Everything You Need to Know About Nonprofit Business Loans
[Article was originally posted on www.forafinancial.com]
Although nonprofit organizations don’t seek profits, they still need money to remain operational. In fact, some nonprofit organizations take out business loans to fund programs and cover other costs. Business loans can provide access to vital capital but come with costs, including interest rates and fees.
Nonprofit organizations share many of the same characteristics as for-profit businesses. Your nonprofit organization will likely need to pay for equipment (i.e. computers), office space, and employee salaries. Still, like any business, your nonprofit must generate revenue, perhaps through donations or collecting fees for services.
Also, like a business, your nonprofit’s success or failure often comes down to execution. How effective are the services that you’re providing? How prudently are you managing your cash flow? Taking out a loan can have a big impact on your organization’s operations, providing funds that you can invest in your services, while also creating financial obligations.
While loans are a great option, many nonprofits face difficulties securing them, and there are some notable downsides that come with them. In this post, we’ll review everything you need to know about applying for and receiving a nonprofit business loan, so that you can determine if it’s right for your organization.
Who Provides Nonprofit Business Loans?
Unfortunately, nonprofit business loans can be hard to obtain, as few lenders offer them. From a lender’s perspective, lending to a nonprofit is just as risky, if not riskier, as lending to a business. To consider your nonprofit, the lender will need to examine your organization’s revenues, fundraising plans, costs, and other financial data.
Many nonprofits rely on government grants and large donations. Unfortunately, these revenue streams can dry up quickly as donors’ priorities change. This increases the liability for lenders, which may result in higher interest rates or increased application rejections.
Further, many nonprofits can’t simply sell more products or services like a business could. In fact, increasing your services could result in higher costs while not raising revenues. Often, the only way nonprofits can increase revenues is through fundraising drives or applying for grants. For these reasons, some lenders won’t lend to nonprofits or may charge higher interest rates if they do.
Where and How to Apply for a Nonprofit Loan
The application process will vary from lender to lender. However, you will almost certainly have to provide detailed and accurate financial information outlining your revenues, spending, and assets. Due to this, you should compile this documentation before applying for a nonprofit loan.
The Small Business Administration (SBA) offers informational resources to help nonprofits and other organizations identify potential lenders. You should look for lenders with experience lending to nonprofits. They may be more likely to accept your application and will have a better understanding of your organization’s needs.
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