Nonprofit organizations are created and managed to benefit the society. In order for their programs to succeed, Boards and managing personnel must explore multiple funding options, which will elevate the organization to the next level of accomplishments. Nonprofits, like businesses, sometimes need cash in the form of a loan for the purpose of growing and evolving.
A loan is a sum of money which is borrowed and has to be re-paid, normally with interest. Loan financing is a potentially advantageous source of funding for many nonprofits. It is often times faster and easier to secure loans than grant funding.
Before you look into securing a loan, you would need to do substantial planning and financial analysis. If your organization has been operating with a persistent loss and you don’t know when or how you will repay the debt, a loan might not be a good idea to salvage your financial situation. However, if you have a feasible plan to repay the loan based on your future income assumptions, loan financing would be a useful funding tool to bridge the cash gap.
There are a few types of loans to consider, depending on the need:
Loans to Stabilize Cash Flow. Generally, grants and donations don’t come in consistently, and your nonprofit still has bills to pay. If the working capital is insufficient to cover the monthly expenditures, a cash flow loan might provide stability to your organization. The first thing to do before you apply for this bridge loan (or a line of credit), is to come up with cash flow projections to determine the amount needed to sustain healthy operations.
Loans for Capital Purchases. Most organizations don’t have sufficient funding to spend on building improvements, add-on’s, or equipment, which are very essential for the organization’s operations and development. If this is the case with your organization, you might want to contemplate a mortgage loan. You will have to consider the value of the asset and the cash flow available for monthly payments before you apply for a loan.
Loans for Debt Consolidation. Due to the lack of continuous funding or poor financial decisions, nonprofits may find themselves in debt and, as a cause of that, temporarily lose their ability to conduct their programs and fulfil the mission. You will need to analyze your goals: if you are using a loan to pay off other debt within a reasonable time period, then you should go for it. If your goal is an ongoing “borrowing from one source to pay the other”, then you might need do additional planning.
Loans for New Opportunities. There are times when your organization is ready to launch a new program, but it is short of start-up funding. In this case, a short term loan might be a solution. You may either pay if off in monthly payments or in a lump sum when the new program funding arrives.
All the above-mentioned loans and their terms are subject for negotiation with the lender. Depending on your goals, loans can be secured for several years with monthly payments or short-term with a stipulation to be paid off in a few months. Interest rates will depend on the loaned amount, term, and the risk involved based on the financial situation of your organization.
When meeting with a lender, make sure you have accurate information regarding the history of the organization, current and future projects, past and projected financial statements, as well as the desired loan size and its repayment plan. The lender will also require some kind of surety (grants receivable, pledges, a building and/or equipment), as well as your legal documents (such as your state-filed articles of incorporation, bylaws, and a board resolution for acquiring a loan).
If you are concerned that your potential grant funders will not appreciate your need to borrow money, you are misguided. Experienced and knowledgeable funders understand that operating a nonprofit is complex and securing a loan can be a valuable tool for the organization’s financial stability and growth.
We wish your organization good fortune!