How Nonprofits Can Use Loans to Expand Their Mission

Nonprofit organisations play an integral role in helping communities while some have a global presence as well. NGOs cover a wide range of niches like childcare, support for the elderly, crisis relief, animal welfare and various others. While most NGOs operate on donations, some are also backed by renowned trusts. Global entities like the Red Cross and UNICEF are well known, and numerous smaller NGOs operate in the UK as well.  

There were about 168,850 registered charities in England and Wales in 2023. Most charities get their money from gifts and raising funds in normal ways. Loans can help them keep going when money is tight.

We will elucidate the potential of how loans can help nonprofits grow, expand operations and maximise impact. 

Understanding Nonprofit Loans 

In the UK, some charities are funded by central or local governments, while others depend on donations or grants from community foundations or trusts. While there is no law that prevents NGOs from seeking funding via loans, it is generally difficult to do so. 

NGOs don’t make profits, so they often find it hard to pay back loans. Getting money from banks can be tough, and they usually need to offer something as backup or pay high interest rates because banks see them as risky.

Charities can get loans from banks, credit unions, special community lenders (CDFIs), or other nonprofit groups that give loans. They usually get better interest rates and easier ways to pay back the money, and it’s not as hard to qualify. They can use these loans to buy buildings, start new projects, or just keep running day to day.

1. Expanding Program Offerings 

Nonprofits can use loans to either fund new initiatives or strengthen existing programmes. For example, a nonprofit that looks after impoverished children could use funds to either renovate an existing children’s home, purchase new real estate to build a school for them or use the funds to hire additional staff and materials. Funds can help nonprofits reach out to more people, enhance community impact or compensate for operational costs.  A structured nonprofit loan can provide capital to create or implement initiatives which could later become revenue sources that would facilitate loan repayment. 

2. Purchasing Property or Equipment 

Acquiring property is one of the biggest challenges for a nonprofit, considering the significant capital required. Most nonprofits take up rented spaces to better manage their cash reserves. Operating while on rent is a significant recurring expense which can cripple growth potential. A loan can help a nonprofit purchase its own property or facilities. It makes more sense to pay off a mortgage rather than burn funds on high rentals. The said property can be utilised as an office space, community area or for specific initiatives.  

In a similar manner, securing a loan for equipment purchases can also be helpful. For example, a food bank could invest in multiple refrigerators to enhance food storage. Not only would this help preserve food for longer, but it would also improve food delivery. 

3. Enhance Cash Flow 

An unreliable cash flow is the most common challenge faced by a nonprofit. Grants can take time to come through, and donations can be delayed. A loan can help ease the cash flow situation and bridge the gaps. Nonprofits can use these funds to bolster cash flow or as may be required. 

For example, a nonprofit that educates children may find it difficult to cover operational expenses. Receiving pending tuition fees can be delayed or stalled. A loan can help alleviate such a cash crunch. It would ensure that the nonprofit is able to function without disruption.  

4. Catalysing Expansion and Capacity 

Growth and expansion helps a nonprofit stay strong for many years. Loans can help them grow by letting them take on more staff, use better computer systems, or improve their buildings.

For example, a mental health charity could use a loan to hire more therapists or buy new tools for their clinic. This would let them help more people and give better care to those who need it.

5. Financial Stability 

Loans can help nonprofits build financial stability. The general perception is that loans are used for expenses, operational costs, or rent payments. The truth is that loans can be used to invest in growth opportunities rather than just cover recurring costs.  It would also reduce the dependence on donations and grants. 

For example, a nonprofit that provides computer skills training could take a loan to expand its workspace and add more computers. This increased capacity would mean additional programme fees as the nonprofit can now service more people. This approach would result in higher revenue, which can be utilised to repay the loan and enhance the capacity and functionality of the nonprofit. 

6.  Emergency Funds 

Unexpected eventualities can strike when you least expect it. Natural calamities, political unrest or public health emergencies could bring about a sudden halt in nonprofit funding. 

A loan can provide nonprofits with the flexibility to respond to these emergencies effectively. A loan could help alleviate the situation and help nonprofits deal with emergency scenarios.  

For example, a nonprofit can respond to an emergency situation by bolstering services, shifting base to a safer location or making other adjustments amidst a crisis. A loan would equip a nonprofit with the necessary funds that would enable it to respond to difficult situations.  

7. Monitoring Impact and Adjusting Strategies 

While loans can be highly useful if utilised with the right strategy, nonprofits need to monitor the situation closely at all times. Once the loan has been received, the nonprofit would need to track impact, implementation and outcomes closely. This could involve monitoring existing programmes or new initiatives where the loan amount has been utilised. Keeping a close eye on the borrowed funds and understanding how well its working is crucial. It would also allow the nonprofit to make changes to its plan to ensure that goals are met. 

Conclusion 

If utilised correctly or with a nuanced business model, loans can be an excellent tool to fuel growth, expansion and sustainability for nonprofits. Loans do come with certain risks, but they can be powerful agents of growth if harnessed correctly by nonprofits. It’s not about what you have but how you use it that matters. The same can be said for loans taken by nonprofits. The right approach and growth strategy can yield stellar results when borrowed funds are allocated sensibly and in accordance with a plan. 
While we don’t provide loans to nonprofit organisations, we do offer tailored solutions for UK SMEs. Contact us to learn more!