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Non-profit (NPO) grants and loans are available to organizations who have filed an IRS legal status of 501 (C) (3) for tax-exempt benefits. This allows you access CDC’s or Certified Development Companies that are SBA certified as well as a number of other organizations that provide assistance to those individuals who are looking to establishing non-profit entities. As a result, you will quickly find that you have access to a number of financing sources and non-profit loans and grants when you starting up this type of organization.
When small businesses and their owners want start non-profit organizations, their two primary sources of financing their operations are grants and loans that are tailored to these types of organizations. The key difference between grants and loans is that the former does not have to be repaid whereas the latter does. Regardless, you may still find that non-profit loans are the better option.
Advantages of Grants
The primary benefit of any federal, state, or local grant is that they provide you with access to FREE money. You do not have to repay any non-profit grants. They are typically FREE money sources because they are paid for with other individual’s donations or tax monies. However, these funds can only be allocated to very specific non-profit programs. If you qualify and fall within that category, you will have access to these grants. Instead of competing against for-profit businesses, you will be competing against other organizations like yours in order to receive grant monies.
Disadvantages of Grants
The competition among non-profit organizations with similar goals is extremely intense and in order to be granted any FREE funding, you are going to have to show a committee what it is that separates you from these other entities. As a result, the grant-writing process can be very complex and will take a great deal of effort, resources, and time on your behalf. Interestingly enough, grant-writing is its own separate industry.
You may need to pay a professional grant writer a competitive salary in order to get the document written. Finally, you can only use the proceeds of the grant for what has been specified in your application. Unfortunately, there are a lot “strings” attached to non-profit grants. Additionally, you’ll quickly discover that the grants themselves along with their guidelines and requirements are not very flexible.
Advantages of Non-Profit Loans
Unlike non-profit grants, the primary that non-profit loans have over them is their flexibility and the fact that you will have more say in how the proceeds are used in order to meet your needs. Furthermore, there are a number of public loan programs that provide low interest loans to non-profit entities. If your organization is registered with the IRS as a 501 (c) (3) legal status, the interest on your loan may be tax deductible.
Another key advantage is that the application process involved with non-profit loans is much easier than what you would normally experience when applying for non-profit grants. Qualification for these types of loans is based on your business status along with your credit history. Finally, there are far more loans available than grants. So despite the fact that you will be competing against more companies for the funding you need, there are more opportunities for receiving the loan you need.
Disadvantages of Non-Profit Loans
As with any other type of loan, the primary disadvantage in the eyes of the borrower is that non-profit loans must be repaid while non-profit grants do not have to. Plus, you will still have to relinquish some flexibility in order to be eligible and qualify for a federal guarantee (such as SBA guaranteed loans) and lower interest rates.
In the case of non-profit grants and non-profit loans there is no happy medium or “best of both worlds” scenario. From a donor funding and non-profit standpoint, taking on debt can be extremely tricky. Finally, you will need to disclose that debt and explain why the funds may go towards other obligations instead of funneling them into your charitable efforts.
If you are expanding or starting a new business, you will not be able to receive any federal grants. Since your tax dollars are what funds a federal grant, the compliance and reporting measures are oftentimes very strict. This assures the government that the proceeds of federal grants will be spent properly and that they are never awarded indiscriminately.
Federal government grants are only available to non-commercial such as non-profit organizations. Additionally, they are also available to educational institutions in specific areas including education, healthcare and medicine, scientific research, and technology development. Federal grants are also available to local and state governments to assist them with economic development efforts.
Loans for small businesses are also available through non-profit organizations and other groups as well as local and state programs. As an example, some states provide grant monies to specific businesses and other development efforts including:
- child care centers that are expanding
- creating and developing energy-efficient technologies
- developing and launching tourism marketing campaigns
These grants are not entirely free as the recipient has to combine the grant funds with certain types of financing such as loans. Either that or the recipient will have to match the funds with their own money. Depending on the business and the grantor involved, the amount of federal grant money will vary from one case to another.
If you do not own and operate any of these more specialized businesses, you may have access to financial assistance programs provided by federal and state government agencies. These programs are tailored to the needs of smaller businesses that need low-interest loans from commercial lenders or venture capital financing in the case of new business start-ups.
3 Non-Profit Organizations Funding Options
1) CDC loans through the SBA – Certified Development Company loans are available through the Small Business Administration or SBA. This is referred to as the CDC 504 Loan Program. CDC’s typically focus on funding those businesses that will contribute to economic development and job growth as well as other services, in a specific area.
The approved CDC’s receive direct funding from the SBA and then dispense these funds to organizations that qualify for fixed-asset projects. Additionally, you do not need to be a 501 (c) (3) organization to qualify. However, a number of non-profit organizations do take advantage of CDC 504 loans. Plus, the loan is more affordable when you go through the Small Business Administration.
2) Investor funding – during the initial start-up stage, non-profit organizations sometimes rely on private funding from investors. When you involve private investors in your non-profit organization, they will usually want to assume a certain degree of control over the distribution of the funds and how the business will be managed. As a result, many of these organizations will establish a Board of Directors which is comprised of its members and private investors.
Additionally, private investors who have a significant interest in your charity efforts may donate a larger amount of funds in order to secure a place on the board. Once this occurs, the board member/private investor will start overseeing the way in which those funds are used. Conversely, some investors will only be interested in getting repaid and not being a board member. However, this means that their contributions or donations will be smaller and you will need to find additional investors.
3) Private business loans – it’s not imperative that you limit yourself to non-profit grant or loan funding. In fact, there are numerous traditional funding options that cater to small businesses with a broad range private business loans. In fact, you may be able to deduct the interest (up to a certain amount) on these private business loans when filing your charity’s taxes each year.
Plus, the traditional lender is going to require more from you including an asset base and a business plan. Additionally, private lenders are reluctant to fund start-up costs compared to public lenders. However, once your charitable non-profit organization is up and running, you may be able to gain access to expansion loans for your charity.