Common hurdles
Maybe you’ve already determined that your nonprofit needs a loan and can handle the risks of borrowing. Before making the case to lenders, ensure you have a realistic repayment plan, current financial statements, collateral to secure the loan, a proven history of prudent financial management and your board’s support.
The odds of qualifying for a loan are better if you’ve already established a relationship (such as having a business checking account) with the lender. Your reason for applying also plays a big part in the decision. Seeking money to make a major purchase or to stabilize cash flow with a line of credit is more likely to be successful than applying for a loan to start a new program.
Even if you succeed in getting a loan, lender covenants may prevent you from borrowing for other purposes until your existing debt is paid off. This can limit strategic flexibility.
Nonbank sources
While plenty of banks are willing to make term loans or lines of credit available to nonprofits, your organization may not want, or be able, to pay the interest rates attached to them. Fortunately, there are other options, including:
Community foundations. Short-term loans may be available from local nonprofit foundations or funds such as Propel Nonprofits, or from national groups such as the Nonprofits Assistance Fund. Generally, these organizations charge low interest rates — and, in some cases, no interest at all.
Board members. There are no legal obstacles to borrowing from a board member, but these loans merit caution. To avoid IRS scrutiny, the board member must charge interest at or below market rate, the entire board (absent the lender) must vote to approve the loan, and you must report the loan on your Form 990.
Government bonds. Because these bonds’ income isn’t subject to federal income tax, your nonprofit may be able to borrow at a lower-than-market interest rate. However, fees associated with structuring and issuing the bond could offset interest-rate advantages.
Good rationale
You may think your organization has a good rationale for borrowing, but that doesn’t mean lenders — or your supporters — will agree. If a large portion of your budget is tied up in debt repayment, that can affect how the public, including prospective donors, perceives your organization. Contact us for help weighing this critical decision and finding a lender.