How to Borrow Money for Your Nonprofit - dummies

How to Borrow Money for Your Nonprofit

By Stan Hutton, Frances Phillips

One route to managing cash shortfalls is to borrow the money you need to cover the bills for your nonprofit business. Your cash-flow statement can help you plan the size and duration of the loan you need. Here are some of your options if you need to borrow money:

  • Ask a board member for a loan. If the board member can help, you can probably secure the loan quickly, but borrowing from a board member is only appropriate to do if you act in accordance with your organization’s conflict-of-interest policies, and if the board member can provide the loan at market rates or below market rates.

    Make sure to sign a promissory note with the lender and record the board’s formal approval of accepting the loan in its meeting minutes.

  • Ask local foundations whether they know of a loan fund for nonprofit organizations. Some associations of grantmakers and government agencies offer such loans at low interest to their grantees that face cash-flow problems. Such a program is likely to be more sympathetic to your needs than a commercial lending institution may be.

  • Apply for a small-business loan at your bank. If your organization doesn’t have a credit history, getting a bank loan can be challenging. However, foundations sometimes make this process easier by guaranteeing these bank loans for nonprofits.

  • Check to see whether you qualify for a line of credit from your bank. A line of credit allows you to borrow up to a certain sum for a specified period of time. When the organization repays the borrowed amount, often it can’t borrow from its line of credit again for a designated period of time.

    Your organization may want to apply for a line of credit as a safety net, even if it doesn’t expect problems.

  • As a last resort, borrow the money from an organizational credit card. Do this only if you’re positive that you can repay the loan quickly and cover the interest.

Borrowing money requires time and preparation and usually costs your nonprofit in the form of interest payments. However, borrowing is better than damaging your nonprofit’s reputation or incurring severe penalties and interest charges — particularly on tax obligations.