It’s a challenging process to find a lender for your nonprofit. Now, that the Payroll Protection Program and Disaster Relief Loan Program are no longer funding, there are still some loan options for your organization to consider. Read on to learn more about commercial banks, alternative lenders and board member loans.
Nonprofit Business Loans and Lines of Credit from a Bank
A bank like Wells Fargo, Bank of America and other smaller local bank are usually the first place many businesses and nonprofits turn too when they are looking to get a loan or line of credit. However, what most people do not understand is that banks have strict lending standards because they are funded by bank deposits and the Central Bank (Government).
However, there are three key things a bank will look for when providing any type of loans regardless if it is for a person, business, or nonprofit.
Banks do not loan money unless there is collateral backing for the loan in the form of sellable assets in case of a default. This ensures that in the event of a loan default, the bank can recoup some, if not all the money that was lent. If your nonprofit wants to get a loan or line of credit, the bank will require some form of business or personal collateral.
All banks require the person(s) that signs the loan to accept personal responsibility for paying the loan back if the nonprofit defaults, closes, or declares bankruptcy.
Commercial banks require the signer(s) of the loan to be creditworthy. Creditworthiness is typically based on someone’s personal credit score. In general, the signer(s) will need to have a credit score of 680 or higher.
Alternative lenders to nonprofits are companies that provide loans or lines of credit using private investors that are not government funded.
Because of the nonprofit organizations growing demands for loans and lines of credit, more alternative lenders now are offering lines of credit that do not require collateral or personal guarantees. Financing Solutions has been providing lines of credit to nonprofits that have at least $200,000 per year in yearly revenue since 2012.
There are advantages to utilizing a line of credit from an alternative lender. They are much easier to set up, and based on its usage, are significantly less expensive than a bank.
Most nonprofits use their line of credit for emergencies situations such as making payroll or meeting expense obligations. Nonprofits tend to use the credit line for a short period and pay it back quickly. The line of credit is often used wisely and strategically.
Loans from Board Member or Donors
Getting a loan from a board member or donor might seem like an inexpensive way to address an emergency but there are IRS and state laws that your organization must adhere to. It is good idea to have your CPA or legal counsel involved in the process.
Conflict of Interest
If a member of your nonprofit provides a loan to the nonprofit, there should be no evidence of a conflict of interest. Because the IRS does not always give clarity to all the potential issues, it is your organizations responsibility to be compliant.
Related Board Members
If your board consist of family, friends or even marriage connections, it is in your organizations best interest, to have all discussions documented with a separate group of advisors appointed to approve the transaction.
No Private Benefits
It is important that the person loaning the money does not benefit financially or obtain favors.
The board should have a formal meeting to discuss and approve the loan. The person who will potentially provide the loan, should not attend this board meeting.
Many of the nonprofits that become clients of Financing Solutions, express concern pertaining to accepting a loan from a board member or donor as it relates to IRS rules. Most nonprofit organizations, desire to have a line of credit in place, so that they have a readily available back up plan to meet all unforeseen financial challenges.
A nonprofit organization is no different than a business and therefore should have the same finance tools. The people you serve are your clients and they depend on you. If you know that reimbursements or donations will be coming in, a loan or line of credit can be a good tool to help even out cash flow that can make life a little bit easier.
Stephen Halasnik is Managing Partner at Financing Solutions. Financing Solutions provides a nonprofit line of credit to nonprofits who have revenue of at least $200,000 per year.