Business owners with a mission-based cause often become profitable later than typical commercial projects. For this reason, community-oriented businesses may find it challenging to secure loans and business financing during their early growth stages.
Thankfully, not-for-profit lenders exist to serve businesses that seek to advance the public interest. Issuing nonprofit loans to small businesses, nonprofit lenders offer a service to the community by providing important social enterprises with capital when they’re denied by for-profit lenders.
If you’re interested in applying for a nonprofit loan, you probably realize how difficult it can be to get a community-focused small business off the ground. That’s why we put together this short guide to the benefits of nonprofit microlending, and how to get approved for a microfinance loan without any headaches or rejections.
Microlending: Everything You Need to Know
Your standard bank or credit union is naturally risk-averse. In other words, they’re interested in issuing loans and other forms of credit at the lowest possible risk to the lender. Generally, the higher the value of the loan, the riskier the loan. Consequently, high-value loans tend to be the most exclusive.
This is where the magic of nonprofit microlending comes into play. Microlenders offer low-risk, low-value loans to small businesses and community organizations that need a modest supply of capital to bring a project to life or to pay outstanding balances. Falling short of the SBA’s average business loan value of $370,000, the standard SBA microloan is only $13,000.
Micro business loans provide a low-interest alternative to conventional for-profit lending. Business owners who lack business credit history, collateral, or cash reserves can often be approved for a small microloan of $50 thousand or less. Since microloans are often issued at zero or low interest, they have a remarkably high repayment rate between 95 and 98 percent.
Better yet, most nonprofit lenders also offer a host of other low-cost or pro bono services for small business owners. These services include:
- Strategic advising
- Leadership workshops
- Skills development
- Networking socials
Why Should You Choose a Nonprofit Lender?
Not every business is well-suited for nonprofit lending. The truth is, some entrepreneurs may benefit more from seeking out traditional business financing options. Nonprofit small business loans are best suited for business owners who run community-focused social enterprises that can’t secure working capital by other means.
For instance, entrepreneurs that operate small upstart restaurants staffed by at-risk youth, or a community worker who owns a soup kitchen, can take advantage of nonprofit loans to get the financing they need to order a 100-gallon mixing vat.
Nonprofit lenders are designed to benefit business owners who only need a small sum of money to reach their short or medium-term needs. In other words, nonprofit business loans should be applied for by business owners who need $50 thousand or less to get out of a cash crunch or to cover short-term expenses when cash flows are delayed.
The Benefits of Working With a Nonprofit Lender
Nonprofit lenders are typically mission-based organizations that are mandated to help other community-based enterprises reach their goals through financial assistance. They offer lower interest rates than standard banks and credit unions and are far more lenient when it comes to approving businesses without a positive credit history.
Unlike some banks and for-profit financial institutions, nonprofit lenders thrive on building lasting relationships with business owners. Since their customers often have little or no credit history, it is important that business owners and nonprofit lenders establish trust and rapport through interpersonal connections.
If you’re thinking of applying for a nonprofit business loan, be aware that there are limited resources available at nonprofit institutions. Nonprofit lenders are not banks and, naturally, they don’t have the same deep pockets that banks have. Consequently, you may not receive a microloan valued at the amount you expect.
How Do They Work?
There are several kinds of nonprofit lenders that each have a unique business model. However, the two most common nonprofit lenders are crowdfunding companies and Community Development Financial Institutions (CDFIs) that focus on low-income applicants. Below, we’ll provide a basic overview of these two lenders.
Through the collective power of crowdfunding, nonprofit loans for small business owners can be granted at rock-bottom interest rates. In recent years, technology has made it easier to bring business owners closer to their customers. However, the same is true of lenders and loan recipients.
Online crowdfunding, led by platforms such as Indiegogo and GoFundMe, have launched a revolution around peer-to-peer giving. However, peer-to-peer lending (P2P lending) has also taken off in recent years as banks and traditional lenders have tightened their belts. In the United Kingdom in 2015 alone, 2.8 billion pounds were lent through P2P lending institutions.
Crowdfunding lenders raise finances online through a pool of interested donors, investors, and members of the community who share an interest in supporting community-based businesses. Best of all, crowdfunding sources offer no-strings-attached loans that do not require the sale of equity in the business.
With the sponsorship of the US Department of the Treasury, CDFIs stimulate economic growth by supporting small business and public interest initiatives where they’re needed most. The Treasury maintains a CDFI Fund that provides mission-driven financial institutions with resources that are lent to small business owners.
Those interested in applying for a CDFI microloan should apply directly to their local CDFI lender and not to the Treasury. These institutions can provide credit to in-need businesses as well as financial counseling and other low-cost services.
Forget about FICO scores, balance sheets, and other conventional indicators of a business’s creditworthiness. When it comes to securing nonprofit loans, your business is more likely to be approved based upon its social standing in the community rather than formal credit metrics.
In other words, nonprofit lenders evaluate the extent to which the community stands to gain from the loan rather than how much they, as a lender, can benefit financially. In industry parlance, “social underwriting” governs whether a nonprofit lender will grant a loan.
To bolster your “creditworthiness” during the social underwriting process, it is often necessary for the applicant to cite several—sometimes up to 25—professional contacts in the community that can vouch for your business. If you are endorsed by established community members, your application is more likely to be approved.
Social underwriting is based on an age-old philosophy that holds that a business owner’s reputation should dictate their creditworthiness. In other words, social underwriting uses a qualitative reputation assessment instead of a quantitative one.
The Best Nonprofit Lending Institutions
Nonprofit lenders can be difficult to find—especially ones with a solid reputation of true community-based lending to back them. However, a few standout organizations have a wide enough reach to serve most American small businesses. To help you find some of the best nonprofit lenders on the market, we’ve listed some of our favorites below.
Accion is a global nonprofit headquartered in Cambridge, Massachusetts. Founded in 1961, Accion provides individuals and small business with the financial resources they need to empower themselves or their cause. A community development initiative and CDFI, Accion is a leader in the microfinance and impact investing industries dedicated to maximizing financial returns and social impact.
The SCORE Foundation is a philanthropic organization that serves small businesses in the United States with financial and strategic resources. Powered by a community of 11,000 volunteers, SCORE provides confidential financial services to social enterprises and businesses that need short-term microloans.
Association for Enterprise Opportunity (AEO)
The Association for Enterprise Opportunity (AEO) seeks to bridge the multi-billion-dollar credit gap that exists among small and mid-sized enterprises in America. The AEO provides financial support, counseling, and advocacy for small US-based Main Street businesses. They manage the TILT Forward Network of mission-based lenders that provide microloan assistance to small businesses and minority-owned businesses.
Making the Right Call
Once considered a lender of last resort, nonprofit lending institutions are quickly becoming an attractive alternative to commercial banks and credit unions. If you run a community-focused or mission-based small business, applying for nonprofit loans might offer you the best rates on a business loan as well as attractive term lengths and flexible conditions.
Business owners that don’t need loans valuing in the six-figures should consider nonprofit lending as a viable alternative to standard bank loans. By taking advantage of their competitive rates and progressive social underwriting process, you can take your social enterprise to new heights, even with less-than-perfect credit.