If you operate a nonprofit, it's very likely that you understand the difficult landscape when it comes to acquiring funding. It’s not as easy as applying for capital if the business was an LLC, C Corp or S Corp. But why is it so difficult to raise money for your nonprofit? And what are the options that a nonprofit can take to acquire funding?
We will take a look at all these questions, as well as explore several alternatives that a nonprofit can take when it comes to raising capital through a combination of donations, loans and grants.
Why Is Getting a Loan for a Nonprofit So Difficult?
Unlike a for-profit business that can raise money through investors — including venture capitalists and angel investors — and even apply for startup loans and other forms of funding from banks, getting money for your nonprofit proves to be more challenging.
First off, the idea of financing a nonprofit may not be too appealing to investors. After all, you’re a non-profit. The name for your type of business basically promises no return — or profit — on investment. So there’s no real financial reward for an investor looking for a return.
The same may apply when it comes to bank loans. When it comes to working with nonprofits, most banks have stringent requirements that can present a number of hurdles when it comes to acquiring funding. One reason is that banks may never get back the money from the loan. Many nonprofits, especially startups, lack three important requirements:
- Collateral
- Consistent cash flow
- Credit
Without these items, banks may not view nonprofits as good candidates for financing. To improve your chances of getting a loan, make sure that you have the following documents:
- Incorporation documents
- Income/revenue history
- Financial statements
- Bank statements
- Budget and cash-flow projections
- Collateral (property, equipment, etc.)
- Business plan or mission statement
- Tax returns
Where and How Can I Apply for a Nonprofit Loan?
If seeking funding from investors and banks — often considered the go-to sources of funding for businesses — does not work out for your nonprofit, don't despair! There are other options available. In fact, many nonprofits get their funding either through government grants and loans from the local, state and federal level, as well as funding from foundations and other institutions.
To make things easier, we have organized several key sources for raising capital for your nonprofit.
Seven Funding Options for Nonprofits
There are an estimated 1.5 million nonprofits in the United States, all looking to fund their charitable organizations, social advocacy groups or even trade and professional organizations. For many of these nonprofits, they may consider one or more of the funding options listed below.
1. SBA Grants and Loans
One of the most popular sources nonprofits use for grants and loans is the U.S. Small Business Administration, more commonly referred to simply as SBA. This government agency is dedicated to helping underprivileged communities and has a number of programs and loans with opportunities for funding.
To get started, go to the SBA site where you can review funding programs and loans for your nonprofit. In addition, you can also find out how to apply for microloans and where you can apply within your state by browsing through a list of lenders.
The SBA has awarded billions of dollars in grants and loans and offers a number of services that can support the needs of your nonprofit, including a business guide and learning platform.
2. Community Development Financial Institutions (CDFIs)
CDFIs are established to help communities through financial assistance programs and social services. Most of these loan amounts are small and considered microloans of $50,000 or less, but qualifying for financing is easier than dealing with the hurdles presented by traditional banks.
Much like a nonprofit, CDFIs are financial institutions with a mission to assist people living in low-income or disadvantaged communities. A quick online search will help locate CDFIs in your area. You can also check with the SBA Small Business Development Centers in your city or state.
3. Corporate “Giving” Programs
Although this option would not be considered a stable source of funding, it is an alternative worth exploring. Many businesses, especially large corporations, have programs to support nonprofits. Many of the programs and grants offered by corporate “giving” programs are broad in scope and cover education, health, housing, economic development, hunger relief and more.
It’s worth taking a look and soliciting companies, whether they are mega corporations like Citigroup or The Home Depot or local community businesses.
4. Foundation Grants
Getting a grant from a foundation or through a fiscal sponsor can help inject cash into your nonprofit and support your programs and day-to-day operations. There are both public and private grants that help support nonprofits.
Public foundations can include community foundations, which rely on donor support. Private foundations are often started by wealthy families that may support specific charities or causes. Each will have its own grant application requirements, so it’s worth doing the research.
One example of a well-known foundation is the Bill and Melina Gates Foundation, which provides grants for health, global development and education. In 2020 alone, the Bill and Melinda Gates Foundation provided $5.8 billion to 2,136 organizations.
5. Nonprofit Loan Funds
This source of financing is often provided by organizations that may themselves be a nonprofit. Unlike the roadblocks a nonprofit may face with a bank, there is a clearer understanding when it comes to applying for a nonprofit loan. There may also be a shared mission when it comes to your nonprofit and the goals it’s trying to achieve. Loan terms are often lower than when dealing with a bank.
To learn more about nonprofit loans, start with the Nonprofit Finance Fund and the National Council of Nonprofits.
6. Crowdfunding
Fundraising can prove to be a great source for raising capital for you nonprofit. Sites like GoFundMe and Kickstarter are just two examples of online platforms that help raise small amounts of money from large pools of people.
Ultimately, this support from people looking to fund worthwhile causes can result in a large source of funding from individuals that believe in what your nonprofit is trying to achieve. Crowdfunding as a capital-raising option has grown in popularity due to social media and the ease of using these online fundraising platforms.
7. Banks and Credit Unions
Although we’ve touched upon the strict requirements when it comes to applying for a loan from a bank, this doesn’t mean that you should avoid this option. This is especially true if your nonprofit has a track record that includes a revenue history, collateral and strong credit. A strong financial profile will make acquiring a bank loan easier. And don't forget to organize all of your supporting documents and financial records before you apply for your loan.
Operating a nonprofit is just like running any business. You’ll have bills, rent and even employees to pay. If you need assistance with your accounting and bookkeeping, Incfile can help.
Peter Mavrikis
Peter Mavrikis is an author and editor with over 25 years of experience in publishing. He has worked as the Editorial Director for Barron’s Educational Series, as well as Kaplan Test Prep, where he ran the test prep, foreign language, and study guide divisions. Peter has also written several books on history, exploration, science, and technology.
