3 Tips for Securing Working Capital with a Strategic Nonprofit Loan

Nonprofit organizations play a vital role in addressing society’s toughest challenges, but they are not immune to the financial realities of doing business. Just like a for-profit company, nonprofits need to pay expenses and strive to do better than just breakeven. The good news – according to the most recent Nonprofit Finance Fund survey, 76% of respondents broke even or better. For these nonprofits, enhancing working capital with a strategic nonprofit loan can give them an extra boost. In this entry, we will look at 3 tips for securing working capital with a nonprofit loan at friendly rates and terms.

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1. Work With Nonprofit Focused Lenders

Whether your operation is simply getting started or has been serving your community for years, many nonprofit organizations find it difficult to gain financial assistance from traditional banks. While bankers are often supportive, banks are regulated to box loan applications into squares and are not always accommodating to nonprofits. On the other hand, nonprofit focused lenders, such as Community Development Financial Institutions (CDFI) and some community banks, have stated missions to support their communities, giving them clear goals to help you succeed. In recent years, online lending has also played a role. LENDonate is a platform that helps nonprofits source loan capital and donations in a streamlined process, by connecting them with philanthropists and investors who are looking for investment opportunities that align with their own personal values. This type of impact investment has been trending, especially in 2020 when “tapped out” donors look for ways to provide additional support.

2. Budget Cashflow Carefully During Strategic Growth

There is a common concern among bankers: what if a nonprofit borrower defaults? The image of foreclosing on a school while parents protest outside sends chills up a banker’s spine. Unfortunately, this puts nonprofit loan applications under the microscope. When considering a strategic nonprofit loan, it is important to show your potential lender that you have a plan in place. This includes a specific allocation for the funds you are requesting and a clear source of repayment. The best financial projections show how a cash infusion will build up the long-term financial strength of a nonprofit. For example, if you plan to expand a program that is expected to reach self-sufficiency in 3 years, with a $1M annual revenue increase starting in year 4, that is a good pitch. However, if cash flow projections reveal that the project will drain cash reserves by year 2, then a strategic working capital loan could deliver just-in-time cash to carry the project expansion to the finish line. A cashflow roadmap matters!

3. Highlight Your Strengths: Telling Your Financial Story

Why would some banks reject your loan application while others welcome you with open arms?  There are multiple factors at play at any given time, and it might surprise you to know that sometimes the primary reason may have little to do with you specifically. For example, a big bank’s appetite for nonprofit loans could ebb and flow. In 2020 when interest rates are at an all-time low, banks may retreat in making certain types of loans. Therefore, you can’t afford to sell yourself short. Much like including a well-crafted cover letter with a resume, you need to highlight your organization’s strengths. A casual review by a busy underwriter may overlook an offsetting cost, not knowing that a new expense will replace the old. For example, erroneously double-counting certain expense projections can result in a loan being declined. Having a place to tell your financial and impact stories not only reduces the chance of getting lost in the shuffle but also garners attention from mission-aligned investors who are searching for you or for nonprofits doing that work.
Nonprofits play an increasingly critical role in society, and the sector accounts for 5.6% of US GDP. For this large and important a sector to have access to affordable capital to operate strategically is not only essential but also broad-reaching. When traditional bank loans leave a void, success stories like these showcase the importance of embracing nonprofit lenders and supporters in an innovative approach to collaboration. Money is just money until you make it strategic and use it for good.

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