Navigate the risky business of nonprofit borrowing

Running a nonprofit comes with its own unique set of financial challenges. Maybe you need to buy new equipment, expand your facilities, or simply navigate uneven revenue streams. While for-profit businesses often use loans to fuel their growth, the decision isn't as straightforward for nonprofits.

Loans can be riskier for both the lender and your organization. Before you commit to taking on debt, it's crucial to understand what lenders are looking for and to perform your own careful due diligence.

The Pros and Cons of Borrowing

The biggest downside to any loan is simple: you have to pay it back, with interest. Rates for nonprofits can be higher than for businesses because lenders often view them as a greater risk. On top of that, other expenses like appraisal charges, closing costs, and legal fees can add up. Your nonprofit might also be required to provide a significant down payment.

So, what's the upside? Once you're approved by a reputable lender, those funds are guaranteed. Securing a loan can also be faster and require less effort than a major fundraising campaign, courting large donors, or writing extensive grant proposals.

Exploring Your Loan Options

The right type of loan depends on your specific financial needs and situation. Here are a few common options:

• Lines of Credit: Does your nonprofit's revenue have predictable peaks and valleys that create cash flow crunches? A revolving line of credit can provide the flexibility you need to manage these fluctuations.
• Bridge Loans: Sometimes cash flow issues are less predictable. A reliable funding source might disappear, or a disaster could strike when your cash reserves are low. A bridge loan, which typically lasts for a year or less, can help you navigate these short-term gaps.
• Long-Term Loans: For major purchases or large-scale projects, a standard loan with a longer repayment schedule might be the best fit. You might plan to finance a project with a capital campaign, but these can take longer than expected. A long-term loan can help you get started without delays while you continue to raise funds.

Both bridge and long-term loans can also be useful when time-sensitive opportunities arise, like when the perfect office space becomes available or you have the chance to merge with a like-minded organization.

Preparing Your Loan Application

Once you’ve identified your financing needs, it’s time to prepare your application. Lenders will want to see a clear plan for how the loan proceeds will be used. Be ready to provide:

• Several years of tax filings and audited financial statements.
• Reports on pledges, receivables, accounts payable, and any outstanding debt.
• A description of your major funding sources.
• A board resolution approving the loan.

You may also need to submit information about your organization’s history, including articles of incorporation and bylaws, details about your management and board, your strategic plans, and an overview of your programs. Lenders almost always ask for cash flow projections that show a clear repayment plan.

We're Here to Help You Navigate the Process

Securing a loan can be a demanding process, and not every nonprofit will qualify. Higher interest rates can also make borrowing an expensive option, especially if your organization is considered a risky bet.

But you don't have to figure it out alone. At SD Mayer & Associates, we're more than just accountants—we're your strategic partners. We can help you assess your options, prepare a strong loan application, and explore other, potentially more accessible, financing solutions.

Ready to find the right financial path for your nonprofit? Let's talk.