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Nonprofit Business Loans: Top Funding Options for Charities

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Business lending is pretty straightforward for most companies: Apply for a loan and get a decision. Nonprofit business loans, however, have more moving parts. As you’re looking for business loans for nonprofits, learning where to apply for financing and what criteria lenders use to approve applications is essential.

After all, nonprofits will use these funds to build infrastructure, pay employees, market their cause, and more. We’ll walk through the nuances of applying for a business loan as a nonprofit organization, as well as your available sources of funding.

Why are nonprofit business loans hard to obtain?

Business loans for a nonprofit organization or charity tend to be tougher to obtain than loans for other types of for-profit businesses. Here’s an overview as to why you might find the process slightly more challenging.

Strict requirements

As you might expect, lenders have strong business loan requirements. They typically seek candidates with strong revenue and cash flow, which makes them more likely to pay off their business loans. And that’s what they’re in business for—making sure candidates pay off their loans with interest, which is where these companies generate profit.

As a nonprofit organization, one of the key elements of your charity is that you invest all of your profits back into the organization. You might even be operating at a loss, which many nonprofit corporations do.

Risky investment for lenders

To lenders, nonprofits are risky candidates for business loans. What’s behind this designation?

Well, without the profits and consistent revenue to assuredly pay back their loans, nonprofits are seen as more likely to default on their loans. That’s especially true with nonprofit organizations that are operating at a loss. Since the lender loses money, nonprofits are risky investments.

On the flip side, for-profit businesses have revenue streams that lead to profit. They don’t always get approved for business loans, but for-profits with strong revenue and cash flow pose a lower risk in a lender’s eyes.

This doesn’t necessarily mean that you can’t get capital from traditional sources—it just often translates into higher interest rates on any loans you secure for your nonprofit organization.

Collateral is likely necessary

As a nonprofit or charity, the lender will likely request collateral to secure the loan (assets they’ll seize to recoup their money if you can’t pay back the loan). This could be in the form of physical assets or cash reserves. Make sure you think about this since the seizure of collateral could put your nonprofit at risk.

Top funding options for nonprofits and charities

Don’t worry: Funding options for nonprofits aren’t all doom and gloom. There are plenty of options to explore and different avenues to obtain capital. Here are some business loan options to consider and some alternatives, including grants and government capital.

1. SBA loans and grants

What it is: Financing solutions for nonprofits backed by the U.S. Small Business Administration.

Guaranteed by the SBA and offered by traditional lenders such as banks, SBA loans may be an option for nonprofit candidates. The SBA also issues grants to nonprofits dedicated to helping underprivileged individuals or communities through their Program for Investment in Micro-Entrepreneurs (PRIME). Last year, 100 organizations in 44 states received a total of $8 million in funding—so the resources are out there. Keep in mind that looking into SBA resources and funding might take a bit of time, but don’t hesitate to reach out to them for more information.

2. Nonprofit loan funds

What it is: Obtain nonprofit financing from lenders that work exclusively with nonprofits and charities.

There are a few organizations that offer loans exclusively to nonprofits and charities. Oftentimes, these are nonprofits themselves, whose mission is to better their communities. Although these nonprofit loan funds are not plentiful, those who offer nonprofit funding often provide preferable terms—or even zero-interest loans.

Getting started: Consider starting with the Nonprofit Finance Fund and Propel Nonprofits to get some information on organizations like these, and to figure out if they might be the right fit for your nonprofit business loan needs.

3. Nonprofit grants

What it is: Free funding available to nonprofits that meet certain criteria, obtained from grantmaking agencies.

You might already be aware, but grants are a significant source of free funding for nonprofit organizations. Many charities run almost exclusively on donations and grants—and many hours are spent in development to raise these funds. The best part about grant awards, of course, is that they’re not loans at all: You don’t have to pay back these funds.

In your search for nonprofit funding options, don’t forget to apply to an array of grants. Make certain that you explore several different sources of grant funding—federal, state, and corporate.

It’s worth noting that applying for grants is a time-consuming process, so consider creating a tiered system for the grants to which you want to apply. For instance, pick a few that you think you’re most likely to win and spend your time working on those applications. Then, when those priority grant applications are in, get to the second tier when you and your team have time to work on applications. You shouldn’t be spending so much time on applications that your day-to-day operations suffer as a result.

Getting started: Visit various nonprofit grant agencies, like the 3M Foundation and The Carnegie Foundation, and research their requirements to see if you qualify.

4. Community development financial institutions (CDFIs)

What it is: Financing generally in lower amounts from lenders that specialize in financially assisting nonprofits and charities.

In a similar vein, CDFIs are lenders that specialize in offering financial assistance to nonprofit businesses. This includes loans for charities and other nonprofit organizations. Note that loan amounts may be small—though, on occasion, some do offer higher capital amounts—and interest rates might be high. Still, if you’re having trouble finding a loan for your nonprofit, researching CDFIs could be a viable option.

CDFIs are generally nonprofits themselves, or some might be financial institutions, including banks or credit unions. Be sure to look locally for CDFIs, since they often operate within local or state jurisdictions.

Getting started: To kickstart your research, check out the CDFI locator. The Connect2Capital platform is another option connecting small business owners with a network of nonprofit CDFI lenders that want to support organizations with a worthy vision and cause.

5. Banks and credit unions

What it is: Traditional business loan options obtained from banks.

Speaking of banks and credit unions, you can look into applying for a “traditional” business loan, such as a business term loan or business line of credit, through these types of lenders. Please note that bank loans are challenging to secure for nonprofits. In general, candidates must present a strong financial profile, since bank loans only go to the most qualified candidates.

If you have a very strong credit history and your nonprofit is generating revenue, it’s worth applying for a loan through your bank. You will want to look for language in their materials that says that the bank or credit union lends to nonprofits. (You might have more luck with credit unions than large banks, which are often set up to serve a community or group specifically, and might be more friendly to nonprofits as a result.) Also, expect higher than normal interest rates—remember, it depends on how they evaluate your risk.

You’ll need to provide extensive documentation when applying—financial statements, revenue history, incorporation documentation, development plans, and more. It’s better to over-prepare than to under-prepare since having the right paperwork on hand will speed up your loan approval process.

Getting started: As we’ve mentioned, securing a loan for a nonprofit is challenging. To kickstart your research, the following guides break down the process and available options:

6. Corporate giving programs

What it is: Collecting contributions, either monetary donations or physical gifts or time spent volunteering, from local businesses and large corporations.

While corporate giving programs may not secure the bulk of capital that a grant or loan might, every amount helps. If you’re a nonprofit with a worthy cause, you can appeal to local small businesses and corporations who want to give back to their community.

Contributions in corporate giving programs can vary:

  • Cash donations

  • Physical gifts (e.g., free tickets if the small business is an entertainment venue)

  • Sponsorships for fundraising events

If you take the time, you might be surprised to see how many local businesses are willing to support your nonprofit. In fact, socially responsible companies, like The Walt Disney Company, partner with organizations like The Make a Wish Foundation to create positive change in the world.

Getting started: View the websites of local businesses and big corporations to see if they offer any charity or nonprofit organizations. Also, consider calling local businesses and pitch your nonprofit cause to their marketing or PR team.

7. Business credit card

What it is: Draw against a line of credit that will be repaid over time—ideal for daily and fixed expenses.

You might not think of a business credit card as a loan, but it can be. After all, you’re drawing against a credit line that you need to pay back later. With some research, you can find business credit cards with low interest rates, which is beneficial if you cannot pay your bills on time.

There is also the option of applying for a 0% introductory APR business credit card. These cards are different than other business credit cards because they offer a fixed period during which you won’t have to pay interest on the balance you carry. These fixed periods are relatively long, often up to a year, which will enable you to generate the revenue to pay off the balance and create a payment plan to do so.

It’s worth noting that paying off your 0% intro APR credit card by the end of the introductory period is crucial for minding your organization’s money. After the introductory period ends, a variable interest rate will set in based on your creditworthiness and the market Prime Rate.

Even with this in mind, many nonprofits and for-profits alike rely on business credit cards to help them build and grow their businesses.

Getting started: The best credit cards for nonprofit organizations are often the same as for other small businesses. Consider the options and perks including cashback, sign-up bonuses, and low APRs.

8. Crowdfunding sites

What it is: Fundraise small amounts of capital from numerous people using crowdfunding sites like GoFundMe.

Crowdfunding has now an increasingly popular way for nonprofits to raise capital. Instead of securing a large lump sum from a loan or grant, crowdfunding focuses on collecting small donations from a large number of people.

There are many crowdfunding sites—Kickstarter, Indiegogo, GoFundMe—which do you choose? Typically, GoFundMe resonates with many nonprofits and is ideal at fundraising for worthwhile causes. Many nonprofits and individuals have created GoFundMe campaigns to raise relief funds for natural disasters, fund diversity programs for schools, and even pay for pets’ medical procedures.

If you’re willing to devote resources to marketing your campaign, crowdfunding can be a viable funding source for your nonprofit.

Getting started: Check out our GoFundMe guide to learn how to start a campaign and start raising funds for your nonprofit organization.

The bottom line

We won’t sugarcoat it: Finding nonprofit business loans isn’t the easiest process. Because of your unique circumstances surrounding the way you are required to reinvest your profits back into your organization and your potentially low revenue or tight cash flow, you might be ruled out as a candidate for many business loans.

However, that doesn’t mean you’re left without options. It’s important to do the legwork to look into grants, funds from other nonprofits and community development organizations, corporate giving programs, and more. While it may be more time-consuming than a for-profit business’s loan search, it’ll be worth it to get the funding for which your nonprofit is looking.

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Banking

How to Get a Loan to Buy a Business

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Not everyone wants to take on the challenge of building a business from the ground up. An attractive alternative can be to step into a business that’s already up and running by purchasing it from the current owner. Some advantages of buying a business may include easier financing, an established customer base and an existing cash flow.

Buying a business is different from buying a franchise. Franchises have a set business model that’s proven to work. However, when you buy an independently operated business, it’s important to show the lender that you, your previous business experience and the business you want to buy are a winning combination.

What lenders look at when you want to buy a business

Because lenders can view the performance record of an existing business, it’s typically easier to get a loan to purchase an existing business compared with startup funding. However, your personal credit history, experience and details about the acquisition business still matter.

Your personal credit and experience

Through credit reports and credit scores, lenders are able to assess how you’ve managed debt in the past and potentially gain insights into how you will handle it in the future. Your education and experience will also be evaluated.

Solid credit history: Lenders look to see if you have a history of paying your debts. Foreclosures, bankruptcies, repossessions, charge-offs and other situations where you haven’t paid off the full amount will be noted.

Business experience: Having worked in the same industry as the business you want to purchase is helpful. Related education can also be viewed as a positive.

Other businesses you’ve owned

Having a track record of operating other successful businesses can have a positive influence on lenders when it comes to buying a new operation.

Record of generating revenue: Business financial statements can help a lender document that your current or past businesses were well-managed and turned a profit.

Positive credit record: Lenders review business credit scores and reports to verify creditworthiness and to identify liens, foreclosures, bankruptcies and late payments associated with your other businesses.

The business you want to buy

Just because a business is operating doesn’t mean it’s a good investment. Lenders will ask for documentation, often provided by the current owner, to assess the health of the operation.

Value of the business: Like you, your lender will want to ensure that you’re buying a business that has value and that you’re paying a fair price.

Past-due debts: Lenders will be interested in the business’s past-due debts, which may include liens, various types of taxes, utility bills and collection accounts.

Documentation

Most lenders will let you know what they want included in the loan application package, but there are some personal documents that are typically requested, as well as ones related to the business you want to purchase.

Personal documents

The following documents are used to evaluate your personal finances, business history and plans for operating the business after its purchase:

  • Personal tax returns.

  • Personal bank statements.

  • Financial statements for any of your other businesses.

  • Letter of intent.

Business documents

Documents from the current business owner will also be evaluated. Some common ones requested by lenders include:

  • Business tax returns.

  • Profit and loss, or P&L, statements.

  • Business balance sheet.

  • Proposed bill of sale.

  • Asking price for inventory, machinery, equipment, furniture and other items included in the sale.

Where to get a loan to buy a business

Compared with finding a loan to start a business, getting funding to buy an existing business may be easier. Here are three popular funding options to check into for a business loan:

Bank loans

Banks generally offer the lowest interest rates and best terms for business loans. To qualify for this type of loan, you’ll typically need a strong credit history, plus the existing business will need to be in operation for a certain minimum of years and generate a minimum annual revenue amount set by the lender.

SBA loans

If borrowers don’t qualify for a traditional bank loan, then SBA loans, ones partially guaranteed by the Small Business Administration, may be the next option to explore. Because there is less risk to the lender, these loans can be easier to qualify for. Banks and credit unions frequently offer SBA loans in addition to traditional bank loans.

Online business loans

Another option to consider is online business loans. Online business loans may offer more flexibility when it comes to qualification, compared with bank and SBA loans. Minimum credit score requirements can be as low as 600, and in a few cases lower. Generally, interest rates are higher than what’s available with a traditional bank loan.

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Accounts Receivable Financing: Best Options, How It Works

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Accounts receivable financing, also known as invoice financing, allows businesses to borrow capital against the value of their accounts receivable — in other words, their unpaid invoices. A lender advances a portion of the business’s outstanding invoices, in the form of a loan or line of credit, and the invoices serve as collateral on the financing.

Accounts receivable, or AR, financing can be a good option if you need funding fast for situations such as covering cash flow gaps or paying for short-term expenses. Because AR financing is self-securing, it can also be a good choice if you can’t qualify for other small-business loans.

Here’s what you need to know about how accounts receivable financing works and some of the best options for small businesses.

How Much Do You Need?

with Fundera by NerdWallet

How does accounts receivable financing work?

With accounts receivable financing, a lender advances you a percentage of the value of your receivables, potentially as much as 90%. When a customer pays their invoice, you receive the remaining percentage, minus the lender’s fees.

Accounts receivable financing fees are typically charged as a flat percentage of the invoice value, and generally range from 1% to 5%. The amount you pay in fees is based on how long it takes your customer to pay their invoice.

Here’s a breakdown of how the process works:

  1. You apply for and receive financing. Say you decide to finance a $50,000 invoice with 60-day repayment terms. You apply for accounts receivable financing and the lender approves you for an advance of 80% ($40,000).

  2. You use the funds and the lender charges fees. After receiving the financing, you use it to pay for business expenses. During this time, the lender charges a 3% fee for each week it takes your customer to pay the invoice.

  3. You collect payment from your customer. Your customer pays their invoice after three weeks. You owe the lender a $4,500 fee: 3% of the total invoice amount of $50,000 ($1,500) for each week.

  4. You repay the lender. Now that your customer has paid you, you’ll keep $5,500 and repay the lender the original advance amount, plus fees, $44,500. You paid a total of $4,500 in fees, which calculates to an approximate annual percentage rate of 65.7%.

Because accounts receivable financing companies don’t charge traditional interest, it’s important to calculate your fees into an APR to understand the true cost of borrowing. APRs on accounts receivable financing can reach as high as 79%.

Accounts receivable financing vs. factoring

Accounts receivable financing is often confused with accounts receivable factoring, which is also referred to as invoice factoring. Although AR financing and factoring are similar, there are differences.

With invoice factoring, you sell your outstanding receivables to a factoring company at a discount. The factoring company pays you a percentage of the invoice’s value, then collects payment directly from your customer. When your customer pays, the factoring company gives you the rest of the money you’re owed, minus its fees.

With accounts receivable financing, on the other hand, your invoices serve as collateral on your financing. You retain control of your receivables at all times and collect repayment from your customers. After your customer has paid their invoice, you repay what you borrowed from the lender, plus the agreed-upon fees.

Invoice factoring can be a good financing option if you don’t mind giving up control of your invoices and you can trust a factoring company to professionally collect customer payments. If you’d rather maintain control of your invoices and work directly with your customers, AR financing is likely a better option.

Best accounts receivable financing options

Accounts receivable financing is usually offered by online lenders and fintech companies, many of which specialize in this type of business funding. Certain banks offer AR financing as well.

If you’re looking for a place to start your search, here are a few of the best accounts receivable financing companies to consider.

altLINE

A division of the Southern Bank Company, altLINE is a lender that specializes in AR financing. AltLINE offers both accounts receivable financing and invoice factoring, working with small businesses in a variety of industries, including startups and those that can’t qualify for traditional loans.

AltLINE offers advances of up to 90% of the value of your invoices with fees starting at 0.50%. To get a free quote from altLINE, call a representative or fill out a brief application on the lender’s website. If you apply online, a representative will contact you within 24 hours.

AltLINE’s website also contains a range of articles for small-business owners, covering AR and invoice financing, payroll funding, cash flow management and more. AltLINE is accredited by the Better Business Bureau and is rated 4.7 out of 5 stars on Trustpilot.

1st Commercial Credit

1st Commercial Credit offers accounts receivable financing in addition to other forms of asset-based lending, such as invoice factoring, equipment financing and purchase order financing. The company works with small and medium-sized businesses, including startups and businesses with bad credit.

With 1st Commercial Credit, you can finance $10,000 to $10 million in receivables with fees ranging from 0.69% to 1.59%. You can start the application process by calling a sales representative or filling out a free quote form on the company’s website. After your application is approved, it typically takes three to five business days to set up your account, then you can receive funds within 24 hours.

1st Commercial Credit is accredited by the Better Business Bureau and has an A+ rating.

Porter Capital

Porter Capital is an alternative lender specializing in invoice factoring and accounts receivable financing. The company also has a special division, Porter Freight Funding, which is dedicated to working with businesses in the transportation industry.

With Porter Capital, you can receive an advance of 70% to 90% of your receivables and work with an account manager to customize a financing agreement that’s unique to your business. Porter funds startups and established businesses, offering fees as low as 0.75% monthly.

You can provide basic information about your business to get a free quote and receive funding in as little as 24 hours. Although Porter Capital isn’t accredited by the Better Business Bureau, it does have an A+ rating; the company also has 3.7 out of 5 stars on Trustpilot.

Additional options

Although AR financing and factoring are distinct, many companies blur the lines between the two. As you compare options, make sure you understand the type of financing a lender offers.

If you decide that invoice factoring may be a fit for your business, you might consider companies like FundThrough, Triumph Business Capital or RTS Financial.

Find and compare small-business loans

If accounts receivable financing isn’t right for you, check out NerdWallet’s list of the best small-business loans for business owners.

Our recommendations are based on the market scope and track record of lenders, the needs of business owners, and an analysis of rates and other factors, so you can make the right financing decision.

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Finance & Accounting

SBA Loan Collateral vs. Guarantee: What’s the Difference?

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Personal guarantees and collateral are both ways of promising a lender that you’ll make good on your debt. You may have to offer both to get an SBA loan.

Collateral ties a loan to a specific asset, like your business’s inventory or your home, which the lender can seize if your business can’t repay the loan. A personal guarantee promises the lender that you will repay the debt using your personal assets, but may not specify how.

In general, SBA lenders require anyone who owns 20% or more of a business to provide a personal guarantee. SBA loans larger than $25,000 usually require collateral, too.

Do SBA loans require a personal guarantee?

SBA loans usually require unlimited personal guarantees from anyone who owns more than 20% of a business. Lenders may ask for limited or unlimited personal guarantees from other business owners, too.

Unlimited personal guarantee: This is a promise that the guarantor (the business owner) will pay back the loan in full if the business is unable to. The lender doesn’t have to seize collateral or seek payment from any other source before going straight to the loan applicant for loan repayment.

Limited personal guarantee: If you own less than 20% of a business, you may have the option to sign a limited personal guarantee instead. The limited personal guarantee caps the amount you’ll have to pay the lender, either as a dollar limit or a percentage of the debt.

Limited personal guarantees can be secured by collateral, which means the lender will seize those assets when they recoup payment instead of asking you to pay back a certain dollar amount.

Who has to personally guarantee an SBA loan?

The SBA requires personal guarantees from:

  • Individuals who own more than 20% of a business.

  • Spouses who own 5% more of the business, if their combined ownership interest is 20% or more.

  • Trusts, if the trust owns 20% or more of the business.

  • Trustors, if a revocable trust owns 20% or more of the business.

SBA lenders may require additional personal guarantees.

Do SBA loans require collateral?

For SBA 7(a) loans of between $25,000 and $350,000, SBA lenders have to follow collateral policies that are similar to the procedures they’ve established for non-SBA loans. Banks and credit unions are usually the intermediary lenders for SBA 7(a) loans.

If you use an SBA loan to finance specific assets, like an equipment purchase, the lender will take a lien on those assets as collateral. The lender may also use your business’s other fixed assets as collateral, and you may have to offer personal assets, too.

For SBA 7(a) loans larger than $350,000, SBA lenders need collateral worth as much as the loan. The lender will start with your business assets. If they need more collateral, the SBA requires them to turn to the real estate you own personally, as long as you have at least 25% equity in the property.

Live Oak Bank is the largest SBA 7(a) lender in the U.S. by volume. Its loans may require collateral in the form of:

  • Personal residences.

  • Retirement accounts.

  • Commercial real estate.

  • Equipment.

  • Commercial vehicles.

  • Accounts receivable.

  • Inventory.

What if I can’t provide collateral or a personal guarantee?

If you’re seeking any type of SBA loan, there’s a good chance you’ll have to provide both collateral and a personal guarantee. Even SBA microloans usually require collateral and a personal guarantee. Without them, you’ll have trouble getting an SBA loan.

Some online lenders offer unsecured business loans, which don’t require collateral. But you may still have to sign a personal guarantee.

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