Have you ever noticed that money is hardest to get when you need it the most? For nonprofits, this challenge can be existential. While survival rates vary, financial stability—not mission effectiveness—is often the determining factor in a nonprofit’s longevity.

If you’re running a nonprofit today, you might feel the squeeze of rising costs, shrinking or canceled grants, and high staff turnover. Many organizations are also facing credit line terminations, cutting off vital access to working capital. This creates a perfect storm: grants typically pay out after you’ve spent the money, creating cash flow gaps that can stretch your organization to the breaking point. While some nonprofits can tap healthy reserves, many rely on bridge financing just to meet payroll or keep essential programs running.

When the bank says “no” and reserves run low, it’s tempting to grab the first lifeline thrown your way. Often, the would-be savior is an enthusiastic hard-money lender promising quick cash against your building along with introductions to deep-pocketed donors. But there are serious reasons to proceed with caution. Before you jump on that opportunity, let’s identify predatory financing practices and explore healthier alternatives.

Recognizing warning signs

It should come as no surprise that nonprofits face the same financing risks that families and individuals encounter. This includes unfair and deceptive lending practices that can severely impact your organization’s stability and mission effectiveness.

Several red flags may indicate potentially exploitative financing arrangements:

• Unusually high interest rates compared to market standards
• Hidden or excessive fees buried in complex documentation
• Repayment terms that exceed your organization’s realistic cash flow capacity
• “Too good to be true” offers featuring zero fees or below-market rates
• High-pressure tactics urging quick decisions without proper due diligence

Nonprofits should also be cautious of “tied” selling practices, where lenders pressure organizations to move their banking or investment relationships as a condition of financing. Although linking financial products isn’t inherently predatory, tied selling may become problematic when it imposes high fees or forces organizations to purchase unnecessary services.

Healthy financing alternatives

When facing financial pressure, instead of rushing into potentially exploitative arrangements, consider these healthier financing alternatives that respect your organization’s unique needs and mission.

1. Credit Unions: These nonprofit financial institutions often offer lower interest rates and more flexible terms due to their tax advantages. Many have dedicated nonprofit specialists who understand your unique financial cycles better than commercial banks.
2. Specialized Nonprofit Lenders: Organizations like the Nonprofit Finance Fund and CDFIs (Community Development Financial Institutions) exist specifically to support mission-driven organizations with below-market rates and technical assistance. They understand that nonprofits don’t fit traditional banking models.
3. Endowment Solutions: Beyond borrowing against endowments, consider board-approved spend rate adjustments for board-designated funds. For permanent endowments, professional legal guidance can help explore conversion options to quasi-endowments when appropriate.
4. Securities-Based Lending: Investment portfolios can provide quick capital access at competitive rates. Be mindful of market volatility risks. Custodians and third parties may lend against securities, and some community foundations offer this service to their nonprofit fundholders.
5. Real Estate Financing: Your property can secure traditional mortgages or more flexible lines of credit. Choose mission-aligned lenders who prioritize supporting your work rather than just acquiring your banking relationship.
6. Crowdfunding: Beyond platforms like GoFundMe, consider peer-to-peer lending networks and fiscal sponsorship arrangements. Success requires clear messaging and an engaged  community but it can bring in unrestricted funds quickly.
7. Government Support: The CDFI Fund, SBA loans, EDA grants, and New Markets Tax Credits offer favorable terms for qualifying organizations. The paperwork is worth the patience for these often below-market options.
8. PRIs and Impact Notes: Program-Related Investments from foundations and impact notes from nonprofits offer below-market rates and patient repayment terms, as they’re designed to support charitable activities while potentially returning capital to the organization.

Building financial Resilience

Smart nonprofit leaders use a combination of these funding sources. They understand that financial strategy isn’t just about survival – it’s about creating the stability needed to achieve their mission.

Partner with advisors who understand the nonprofit sector. Read the fine print carefully. Be especially skeptical of deals that sound too good to be true – because they usually are.  

Remember: Your mission deserves more than just staying afloat. By leveraging all available resources wisely, you can build the financial foundation needed to create a lasting impact. The key is to start exploring these options before you desperately need them. In finance, as in most things, preparation and foresight are your best allies.