How to Secure Financing for Nonprofits
Nonprofit organizations are driven by a commitment to a specific social cause or shared vision and include different organizations like public arts organizations, charities, and religious institutions. Unlike for-profit businesses, nonprofits reinvest surplus funds into their philanthropic goals rather than distributing them to stakeholders.
Achieving 501(c)(3) tax-exempt status, typically through filing IRS Form 1023, is crucial for nonprofits since it grants them exemption from federal income taxes and allows donors to claim tax deductions for their contributions.
Also, nonprofits may qualify for property tax exemptions. A significant advantage of operating as a nonprofit is a limited liability, shielding individuals from personal responsibility for organizational debts or liabilities.
With these benefits in mind, understanding how to secure nonprofit low cost financing becomes important for any nonprofit looking to fulfill its mission.
Where Can I Get Financing for Nonprofits?
Funding for your nonprofit can come from a variety of sources. You’ll find a few of the most common sources below.
Credit Union Loans
Credit unions are a great choice when it comes to financing for nonprofits because they’re focused on investing back into the local community. Like nonprofits, credit unions are not-for-profit and designed to serve their members, not shareholders or leadership.
Grants
Grants can be highly competitive, especially if they’re government-funded. Keep in mind that grants can take a long time to come through, so don’t choose this option if your organization is on a tight funding schedule. It’s also important to know that grants usually won’t provide as much money as loans.
You can find grants for your nonprofit through sources like the federal government, corporate and local foundations, and your board of directors.
Individual Donations
Some nonprofits use individual donations to fund their startup costs. Make sure you find a donor who fully supports your organization’s mission and goals. If you do use an individual donor, make them feel valued by allowing them to be involved in your nonprofit, possibly by having a voice in its operations by serving on your board of directors or through volunteering their time and expertise.
Institutional Donations
Like individual donors, institutions need to be sold on your organization’s mission and impact. Examples of institutions that donate to nonprofits include The Gates Foundation, the United Way, GE, Disney, Amazon, and Whole Foods.
Private Endowments
Private endowments are usually made up of gifts and bequests from donors. They typically require that the principal remain intact and is invested to create a source of income for the organization. Endowments are typically limited to the philanthropist’s area of interest.
What Can Nonprofit Funds Be Used For?
Your nonprofit can use its funding for a variety of purposes. Here are a few of the most common:
Cash Flow – Many nonprofits don’t have a steady stream of cash coming in, so they’ll replace it with loan or grant money.
Equipment and Supplies – You can use your funding to purchase new equipment or supplies for your nonprofit.
Real Estate – Most lenders will finance your nonprofit’s mortgage if you’re looking for a new space. You can also use your funding to redesign your current venue or make improvements.
Debt Consolidation – If you owe money to several creditors, you can use your financing to consolidate your organization’s debt. Only owing money to one lender means you’ll pay less interest in the long run.
Marketing for Growth – You can also use your funding to get the word out about your nonprofit through marketing efforts, which in turn can lead to more growth in awareness and contributions.
Restricted vs Unrestricted Funds
In nonprofit finance, you might hear funds classified as “restricted” or “unrestricted.” It’s important to know the difference between the two and learn the nonprofit laws so you don’t confuse them.
What are Restricted Funds?
Restricted funds are meant for one specific purpose and that’s it. For example, a patron can make a donation specifically for the construction of a new building project. When you receive a restricted donation you need to keep careful records of what the donation was used for.
Donations to organizations can come with restrictions, which dictate how the funds can be used. These restrictions can be temporary, typically tied to a specific project or timeframe. For instance, a donation might be restricted for the construction of a new building, with the restriction lifting once the project is completed.
Permanently restricted funds are designated for ongoing activities without a set end date. These funds might support ongoing programs or be invested in an endowment, where the generated interest provides a continual source of income for a specific purpose or general operations.
And, the restricted funds designation should be taken seriously. Donors can take legal action against a nonprofit if they believe it’s misusing restricted donations. The last thing your nonprofit wants is to be stuck in a legal battle.
What are Unrestricted Funds?
Unrestricted funds are donations or grants given to an organization without any specific conditions or limitations on their use. Many regular donations come through as unrestricted and most nonprofits prefer this nonprofit financing option. This flexibility is essential, as it allows the organization to assign resources according to its most urgent needs and strategic goals.
These funds often cover essential operational expenses, such as staff salaries, utilities, and administrative costs, ensuring the organization’s day-to-day functioning.
Also, unrestricted funds let organizations adapt to unexpected challenges, invest in new programs, and build long-term financial stability, allowing them to successfully pursue their mission.
What Do I Need to Apply for Nonprofit Financing?
Wondering how to secure funding for a nonprofit organization? You’ll need several important documents, but here are the most important:
Financial Statements – These give lenders a snapshot of your organization’s net worth, cash flow, spending, and assets. Bank statements are especially important because they show the lender how much your organization can afford in monthly payments.
Nonprofit Bylaws – These provide lenders with a closer look at your organization’s financial model to help them customize your funding.
Board Resolution – This gives the lender information on your nonprofit’s board of directors and some insight into the nonprofit’s financial history.
Tax-exempt Status: This is a letter from the IRS proving that you have nonprofit status. It usually includes your tax-exempt status number.
Tax Returns: By showing lenders your tax documents, including your IRS 990 tax return, you can prove that you’re a legitimate nonprofit.
Articles of Incorporation: These are the legal documents that officially establish your nonprofit.
Employer Identification Number (EIN): A nine-digit number assigned by the IRS to your nonprofit that you need to open a bank account or apply for grants.
Operating Budget: Including your budget for the current fiscal year
Year-end Financial Statement: Include a comparison of your actual budget figures to your projected budget for the year to show lenders that you’re a viable nonprofit that turns a profit.
These documents also help with financial transparency, as is required by law. It also helps nonprofits stay accountable to their donors and employees.
What Are the Potential Liabilities of Nonprofit Borrowing?
As you’ve seen there are several ways for nonprofits to get financing but there are some precautions to keep in mind. It’s important to understand that your collateral can be repossessed if you don’t make payments on your loan. In some cases, repayment plans can take a toll on your cash flow and create liquidity problems. Make sure you’re only borrowing the amount you need.
Finally, it’s crucial to understand the repayment terms, fees, and interest rates involved in your financing. Always read the fine print. And remember that while long-term loans carry lower monthly payments, they often cost you more over time due to accruing interest.
Working with the right financial partner can help you navigate the somewhat confusing world of nonprofit low cost financing. Diamond’s team can help answer any questions you have and help you get your paperwork in order to help you get he funds your nonprofit needs. Contact a Diamond representative to get started.