Guide to Business Loans for Nonprofit Organizations

By Lauren Ward · May 22, 2024 · 10 minute read

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Guide to Business Loans for Nonprofit Organizations

Just like for-profit businesses, nonprofits need capital to buy equipment, pay employees, build infrastructure, and fund their projects. However, when it comes to getting financing, nonprofits often face more hurdles than traditional businesses do.

Fortunately, options for nonprofit business loans are out there. The key to finding the right financing for your organization is knowing where to look.

Key Points

•   Nonprofit business loans are similar to for-profit business loans. To qualify for any business loan, you’ll need to meet the lender’s requirements, regardless of whether your business is for-profit or not-for-profit.

•   Nonprofit loans are often viewed as risky to the lender. Because of this, you may have to meet a certain credit requirement and/or put up collateral to secure the loan.

•   Funding options for nonprofits include loans, grants, corporate giving programs, crowdfunding sites, and more.

•   Nonprofit organizations can also apply for small business lines of credit and business credit cards when in need of funds.

What Are Nonprofit Business Loans?

A nonprofit business loan is similar to any type of small business loan except that it’s made available to a not-for-profit organization. These types of loans are often available through lenders and organizations that are themselves nonprofit. Some banks, credit unions, and online lenders are able to provide loans to nonprofit businesses.

How Do Nonprofit Business Loans Work?

Like any business loan, nonprofit business loans often have a lengthy application and approval process. This is done to ensure the organization actually has the monthly cash flow to easily pay upon a new debt.

With a nonprofit term loan, your charity would receive the full amount of the loan (known as the principal) up front, then have a period of time — which could be anywhere from a few months to 25 years — to pay it back (with interest and fees added), typically in monthly installments.

As you explore business loans for your organization, it’s important to read the fine print. You’ll want to know the repayment terms, interest rates, fees, and if collateral or a personal guarantee is required. Keep in mind that longer repayment terms carry lower monthly payments, but could actually cost more in the long run as interest accrues.

Pros and Cons of Using Loans for Nonprofit Organizations

Taking out a loan in the name of your nonprofit can expedite the growth of your organization, allow you to better market your cause, fund new projects, hire more staff, and ease any cash flow issues. And, if you can find a nonprofit lender, you may be able to get financing with a low interest rate and favorable terms.

However, a nonprofit business loan can take some time and effort to find, apply for, and get funding from. In addition, interest rates from a traditional lender may be high, since they often see nonprofits as higher risk. The lender may also require collateral, which could be seized if you fail to make payments.

Pros of Using Loans for Nonprofits

Cons of Using Loans for Nonprofits

Money can be used to ease cash flow issues, grow your nonprofit, and fund new projects Not many lenders are willing to loan to nonprofits
You don’t have to wait to start initiatives until you are able to raise enough money through donations Interest rates from traditional lenders may be high

Why Are Nonprofit Business Loans Difficult to Obtain?

Getting a small business loan is often a lot easier than getting a nonprofit loan. For one reason, there aren’t as many nonprofit business loans available as there are traditional small business loans. Below are some of the obstacles your organization may face when seeking financing.

Strict Requirements

Lenders are in the business of getting their loans repaid, so before lending to a nonprofit, they will likely want to see strong revenue and cash flow. A nonprofit that has consistent and solid cash flow is more likely to pay upon its debts and less likely to default in the future. Nonprofits that are operating at a loss may find it especially hard to qualify for some loans.

Risky Investment

When lenders give a loan to a small business, they assume that the funds will increase profits in some way. However, it’s more difficult for a nonprofit to bring in revenue than a traditional small business.

For businesses, small gambles like increasing services can help bring in more cash flow. But when a nonprofit does this, it’s spending more money without any guarantee that charitable donations will increase. This doesn’t necessarily mean that you can’t get capital from traditional sources, but it can mean higher interest rates on any loans you secure for your nonprofit organization.

Collateral Is Often Required

As a nonprofit, a lender will likely require collateral to help mitigate their risk. When a loan is secured with collateral, a lender knows it will be able to recoup most or all of their money even if the borrower defaults on payments by seizing and selling the collateral.

This can be a tricky requirement for nonprofits to navigate, since they may not have valuable assets that can help them secure a loan. The difference between secured vs. unsecured loans is that secured loans (with collateral) tend to come with much lower interest rates than unsecured loans (without collateral).

Typical Funding Options for Nonprofit Businesses

Despite the potential difficulties, there are many funding options available to nonprofits. Here are some you may want to explore.

SBA Loans and Grants

Loans backed by the U.S. Small business Administration (SBA) are not typically available to nonprofits. However, the SBA provides grants to nonprofit organizations dedicated to helping underprivileged individuals or communities through their Program for Investment in Micro-Entrepreneurs (PRIME).

Nonprofit Loan Funds

There are some lenders that focus exclusively on loaning money to nonprofits. In many cases, these lenders are nonprofits themselves with a mission to help underserved communities. While there aren’t many options out there, nonprofit loan funds often come with low (and sometimes even zero) interest rates and attractive terms. You may want to start your search with Nonprofit Finance Fund and Propel Nonprofits to see if this might be a good fit for your charity.

Nonprofit Grants

Grants can be a major source of funding for nonprofits. Grants for nonprofits are often available from government agencies, business associations, corporations, or other nonprofit organizations. The upside of grants vs. loans is that the money does not have to be repaid. However, grant money sometimes needs to be used for a specific purpose and competition for these awards can be stiff.

When searching for grants, you can check Grants.gov, which is the largest database of federal grant opportunities. You may also want to look locally, as many grants targeted for nonprofits are offered at the state and local level.

CDFIs

The Community Development Financial Institutions Fund (CDFI Fund), which is part of the U.S. Treasury, gives funds to lenders focused on providing financial assistance to businesses and organizations that serve disadvantaged areas. These lenders, known as “CDFIs,” typically don’t operate at the national level, but you can reach out to local banks and nonprofit groups that have received CDFI funds to discuss low-cost business loans for nonprofits.

Corporate Giving Programs

A corporate giving program (CGP) is a program in which a business donates gifts, cash, or organizes fundraising campaigns to help a cause it believes in. While a CGP may not become a major source of funding for your nonprofit, it can be worthwhile to appeal to local small businesses and corporations who want to give back to the community. You may be surprised by how many companies want to offer their support.

Crowdfunding Sites

Crowdfunding is another way you may be able to raise capital for your nonprofit. Rather than securing a large lump sum from a loan or grant, crowdfunding focuses on collecting smaller amounts from a large number of people. Depending on the crowdfunding platform you use, you may be able to get free money (in the form of online donations) or a no-interest crowdfunded loan, which means you’ll only have to repay the principal on the loan.

Applying for Nonprofit Business Loans

Once you find a loan that may work for your organization, you’ll want to start preparing your application. The process will vary with each lender, but here’s how to get started.

Read the qualification requirements carefully. Nonprofit loans are a very specific type of financing, so you’ll want to make sure your nonprofit meets all the minimum requirements to avoid wasting time.

Write a strong business plan. Just like a for-profit business, nonprofits need to have a solid business plan in place when applying for financing. The lender will likely want to see details about how your nonprofit meets a need in the community, along with how you plan to use proceeds from a loan, including supporting research and financial documentation. They’ll also want to see that your organization can successfully raise funds.

Gather your documents. Whether you’re applying for a loan or a grant, you will likely be asked to submit a fair amount of paperwork. This may include:

•   Your organization’s fundraising case statement

•   Proof of 501(c)(3) (nonprofit/tax-exempt) status

•   Recent tax returns

•   Recent bank statements

•   Other financial documents (e.g., income reports, cash flow projections)

•   Proof of collateral

Recommended: Starting a Minority Woman Owned Business

Alternative Funding Options for Nonprofits

Besides the loans and grants listed above, you may want to investigate these other sources of business and nonprofit funding.

Online Loans

There are various types of online business loans that your nonprofit may be eligible for. Typically, online loans have more relaxed requirements and are much faster to fund than bank loans. However, they often come with higher interest rates.

Banks or Credit Unions

If you have a very strong credit history and your nonprofit is generating revenue, it may be worth applying for a loan through your local bank or credit union. Just make sure that the bank or credit union lends to nonprofits. Also keep in mind that interest rates from traditional lenders may be higher for a nonprofit than a for-profit business, due to higher risk.

Business Credit Card

With some research, you may be able to find business credit cards with low interest rates. Some cards even offer a 0% introductory APR (which may last as long as 21 months). This might allow you to cover an unusually high expense, then pay the card off before the usual interest rate kicks in.

Business Line of Credit

It may be possible for your nonprofit to qualify for a business line of credit, which is a pre-approved amount of money that you can access at any time and for any reason. You only pay interest on the money you actually borrow.

Recommended: Nonprofit vs. Foundation

Nonprofit Lenders

Nonprofit lenders can be a good source of funding for a charity.

What Nonprofit Lenders Are

A nonprofit lender is one that focuses on lending to nonprofits and mission-based small businesses in their community that have the potential to provide an economic impact. In addition to funds, nonprofit lenders also often offer training, education, and other resources to help nonprofits and small businesses make the right decisions for their development and longevity.

How Nonprofit Lenders Work

Many nonprofit lenders focus on offering smaller loans (typically $50,000 or less). While the application and underwriting process can often be involved and time-consuming, these lenders often offer low interest rates to organizations unable to access capital from traditional sources.

How to Find Nonprofit Lenders

Your local Small Business Development Center (SBDC) or SCORE office (a resource partner of the SBA) may be able to help you identify local nonprofit lenders. You can find these offices, as well as other helpful resources, using the SBA’s search tool.

Recommended: Guide to Grant Writing for Small Businesses

The Takeaway

It’s possible to find a business loan for a nonprofit organization, but it can take a bit of time and legwork.

If you’re seeking financing for your business, SoFi can help. On SoFi’s marketplace, you can shop top providers today to access the capital you need. Find a personalized business financing option today in minutes.


With SoFi’s marketplace, it’s fast and easy to search for your small business financing options.

FAQ

Can you get a business loan for a nonprofit?

Yes. Many traditional lenders, however, see nonprofits as risky and may charge a higher interest rate.

Does SBA give loans to nonprofits?

Not typically, but they do offer grants to nonprofits. To get a loan as a nonprofit, you can apply with banks, credit unions, and online lenders. Online lenders tend to have less stringent income and credit requirements, but may charge higher interest rates and more fees.

Do nonprofits have a credit score?

Yes, nonprofits can establish a credit history and build a credit score by getting a D-U-N-S Number, along with a bank account and credit card in the organization’s name.

Can a nonprofit be a small business?

No, to meet the definition of a small business, you must be organized for profit. A 501(c)3 is not organized for profit, so it does not qualify as a small business.


Photo credit: iStock/FG Trade

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