Looking for funding to keep serving your community? Nonprofit loans can help, but not every option is a good fit. I’ll break down everything you need to know in this comprehensive guide.
Join the fundraising movement! Join the fundraising movement!Studies show that 59% of U.S. nonprofit organizations operate on annual budgets of less than $50,000. With growing demands for community services and rising economic challenges, you may be considering a loan so your nonprofit can manage short-term funding gaps.
Below, I’ll walk you through the benefits and different types of loans for nonprofits. I’ll also share general eligibility requirements, where to apply, and a checklist to get you started.
Yes. Although nonprofit organizations aren’t established to earn a profit, they can still apply for loans from banks, government agencies, credit unions, and specialized lenders.
Loans can help nonprofits operate and run community programs successfully.
What sets nonprofit loans apart from for-profit loans is how they are repaid. Instead of traditional sales or commercial revenue, nonprofits typically use funds from donations, grant programs, and program-related activities to repay what they’ve borrowed.
Here are some of the advantages of taking out a loan for your nonprofit:
Here are some key questions to ask before applying for a loan:
One expert from the Nonprofit Finance Fund sums it up nicely:
There are some circumstances where taking on debt can potentially harm your mission and should be avoided, such as if:
Remember, a loan should help accelerate your nonprofit’s long-term impact, not compensate for financial instability.
A bridge loan – or bridge financing – is a short-term financing solution to cover immediate gaps in operational cash flow while waiting for committed capital to arrive, like a pledged donation or grant reimbursement.
Bridge loans typically mature in 6-24 months, making them especially ideal for smaller or newer nonprofits who don’t have the reserves to continue operating successfully while waiting on reimbursements.
A nonprofit line of credit is a revolving credit facility that lets you borrow up to a pre-approved amount and withdraw funds as needed. You are only charged interest on the amount you use, and the credit becomes available once you repay what you’ve borrowed.
This type of loan provides financial flexibility by providing immediate cash flow to cover funding gaps, payroll, and seasonal dips in fundraising.
Loan repayment terms are typically more flexible with a line of credit; you can pay off the balance owed once funding arrives, or make smaller payments throughout the year.
An SBA loan is a business loan issued by participating lenders – such as banks and credit unions – and partially guaranteed by the U.S. Small Business Administration (SBA). SBA loan terms typically range from 10 to 25 years.
The SBA was established to support for-profit small businesses that create private sector jobs and earn a taxable income. Due to SBA’s standard eligibility requirements, their loans are generally hard to qualify for as a tax-exempt organization.
However, certain 501(c)(3) organizations may qualify for an SBA loan. Here are some instances where nonprofits may qualify:
Pro tip: Use the SBA’s lender match tool to see which potential lenders may express interest in your loan application.
As the most traditional loan type, a term loan is where you borrow a specific amount of money and pay it back within a set period of time, with interest charged. Terms for these loans typically run for a period of one to five years.
Term loans are ideal for funding large, one-off expenses like new equipment purchases or capital projects like renovations and new vehicle purchases.
Here are some potential lenders to approach if your nonprofit is considering applying for a loan:
Below, I’ll highlight general eligibility requirements to keep in mind.
To apply and qualify for a nonprofit loan, you must meet certain eligibility requirements. While different loans have specific eligibility criteria and paperwork, here’s what you can typically expect to submit:
Pro tip: Make sure you answer every question correctly and include all the required documentation when submitting your application to avoid automatic rejection.
Loans are a fantastic option to mobilize your mission. However, it’s important to avoid these common mistakes when incurring debt of any kind:
Use this checklist to prepare for your loan application:
Pro tip: When demonstrating your ability to repay a loan, use visual charts and graphs to showcase recurring donation revenue and other relevant data.
For example, Donorbox gives you access to an interactive dashboard for an at-a-glance view of key fundraising and donor metrics. Use it to easily review and download visual charts and graphs to showcase key donation and supporter data.
Loans can be a valuable financial solution to enable program success and support mission-related needs. However, it’s up to you to ensure your nonprofit has reliable, diversified revenue streams and takes a strategic approach to successfully meet the repayment terms.
Plus, before you borrow, it helps to strengthen your revenue engine. Tools like Donorbox empower nonprofits like yours with features that help you raise more consistently, track performance, and strengthen donor relationships. Sign up to start fundraising in minutes.
For more nonprofit fundraising tips and insights, visit the Nonprofit Blog. Subscribe to the monthly newsletter to receive exclusive resources sent to your inbox.
Jamy-Lee has over 7 years of experience in copywriting and content marketing. With a background in volunteering, she now uses her passion for writing to help accelerate the all-important missions of nonprofits worldwide.
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