Nonprofit fundraising is a powerful tool, but in many cases, raising money can take time. This can hamper your efforts to keep programs running year-round. Luckily, a nonprofit line of credit can help remove the stress of fundraising. Plus, it ensures consistent income for nonprofit programs and services.
A line of credit for nonprofits is an excellent safety net for new and smaller organizations. This article will discuss why they’re needed, the differences between lines of credit and term loans, and how to find one that matches your needs.
What is a Line of Credit, and Does Your Organization Need One?
Think of a line of credit as your nonprofit’s safety net. There will be times when donations are scarce or when waiting for grant funding to arrive. Typically, most nonprofits have specific times during the year when they can depend on money coming in, like the holiday season and during events. But what about the rest of the year? This is when things can get tricky and stressful, even with the best strategic planning. It’s during these times that a line of credit can come in handy and ensure you stay on track with your organization’s goals and mission.
While credit lines are often in place for the year, it doesn’t have to be touched unless necessary. This reassurance allows nonprofits to focus on spreading their mission and building long-term relationships with donors instead of holding fundraising campaigns and events strictly for the money. Nonprofits can choose when to take money from the line of credit and pay it back when more funding comes into the organization.
What is the Difference Between a Term Loan and a Line of Credit?
Term loans and lines of credit are both available for nonprofits through banks, financial institutions, and community organizations. Nonprofits have secure and unsecured options. Let’s understand the key differences between these options to help you make the best choice for your nonproft.
Line of Credit
Nonprofits can get a secure line of credit by pledging collateral that can be seized if they fail to repay the money. On the other hand, an unsecured line of credit depends on the personal guarantee of the applicant. A line of credit typically has less strict requirements than term loans, but unsecured lines can be harder to get and have lower credit limits and higher interest rates.
Nonprofits should set up a line of credit in advance. This way, unlike term loans, grant funding, and other financial resources, the money from a line of credit is immediately available. In most cases, it is wired directly to the nonprofit’s checking account, which reduces stress and ensures that nonprofit programs keep running uninterrupted while awaiting other funds .
Lines of credit repayment plans tend to be more flexible than term loans. Nonprofits can pay off the balance of a line of credit after a grant, event revenue, or campaign funding arrives. They can also choose to make small minimum payments throughout the year. The only time organizations pay interest or fees on a line of credit is when that credit is used.
Term Loans
Nonprofits may take out larger amounts of money in term loans for business needs like building a new facility, purchasing equipment, or expanding programs. It’s not uncommon for nonprofits to take out term loans while running a capital campaign as it reassures donors that their money will be used immediately.
However, term loans can be more challenging to obtain from banks and require a solid credit and payment history, collateral, and larger application fees. Since they are for a large lump sum of money, they must be repaid monthly over a few years. For these reasons, a term loan may not be the best option for smaller or new nonprofits.
How Will a Line of Credit Benefit Your Nonprofit?
Opening a line of credit may seem like the perfect option for nonprofits. However, there are a few pitfalls to consider. Nonprofits must manage their lines of credit responsibly to ensure they don’t overextend themselves financially. Banks require strong financial management, collateral, and detailed financial statements that prove the organization is a safe risk.
Nonprofit founders and board members need to use their personal credit and payment history to convince banks to give them a line of credit. If the nonprofit can’t raise enough money to cover the debt and falls behind on payments, this will affect their personal credit.
The good news is that if the organization is well run and uses the line of credit responsibly, nonprofits that open a line of credit can reap many benefits.
Emergency Funding
When it comes to running a nonprofit, or any business really, it’s important to be prepared for emergencies. These can range from an unforeseen lack of funds to environmental disasters. Nonprofits have the benefit of using online campaigns, events, and grants to collect funds, but these fallbacks can take time. A line of credit is immediately available and can be paid back once other funding flows back into the organization.
Financial Flexibility
Another benefit to opening a line of credit is its financial flexibility. Nonprofits are not responsible for paying back the line of credit until it’s used. Once it is used, they can pay back the total amount after receiving a grant, or other funding, or make small monthly payments. This allows nonprofits to strategically plan for the future and manage current circumstances.
Build Creditworthiness
A line of credit also allows nonprofits to build a solid credit history. Being approved for a line of credit as a new nonprofit relies on the founder or nonprofit board member’s personal credit history. After the organization receives, uses, and begins repayment, it can start to build its credit history and open the possibility to apply for larger term loans.
Strategic Fundraising
The most significant issue when running a nonprofit is the need for more money. Most nonprofit founders and board members assume that this is the aim of running a fundraising event or campaign.
A line of credit removes the stress of needing money immediately. It also allows nonprofits to create strategic fundraising plans that help their organizations grow. Without the pressure to solicit immediate funds, nonprofits can develop fundraising events that help find new donors and strengthen existing relationships.
Relationship Building
Relationships with donors are critical to nonprofits’ long-term success, but donors are not the only relationships nonprofits must build. Establishing a positive relationship with a bank through a line of credit can open doors to other financial services and options that can benefit the organization in the long run.
Loaning Money as a Nonprofit
Banks are the obvious choice when looking for a line of credit. However, finding a willing bank can be difficult without collateral and a solid credit history.
So, what can new and smaller nonprofits do? Credit unions, financial technology companies, and Community Development Financial Institutions (CDFIs) are possible sources of funding as they also offer lines of credit.
CDFIs are private, nonprofit organizations certified by the U.S. Treasury Department’s CDFI Fund. They aim to support disadvantaged communities, promote community development, and create economic opportunities.
CDFIs gain funding through grants, loans, and investments. They then offer smaller loans and financial products to nonprofits and small businesses. Once a nonprofit has formed a relationship with these organizations, it can lead to other benefits, like:
- Pre-loan financial advising
- Training programs
- Technical assistance
CDFIs can have higher interest rates, but the long-term benefit for small nonprofits may outweigh this cost. Nonprofits can also apply for certification with the Treasury Department and offer this service to other organizations with their mission.
Conclusion
A nonprofit line of credit can be a critical safety net and powerful tool that removes the stress of financial struggles. Nonprofits can apply for a line of credit with banks, credit unions, financial institutions, and CDFIs. In all cases, the organization must have a solid credit history or collateral or an individual willing to put their personal credit on the line.
A line of credit can help nonprofits build long-term relationships with banks, other organizations, and donors that will benefit them in the long run. These relationships can do a lot in assisting an organization to raise more funds, strengthen their financial knowledge, and make a greater impact on their community.
Every nonprofit needs essential tools for long-term success. That’s why Donorbox has made it our mission to help nonprofits raise donations more effectively, manage their supporter base, and positively impact the world.
With our affordable online fundraising tools, tips, and resources, we can help organizations of all sizes reach their goals. Visit our website to see why thousands have chosen Donorbox!
Kristine Ensor
