How to Get Business Credit for Your Nonprofit (And Why You Need It)
As a nonprofit leader, you're driven by passion and purpose. You've dedicated time, personal finances, and resources to making a difference, but running a nonprofit organization comes with its own set of challenges—especially when it comes to finances. One aspect that many nonprofit executives overlook is the importance of business credit. Just like any other business, your nonprofit needs financial resources to grow, thrive, and maximize its impact.
Imagine being able to ensure the longevity of that transformative program, fill funding gaps to prevent your organization from missing payroll, or invest in essential training that leads to knowledge-building (that leads to more sources of revenue)—without dipping into your personal savings or relying solely on unpredictable grants and donations.
Imagine being able to continue your operations despite temporary cash flow issues such as delays in funding release or unexpected expenses.
This is where business credit comes in. It offers a lifeline that can help your nonprofit navigate unforeseen financial hurdles and seize opportunities for growth.
But here's the thing: Many nonprofit leaders find themselves in a frustrating catch-22. You need funds to scale your organization and increase your impact, but you can't access the credit necessary to make those investments. This problem plagues countless nonprofits, leaving leaders feeling stuck and unable to fully realize their vision.
I've been there myself. Back in 1999, I was a single mom of two, working full-time and pursuing my Master's degree. Like many, I struggled to make ends meet, often juggling which bills to pay on time. This financial juggling act kept a roof over our heads, but it took a toll on my credit score.
Fast-forward to 2017, when I decided to turn my side hustle into a legal business. I was excited about the possibilities, but there was a major roadblock: My FICO score had plummeted to 540. I quickly learned that business credit is intrinsically tied to personal credit, and my past financial struggles were now hindering my future business prospects.
Determined to overcome this obstacle, I embarked on a journey to repair my credit. Through careful planning, strategic actions, and persistence, I worked to boost my FICO score from 540 to 750 in just a matter of months. This transformation opened doors I never thought possible. On my birthday in September 2019, I received an incredible gift: approval for $48,000 in business credit across multiple cards.
This experience was life-changing. It gave me the freedom, agility, and choices I needed to grow my business. More importantly, it taught me valuable lessons about the power of business credit and the steps necessary to access it—lessons I'm eager to share with you.
In this article, I will discuss business credit for nonprofits. I will cover why it's crucial, how to establish it, and how to leverage it effectively to scale your organization. Whether you're struggling with a low personal credit score or simply unsure of where to start, this guide will provide you with steps to get your nonprofit on solid financial footing.
Remember, your nonprofit is a business—a business with a philanthropic purpose.
By understanding and utilizing business credit, you can manage unforeseen funding gaps in your organization and start focusing on what really matters: carrying out your mission.
How to Get and Build Business Credit for Your Nonprofit
What Is Business Credit?
Personal vs business credit
Why business credit matters for nonprofits
The link between personal and business credit
Improving Your Personal Credit Score
The impact of personal credit scores on business credit
How to repair personal credit
Establishing Business Credit for Your Nonprofit
Creating a Strategic Plan for Your Business Credit
Leveraging Business Credit for Nonprofit Growth (Scaling)
Using credit to invest in organizational development
Managing cash flow
Financing business expenses without self-funding
Responsible Credit Management
Common Mistakes to Avoid
✅Establish Credit for Your Business
What Is Business Credit?
Business credit is a vital financial tool that allows organizations, including nonprofits, to borrow money and access goods or services based on the promise of future payment. Unlike personal credit, business credit is tied to your organization's financial history and creditworthiness.
It's an essential resource that enables nonprofits to manage finances, seize opportunities, and build a separate financial identity from their founders or leaders.
Personal vs business credit
While personal and business credit share some similarities, they differ in several key aspects.
Credit Reporting Agencies
Personal credit is monitored by agencies like Experian, TransUnion, and Equifax. For business, however, specialized business credit agencies such as Dun & Bradstreet, Experian Business, and Equifax Business do the tracking.
Credit Scores
Personal credit scores typically range from 300 to 850, while business credit scores often use a 0-100 scale.
Personal credit scores are impacted by payment history, the amount of debt you owe, how long you've been using credit, new or recent credit, and the types of credit used. Each factor is weighted differently in your score.
Privacy and accessibility also differ significantly. Personal credit reports are protected by federal law, whereas business credit reports are generally public and can be accessed by anyone willing to pay for the information. The factors considered in credit scoring also vary, with business credit taking into account additional elements like industry risk and company size.
Why business credit matters for nonprofits
For nonprofits, establishing strong business credit is crucial for several reasons:
Financial flexibility. It provides access to funds for managing cash flow, covering unexpected expenses, or seizing growth opportunities.
Separation of finances. Good business credit helps create a clear distinction between personal and organizational finances, which is essential for legal and tax purposes.
Better terms with vendors. A strong credit profile can lead to more favorable interest rates and payment terms with service providers, plus suppliers often extend trade credit.
Increased funding opportunities. Good business credit can help your business look more attractive to donors, grantmakers, and potential partners.
Emergency preparedness. It provides a financial safety net when donations may be delayed or reduced or if a grant is on a reimbursement-based payment plan.
The link between personal and business credit
While business credit is separate from personal credit, there's a significant link between the two, especially for a new business or small nonprofit. (As I learned the hard way! 🙋🏿♀️)
When you first apply for business credit for your nonprofit, lenders will look at the personal credit of the organization's leader, particularly for newer businesses without an established credit history.
Then there's the issue of personal guarantees. Many business credit cards and loans require a personal guarantee, meaning the individual (You!) is personally responsible if the organization can't repay the debt.
Understanding this connection is crucial. While your goal should be to establish strong, independent lines of credit for your nonprofit, recognizing the influence of personal credit—especially in the early stages—can help you make informed decisions and develop effective strategies to help you build business credit.
Improving Your Personal Credit Score
Before I discuss improving your personal credit score, it's important to understand the history and purpose of credit scores. The FICO score, created by the Fair Isaac Corporation, is the most widely used credit scoring model in the United States. FICO scores range from 300 to 850, with higher scores indicating better creditworthiness. Lenders use these scores to evaluate the potential risk of lending money or extending credit to consumers.
The impact of personal credit scores on business credit
Your personal credit score can significantly impact your ability to secure credit for your business entity, especially in the early stages of your organization when your creditworthiness is the deciding factor for guaranteeing the repayment of the (loan) credit. Many lenders and credit card companies will look at your personal credit history when evaluating the amount of credit they are willing to extend.
This is particularly true for new organizations that haven't yet established their own credit history. A low personal credit score can negatively impact your business credit prospects. Remember how my 540 FICO score held me back?
A strong personal credit score can:
👍🏾 Increase your chances of approval for business credit
👍🏾 Help you secure better interest rates and terms
👍🏾 Demonstrate your financial responsibility to potential lenders
Conversely, a low personal credit score can create obstacles in obtaining the financial resources your nonprofit needs to grow and thrive.
How to repair personal credit
If your personal credit score needs improvement, don't despair. There are concrete steps you can take to repair and boost your credit.
One effective approach is to work with a professional credit repair service. These companies specialize in identifying negative items on your credit report that may be inaccurate, unfair, or unsubstantiated. Experienced providers also know insider tricks of the trade to remove derogatories that lay persons do not know about. They then work on your behalf to dispute these items with the credit bureaus.
In my case, Approved Life Solutions was a lifesaver. I invested $297, and my FICO increased from 540 to 720 in 90 days! Having Approved Life Solutions on my side made qualifying for business credit more attainable:
✅ Expertise in navigating the complex world of credit reporting
✅ Time-saving, as they handle the dispute process for you
✅ Faster results compared to tackling it alone
BUT, if you want the results, you have to make sure you follow their instructions meticulously. In fact, even if you're taking a DIY approach, it's crucial to follow credit repair practices carefully. This includes:
✅ Paying all bills on time
✅ Reducing credit card balances
✅ Avoiding applying for new credit
✅ Keeping old credit accounts open
✅ Disputing inaccuracies on your credit report
Credit repair is not an overnight process. It requires patience, discipline, and consistent effort. But the results can be significant. As shared earlier, I was able to increase my FICO score from 540 to 720 in just 90 days by following the instructions provided by Approved Life Solutions. (Yeah, the results were so impressive I just can't help but keep sharing them.)
When working to improve your credit, it's helpful to set a specific target. While any improvement is positive, aiming for a score of 750 or above can put you in an excellent position for most financial products.
Here's a general breakdown of FICO score ranges:
300-579: Poor
580-669: Fair
670-739: Good
740-799: Very Good
800-850: Exceptional
By setting a target of 750, you're aiming for the "Very Good" range, which can open up numerous opportunities for both personal and business credit. This score level typically qualifies you for better interest rates and terms, making it easier to manage debt and secure the financing your nonprofit needs.
Improving your personal credit score is not just about numbers—it's about creating a solid foundation for your nonprofit's financial future. By taking these steps to repair and boost your personal credit, you're positioning yourself and your organization for greater financial stability and success.
Establishing Business Credit for Your Nonprofit
At this point in your nonprofit's journey, you should have already completed several crucial steps:
✅ Registered your nonprofit as a legal entity
✅ Obtained an Employer Identification Number (EIN)
✅ Opened and currently use a business checking account
These foundational steps are essential for separating your nonprofit's finances from personal accounts and establishing your organization as a distinct entity in the eyes of creditors. If you don't have all these things in place, I highly recommend reading this first: The Complete Strategy For Anyone Dreaming Of Starting A Nonprofit In 90 Days, Or Less.
Creating a Strategic Plan for Your Business Credit
If you've ticked all the boxes, let's focus on the next step: applying for business credit cards.
Business credit cards can be a powerful tool to help build your business credit history and manage cash flow. Using them properly will help impact your business positively in the long run.
So, it's important to approach this process strategically.
Start with this: Think about what you will use the credit for. It’s important that it does not serve as this slush fund you may end up abusing. 🚩🚩🚩
Consider how these decisions could impact your bottom line before you open a business credit card
1. Finance rate. Look at credit cards’ interest rates, especially if you anticipate carrying a balance. Some cards offer introductory 0% APR periods, which are great for large purchases, but switch to high APR rates of 17% - 24% after the promotional period. These high rates can significantly impact your ability to pay off charges in a timely period, potentially reducing your utilization rate, which will impact your FICO score. Also, you will be stuck in debt, trying to pay off this bill that is growing month after month because of the high finance fees.
2. Annual fee. Weigh the cost of any annual fees against the card's benefits. Some cards with annual fees offer valuable perks that may outweigh the cost. For example, a card with an annual fee of $150 is worth the investment if the perk is “free bag check”—if you travel frequently. Baggage fees run $30 for the 1st bag and $60 for the second. But with “free bag check,” you save hundreds, maybe thousands of dollars, depending on how often you travel.
3. Cashback/rewards. Many business cards offer cashback or rewards points on purchases. Consider which type of reward best aligns with your nonprofit’s spending patterns. For example, with 5% cashback, your organization may use your credit card to purchase the organization’s materials and supplies, racking up a hefty cashback or points that can be used for travel or hotel stays for conferences, reducing the amount spent from your budget.
4. Time to pay off balance. Look for cards that offer grace periods and flexible payment terms that match your organization’s cash flow. For example, AmericanExpress has charge cards, which are a type of credit card in which the balance must be paid in full each month, rather than having the option of carrying a balance from month to month (and paying interest on any unpaid balance).
Consider if the organization is in the financial position to pay off balances in full in 30 days or if it would benefit the organization to be able to pay the minimum of 30% of the total amount each month because the organization is on a reimbursement agreement with its funder and having that flexibility will allow the organization to pay the full amount in 60 - 90 days versus the restrictive 30 days.
5. Card acceptance. Visa, Mastercard, and American Express are widely accepted in the United States, but this is not necessarily the case globally. Consider where you'll be using the card most frequently and why you’d select American Express over Visa. American Express is known for its premium perks and rewards programs, while Visa is known for its wide acceptance and rewards offerings.
6. Leveraging existing relationships. If you have a long-standing relationship with a bank, you may be able to secure better terms or easier approval for their credit products. For example, if you've banked with Chase or a Credit Union for 10 years, their Visa business cards might be a good option to explore.
Timing your applications
Timing is everything. And it's the same when you apply for a small business credit card or, rather, for several cards. You see, each credit application typically results in a hard inquiry on your credit report.
A hard inquiry, also known as a hard pull, occurs when a financial institution checks your credit report as part of its decision-making process. This typically happens when you apply for credit, such as a mortgage, credit card, or loan. Hard inquiries can affect your credit score because it means you’re adding debt, which can be a risk factor for lenders.
‼️ Good to know ‼️
Hard inquiries are performed when a lender or creditor needs to review your creditworthiness for a credit application.
Hard inquiries can lower your credit score by a few points. Multiple hard inquiries in a short period, especially if related to certain types of credit like mortgages or auto loans, may be treated as a single inquiry to minimize impact.
A hard inquiry stays on your credit report for about two years but generally has the most significant impact in the first year.
Hard inquiries are visible to anyone who checks your credit report, including potential lenders.
So, what's the best way to apply for a business credit card to avoid potential hits to your credit score?
First, be strategic. Plan your credit applications carefully. Apply when you don't anticipate needing other significant loans or credit lines in the near future.
Also, be selective. Only apply for credit when you need it and after ensuring you meet the lender's criteria. (See example below. If your FICO is 690, you wouldn’t apply for this card because their lending criteria is a 700 FICO).
This approach helps avoid unnecessary hard inquiries and potential rejections.
Next, consider the timing. It's generally advisable to space out credit applications. Case in point: the 5/24 rule. Many card issuers have criteria for who can qualify for new accounts; Chase is perhaps the most strict. Chase's 5/24 rule means that you can't be approved for most Chase cards if you've opened five or more personal credit cards from any card issuer within the past 24 months.
Another reason it's advisable to space out credit applications is to protect your credit score from the negative impact of multiple hard inquiries. Each time you apply for a new credit card, the issuer conducts a hard inquiry on your credit report. While a single hard inquiry may only cause a small, temporary dip in your credit score, multiple inquiries within a short period can significantly lower your score. This can make it more difficult to be approved for new credit in the future and may result in less favorable terms, such as higher interest rates. By spacing out your applications, you give your credit score time to recover between inquiries, maintaining a healthier credit profile.
What is considered a “short period?” This is typically around 6 to 12 months. Therefore, it's advisable to space out your credit applications by at least six months to avoid a significant negative impact on your credit score.
However, there are situations where applying for multiple business credit cards on the same day can be beneficial.
Credit bureaus may combine multiple inquiries for the same type of credit within a short timeframe (usually 14-45 days), treating them as a single inquiry. This approach allows you to compare offers from multiple issuers without accruing additional hard inquiries over time. You may even increase your chances of approval, as some issuers may not yet see the other applications on your credit report.
To implement this strategy:
Research and select 3-5 business credit cards that align with your nonprofit's needs and your creditworthiness.
Gather all necessary documentation for each application.
Set aside a block of time to submit all applications in one sitting.
Be prepared for immediate decisions in some cases or to follow up on pending applications.
Now, while this strategy can be effective, it's important to apply only for credit you truly need and can manage responsibly. Overextending your credit can lead to financial stress and damage your nonprofit's creditworthiness in the long run.
By carefully considering your options, timing your applications strategically, and potentially applying to multiple providers on the same day, you can set your nonprofit on the path to building strong business credit. This foundation will support your organization's financial health and ability to pursue its mission effectively.
Leveraging Business Credit for Nonprofit Growth (Scaling)
As your nonprofit organization strives to expand impact and reach, taking advantage of business credit can be a powerful tool for growth. By strategically using credit, you can invest in your future, manage cash flow challenges, and scale your operations without relying solely on donations or grants. *Keyword: strategically.
Using credit to invest in organizational development
As a business owner, investing in your organization's capabilities is crucial for long-term success. Business credit can be used to help supplement various aspects of organizational development.
Organizational development is a systematic approach to improving an organization's effectiveness and health. It involves planned interventions in the processes, structure, and culture aimed at enhancing individual and collective capabilities to achieve strategic goals and adapt to changing environments.
Continuous learning is essential for nonprofit leaders and staff. Credit can be used to invest in valuable educational opportunities, training, and courses. These include:
Leadership development workshops to enhance management skills
Grant writing seminars to improve fundraising capabilities
Financial management courses to ensure proper stewardship of resources
For example, my "90 Days to a Profitable Nonprofit" program is one such investment. I highly recommend it to Founders and Executive Directors, as it teaches you how to leverage your passion and skills and turn them into consistent outside revenue. Learn more about the program here.
I also offer Board Training workshops, which educate your Board about their roles and responsibilities. Something that is super critical but often overlooked! Interested? If your Board engagement and fundraising efforts are low, it could be a sign that they need direction and support in developing a strategic plan for growth. Book a call with me here.
If you open a business credit line, it can also be leveraged for hiring contractors who can assist you with generating revenue within six months (so you can immediately pay off that investment); bringing in specialized expertise can significantly boost your nonprofit's capabilities. Credit can be used to engage:
Consultants for strategic Fund Development planning to guide long-term growth (holla at your girl!) 👋🏿
Marketing and branding specialists to enhance public awareness and increase your Individual Donor base
Fundraising experts to diversify revenue streams
IT professionals for system upgrades to help forecast funding opportunities
Chances are, you rely heavily on technology. Credit can help purchase essential software such as:
Donor management systems to track and nurture supporter relationships
Accounting software for accurate financial management
Project management tools to streamline operations and document impact
Volunteer coordination platforms to maximize community engagement
Managing cash flow
Cash flow management is a normal challenge for nonprofits. You probably know this all too well. In this regard, business credit can help you build a safety net.
It can help with covering reimbursement-based contracts. Many government grants and contracts are negotiated on a reimbursement basis. If you have a good business credit score and have access to a line of credit, you can better:
Bridge the gap between service delivery and payment
Maintain program continuity during reimbursement delays
Avoid service interruptions due to cash flow issues
Same thing when handling payroll hiccups. If you want to keep your business running smoothly, ensuring your staff are paid on time is crucial. Credit can make it easier to:
Ensure timely staff payments during funding gaps
Manage seasonal fluctuations in cash flow
Cover unexpected payroll expenses, such as overtime during peak periods
Financing business expenses without self-funding
Business credit allows nonprofits to make necessary short-term investments without having to use your personal resources. On top of organizational development, your nonprofit has other expenses. A business line of credit can help with the following:
Office equipment and supplies: Unforeseen and emergency circumstances; Computers and technology upgrades to improve productivity
Program expansion costs: Emergency coverage; To cover rent for continuity in program services; Vehicle repairs for mobile service delivery; Equipment for unforeseen emergencies; to ensure continuity in delivering program initiatives
Marketing and outreach expenses: Website development and maintenance to establish an online presence; Social media advertising to reach new supporters; Print materials like brochures and annual reports to deepen reach to potential supporters; Develop event sponsorship materials and registration fees to network and raise awareness
If you establish and build business credit strategically, you can overcome financial hurdles, invest in your future, and scale your operations more effectively.
Responsible Credit Management
While leveraging business credit can be a powerful tool for nonprofit growth, it's crucial to manage this resource responsibly. Proper credit management ensures the financial health of your organization and helps with building your business credit profile for future opportunities.
First of all—and I can't emphasize this enough—pay your bills on time.
Timely payment of credit obligations is the cornerstone of responsible credit management. It demonstrates financial reliability and helps maintain a positive credit score. Here are some things you can do to ensure bills are paid on time:
Set up automatic payments for recurring expenses
Create a payment calendar to track due dates
Designate a staff member to oversee bill payments
Maintain a cash reserve in your business bank account for unexpected expenses
Apply for Overdraft Protection to avoid Nonsufficient Funds (NSF) fees
Next, maintain a low credit utilization ratio. The credit utilization ratio (the amount of credit used compared to the total credit available) significantly impacts credit scores.
Establish a commitment to ONLY use the credit for small (1% - 10% of the total approved credit) investments designed to Move the Organization Forward. Such as knowledge building, which will help the organization generate more streams of revenue. My course, 90 Days to a Profitable Nonprofit, does exactly this. In essence, you’re using credit to cover the course because it will help you learn to generate multiple streams of revenue and make wise decisions.
Or, make a “Medium” investment (10% - 30% of the total approved credit). Try never to exceed 30% of the total approved credit amount as it negatively impacts the credit utilization (do not spend more than 30% of your available credit at any given time. For instance, let's say you had a $5,000 monthly credit limit on your credit card. According to the 30% rule, you'd want to be sure you didn't spend more than $1,500 per month, or 30%.)
Commit to never incurring debt if you are not 100% certain there is revenue to pay it off.
Other things you can do:
Consider requesting credit limit increases as your nonprofit grows
Pay down balances regularly, even before the due date, if possible
Spread expenses across multiple cards if necessary to keep individual card utilization low (this is one way to build good credit)
Create short, medium, and long-term strategic goals for using credit. But ALWAYS, ALWAYS, ALWAYS make sure those goals are accomplished with concrete methods for paying off the credit.
Hope is Not a strategy!
Do not purchase items or cover expenses without guaranteed sources of revenue in place to cover those expenses.
Do not EVER max out the credit card or line of credit. ESPECIALLY if you have no idea how you're going to repay the debt. For example, if you cannot cover payroll, do not use the line of credit or credit card if you have no way of paying the debt. Doing so just digs the organization DEEPER in debt because:
It won't be able to make payroll after the line of credit is exhausted
You will still have to Pay back that Debt. If you don't, your FICO score will drop. You will have a judgment on your credit file. It defeats the purpose of having credit!
Additionally, monitor your business credit to ensure financial health. Regularly review your credit report to ensure all inquiries and entries are legitimate, as this helps you detect potential identity theft or errors early. By keeping an eye on your credit, you can track your progress, understand factors affecting your score, and make informed decisions about applying for credit. Regular monitoring also allows you to spot any hard inquiries that shouldn't be there and dispute them promptly, safeguarding your credit score.
Utilize free annual credit reports from major bureaus like Equifax, Experian, and TransUnion. Each business credit bureau allows you to request a free report once a year through AnnualCreditReport.com. Spread these requests throughout the year to monitor your credit more frequently.
Here's one last thing that I also can't emphasize enough: Use your credit strategically for business purposes only.
To maintain financial discipline and avoid misuse of your business account:
Create clear policies on credit card usage within your organization
Use credit only for legitimate business expenses that align with your nonprofit's mission
Do not mix personal and business expenses. Your business and personal credit should be kept separate. Period.
Keep detailed records of all credit transactions for accounting and auditing purposes
Common Mistakes to Avoid
While business credit can be a valuable tool for nonprofit growth, certain pitfalls can hinder your organization's financial health and credibility. Here are some common mistakes to avoid, along with practical tips and examples to help you navigate these challenges.
❌ Mixing personal and business finances
We touched on this earlier—one of the most frequent errors nonprofits make is blurring the line between personal and business finances. This can lead to accounting nightmares and potential legal issues.
Here are practical ways to ensure you keep your personal and business finances separate:
Open a business bank account totally separate from your personal account(s). The same goes for lines of credit and loans.
Use accounting software like QuickBooks Nonprofit or WaveApps to keep business transactions separate.
Implement a clear reimbursement policy for any personal expenses incurred on behalf of the organization. Here’s an example of a business expense policy.
❌ Using business credit for personal expenses
As a corollary to the first point, don't use your nonprofit's credit for personal purchases. It is not only unethical but can also jeopardize your organization's tax-exempt status. Now, you may be thinking, "Who would do such a thing?" You might be surprised. This is one of the common reasons nonprofit founders get in trouble.
What you can do:
Create a written policy outlining the appropriate use of business credit.
Require receipts and explanations for all credit card charges.
Conduct regular internal audits of credit card statements.
Require Two Signatures for approval. By requiring two signatures (The Executive Director and The Board President), the organization is verifying that both signers agree that the payment is proper and reasonable. The requirement of two signatures is a GAAP internal control designed to reduce fraud, embezzlement, and improper payment to themselves or a fictitious company.
Consider using a platform like BILL (formerly Divvy), which allows you to set spending limits and categories for different users—they have a section for nonprofits.
To illustrate, say you're a small arts nonprofit that faced scrutiny when board members used the organization's credit card for personal dining and travel. By implementing a strict policy requiring pre-approval for any expenses over $100 and a monthly review of all charges, you can regain financial control and restore trust.
❌ Neglecting to build relationships with lenders
Many nonprofits focus solely on donors and neglect to cultivate relationships with potential lenders and community banking institutions. This limits your financing options. So, to start building your business credit (and growing it), keep these good practices in mind:
Schedule annual meetings with your bank manager and/or account manager to discuss your organization's needs and goals.
Invite local bank representatives to your fundraising events or facility tours.
Keep lenders informed about your nonprofit's achievements and growth plans.
Consider joining a local nonprofit association that partners with financial institutions.
As an example…a youth mentoring program struggled to secure a line of credit when it needed to expand. By proactively building a relationship with a community bank, including regular updates on its impact and financials, it was able to secure favorable terms when it applied for credit.
A good relationship is everything!
❌ Overextending credit limits
While credit can fuel growth, taking on too much debt can strain your nonprofit's resources and reputation.
If you're already facing debt, create a debt management plan that aligns with your strategic goals. Begin by assessing your current situation, prioritizing debts based on interest rates and strategic alignment. Develop a realistic repayment schedule that balances debt reduction with mission-critical activities and committed revenue streams. Integrate this plan into your broader strategic goals and communicate transparently with stakeholders. Seek professional advice if needed and be prepared to adjust your strategy as circumstances change. Use this opportunity to strengthen overall financial management practices.
Better yet, before you find yourself in that situation, use financial forecasting tools to assess the impact of potential debt on your cash flow. These tools allow you to project future income and expenses, helping you understand how different debt scenarios might affect your organization's financial health. By inputting various loan terms, interest rates, and repayment schedules, you can visualize the long-term impact on your cash flow. This analysis can reveal potential cash crunches or periods of financial strain, allowing you to plan proactively. Popular tools include PlanGuru, Adaptive Insights, or even advanced Excel models tailored to your nonprofit's specific needs.
Set a maximum debt-to-income ratio for your organization and stick to it. This ratio, typically expressed as a percentage, represents the maximum amount of debt your organization is willing to take on relative to its income. For example, you might set a policy that your total debt payments should not exceed 15-20% of your annual revenue. This self-imposed limit helps prevent overextension and ensures financial stability. Regularly review and adjust this ratio based on your nonprofit's growth and changing financial landscape. Communicate this policy to your board and financial decision-makers to maintain discipline in borrowing practices.
Explore alternative funding sources that can provide more flexible and mission-aligned capital than a traditional business loan.
Program-related investments (PRIs) are investments made by foundations to support charitable activities that involve the potential return of capital. Unlike grants, PRIs are expected to be repaid, often at below-market interest rates.
Recoverable grants are similar, typically offering zero-interest loans that are forgiven if certain mission-related milestones are met. These options can offer more favorable terms than commercial loans and align funders' interests with your nonprofit's mission. Research foundations or impact investors in your field who might offer these alternative funding mechanisms.
❌ Failing to shop around for the best terms
Many nonprofits stick with their current bank out of convenience, potentially missing out on better credit terms elsewhere. While I did mention leveraging long-standing relationships with banks, you should still do your due diligence.
Research credit options specifically designed for nonprofits, such as the Nonprofit Finance Fund or community development financial institutions (CDFIs).
Compare offers from multiple lenders, including interest rates, fees, and repayment terms. Also look into credit union offerings, as they often have favorable terms for community organizations.
By avoiding these common mistakes and implementing these practical tips, your nonprofit can leverage business credit more effectively, ensuring financial stability and continued growth.
Establish Credit for Your Business
For small business owners (which you are!), establishing credit for your nonprofit is essential for future financial stability and growth. One step to building credit is to get a business credit card. Additionally, understanding your business structure and correctly registering your business can help lenders identify your business as a bonafide organization.
It's crucial to start building business credit early. Your business credit card, along with other financial products like business loans, can help establish your credit history. Credit agencies report these activities to business credit bureaus, which maintain your business credit reports and scores.
Regular monitoring of these reports is essential to ensure accuracy and understand the factors influencing your scores. By following this guide to establishing business credit, you can take clear steps to build and effectively manage your nonprofit's credit profile. Even if your nonprofit currently lacks a significant credit history, responsible credit management can pave the way to improved financial health. The main objective is to create a solid credit history, which will make it easier to secure funding in the future.
Further reading:
Stay in the know about nonprofit management with the National Council of Nonprofits
For more information on business finances, visit the Small Business Administration (SBA) website.
Read about adding Donor-Advised Funds (DAF) to your income stream.
90 Days to a Profitable Nonprofit: learn to generate consistent outside revenue and see massive success without the struggle.
