What You Need to Know About Nonprofit Loans and Borrowing

Should your nonprofit take out a loan? It’s a big question, and one that deserves careful thought. Maybe you need new equipment, want to expand your facility, or are recovering from an unexpected financial setback. While borrowing can provide quick access to funds, it also comes with risks that nonprofits must weigh carefully.

Why Borrowing Is Different for Nonprofits

For-profit businesses often borrow to grow because they have steady cash flow to repay debt. Nonprofits, on the other hand, face more uncertainty. That makes loans riskier for both the lender and the borrower. Before you apply, anticipate lender scrutiny and perform thorough due diligence.

Pros and Cons of Taking a Loan

Cons

• You must repay the loan—with interest.
• Nonprofit loan rates are often higher than business loans.
• Additional costs like appraisals, closing fees, and legal expenses add up.
• A significant down payment may be required.

Pros

• Once approved, you have guaranteed access to funds.
• Applying for a loan can be faster than organizing a major fundraising campaign or securing grants.

Common Loan Options for Nonprofits

Your financial needs will determine the best loan type. Here are three common options:

• Lines of Credit: Ideal for nonprofits with seasonal revenue fluctuations. A revolving credit line can help smooth out cash flow.
• Bridge Loans: Useful for short-term gaps caused by unexpected events—like a funding source drying up or an emergency expense. Typically lasts up to one year.
• Long-Term Loans: Best for major projects or purchases. If you’re running a capital campaign, a long-term loan can keep your project moving while fundraising continues.

Sometimes opportunities arise quickly—such as acquiring new office space or merging with a like-minded organization. In these cases, bridge or long-term loans can help you act fast.