprofit in the form of online donations you do not have to repay. Or you may qualify for a no-interest crowdfunded loan, and you’ll only have to repay the principal on the loan.

It is extremely important to familiarize yourself with the laws regulating nonprofit fundraising in the state or states where you will be operating. You may have to register your charitable nonprofit with the state before you begin soliciting donations.

The National Council of Nonprofits (councilofnonprofits.org) maintains a state-by-state guide to charitable solicitation registration requirements that can help you navigate this process.

If you’re ready to explore fundraising online, start by looking at nonprofit crowdfunding platforms.

4) Nonprofit Grants

Business grants are another form of funding that nonprofits may be eligible for.

Grant money for nonprofits can come from government sources, business associations, corporations, or other nonprofit organizations. Typically, grant money is intended for very specific purposes, and government grants, in particular, require a rigorous vetting and application process.

Additionally, they will want to see what you’ve achieved with your nonprofit thus far. Most non-government grants are for smaller amounts (less than $50K) and may resemble a contest or competition in which you’re competing with other organizations. Make sure you check that the grant you’re interested in is open to nonprofit businesses; some grants only apply to for-profit businesses.

When searching for grants, you can check grants.gov, the centralized source for all US government grants. You should also do a more targeted search for grants in your particular region, as many grants only apply to applicants living in a certain state, city, or municipality.

If you operate in an economically distressed region or serve a disadvantaged demographic, you might also be eligible for special business grant opportunities. For example, there are grants for women, grants for minorities, and grants for veterans to help with their businesses.

You can learn more about business grants for nonprofit organizations by reading our article on finding nonprofit grants.

5) Nonprofit Loan Funds

Nonprofit loan funds are another viable source of capital for nonprofit organizations to investigate when looking for funding opportunities.

These institutions, often nonprofits themselves, offer loans to nonprofits in need of funding, especially to nonprofits in underserved communities. Typically, nonprofit loan funds charge less interest than traditional lending institutions; in some scenarios, the loans may be interest-free.

Nonprofit loan funds differ from nonprofit grants in that you will have to repay whatever you borrow. Nonprofit loan funds may also be CDFIs. As with other loans, nonprofit loan funds typically require an operating history — meaning your nonprofit startup may not be eligible.

6) Online Loans

Some online lenders offer financing to nonprofits, typically with faster approval times and more relaxed requirements than banks — though rates are generally higher. More established nonprofits may qualify for medium-term loans with reasonable rates, while newer organizations may face higher rates and shorter terms.

If your nonprofit is just starting out and has no track record, a personal loan may be an option — approval is based on your personal credit score rather than your organization’s financials. Keep in mind that personal loans are typically capped at $50,000 and come with higher rates and shorter repayment terms, so treat this as a last resort rather than a first choice.

Note that online loans may require you to sign a personal guarantee, making you personally responsible for repayment if your organization can’t cover it.

How To Improve Your Chances Of Getting Approved For Nonprofit Financing

Once you’ve identified the right type of financing, here are the key steps to improve your approval odds:

• Meet the requirements first: Only apply to lenders that specifically work with nonprofits. Applying elsewhere wastes time and can result in unnecessary credit inquiries.
• Choose the right product: Consider whether a loan or a line of credit better fits your needs, and make sure you can realistically afford the repayments before applying.
• Have a strong business plan: Lenders want to see how your nonprofit serves the community, how you plan to use the funds, and how you’ll repay the loan, all backed by solid financial documentation.
• Get your documents ready: Having your 501(c)(3) status documentation, recent tax returns, bank statements, financial projections, and fundraising case statement on hand will speed up the process significantly.

Once you decide to apply for financing, it’s time to find a potential lender and start putting together your application package. If you take the time to prepare properly for the application process, there is a much higher probability that a lender will decide to take a chance on your nonprofit. Here are a few important tips to keep in mind.

Final Thoughts On Loans For Nonprofits

Loans for nonprofits are not all that different from loans for other business types.

Although the nonprofit’s business model is in some ways very different from that of a for-profit business, nonprofits operate similarly to regular businesses in many respects. Working capital, operational expenses, and expansion of services are valid reasons to seek financing, regardless of an organization’s business model.

While nonprofit financing options are somewhat limited, you may have an advantage over for-profit businesses when applying with organizations such as CDFIs, microlenders, and nonprofit loan funds, and also when applying for government grants.

Finally, don’t overlook corporate giving programs as a supplementary source of support. Local businesses may be willing to sponsor fundraising events, make non-cash donations, or offer paid volunteer days to support your nonprofit. While this won’t replace a loan or grant, it can help reduce operational expenses and stretch your funding further.