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Just like for-profit businesses, nonprofits need capital to buy equipment, pay employees, build infrastructure, and fund their projects. However, when it comes to getting financing, nonprofits often face more hurdles than traditional businesses do.

Fortunately, options for nonprofit business loans are out there. The key to finding the right financing for your organization is knowing where to look.

Key Points

•   Nonprofit business loans are similar to for-profit business loans. To qualify for any business loan, you’ll need to meet the lender’s requirements, regardless of whether your business is for-profit or not-for-profit.

•   Nonprofit loans are often viewed as risky to the lender. Because of this, you may have to meet a certain credit requirement and/or put up collateral to secure the loan.

•   Funding options for nonprofits include loans, grants, corporate giving programs, crowdfunding sites, and more.

•   Nonprofit organizations can also apply for small business lines of credit and business credit cards when in need of funds.

What Are Nonprofit Business Loans?

A nonprofit business loan is similar to any type of small business loan except that it’s made available to a not-for-profit organization. These types of loans are often available through lenders and organizations that are themselves nonprofit. Some banks, credit unions, and online lenders are able to provide loans to nonprofit businesses.

How Do Nonprofit Business Loans Work?

Like any business loan, nonprofit business loans often have a lengthy application and approval process. This is done to ensure the organization actually has the monthly cash flow to easily pay upon a new debt.

With a nonprofit term loan, your charity would receive the full amount of the loan (known as the principal) up front, then have a period of time — which could be anywhere from a few months to 25 years — to pay it back (with interest and fees added), typically in monthly installments.

As you explore business loans for your organization, it’s important to read the fine print. You’ll want to know the repayment terms, interest rates, fees, and if collateral or a personal guarantee is required. Keep in mind that longer repayment terms carry lower monthly payments, but could actually cost more in the long run as interest accrues.

Pros and Cons of Using Loans for Nonprofit Organizations

Taking out a loan in the name of your nonprofit can expedite the growth of your organization, allow you to better market your cause, fund new projects, hire more staff, and ease any cash flow issues. And, if you can find a nonprofit lender, you may be able to get financing with a low interest rate and favorable terms.

However, a nonprofit business loan can take some time and effort to find, apply for, and get funding from. In addition, interest rates from a traditional lender may be high, since they often see nonprofits as higher risk. The lender may also require collateral, which could be seized if you fail to make payments.

Why Are Nonprofit Business Loans Difficult to Obtain?

Getting a small business loan is often a lot easier than getting a nonprofit loan. For one reason, there aren’t as many nonprofit business loans available as there are traditional small business loans. Below are some of the obstacles your organization may face when seeking financing.

Strict Requirements

Lenders are in the business of getting their loans repaid, so before lending to a nonprofit, they will likely want to see strong revenue and cash flow. A nonprofit that has consistent and solid cash flow is more likely to pay upon its debts and less likely to default in the future. Nonprofits that are operating at a loss may find it especially hard to qualify for some loans.

Risky Investment

When lenders give a loan to a small business, they assume that the funds will increase profits in some way. However, it’s more difficult for a nonprofit to bring in revenue than a traditional small business.

For businesses, small gambles like increasing services can help bring in more cash flow. But when a nonprofit does this, it’s spending more money without any guarantee that charitable donations will increase. This doesn’t necessarily mean that you can’t get capital from traditional sources, but it can mean higher interest rates on any loans you secure for your nonprofit organization.

Collateral Is Often Required

As a nonprofit, a lender will likely require collateral to help mitigate their risk. When a loan is secured with collateral, a lender knows it will be able to recoup most or all of their money even if the borrower defaults on payments by seizing and selling the collateral.

This can be a tricky requirement for nonprofits to navigate, since they may not have valuable assets that can help them secure a loan. The difference between secured vs. unsecured loans is that secured loans (with collateral) tend to come with much lower interest rates than unsecured loans (without collateral).

Typical Funding Options for Nonprofit Businesses

Despite the potential difficulties, there are many funding options available to nonprofits. Here are some you may want to explore.

SBA Loans and Grants

Loans backed by the U.S. Small business Administration (SBA) are not typically available to nonprofits. However, the SBA provides grants to nonprofit organizations dedicated to helping underprivileged individuals or communities through their Program for Investment in Micro-Entrepreneurs (PRIME).

Nonprofit Loan Funds

There are some lenders that focus exclusively on loaning money to nonprofits. In many cases, these lenders are nonprofits themselves with a mission to help underserved communities. While there aren’t many options out there, nonprofit loan funds often come with low (and sometimes even zero) interest rates and attractive terms. You may want to start your search with Nonprofit Finance Fund and Propel Nonprofits to see if this might be a good fit for your charity.

Nonprofit Grants

Grants can be a major source of funding for nonprofits. Grants for nonprofits are often available from government agencies, business associations, corporations, or other nonprofit organizations. The upside of grants vs. loans is that the money does not have to be repaid. However, grant money sometimes needs to be used for a specific purpose and competition for these awards can be stiff.

When searching for grants, you can check Grants.gov, which is the largest database of federal grant opportunities. You may also want to look locally, as many grants targeted for nonprofits are offered at the state and local level.

CDFIs

The Community Development Financial Institutions Fund (CDFI Fund), which is part of the U.S. Treasury, gives funds to lenders focused on providing financial assistance to businesses and organizations that serve disadvantaged areas. These lenders, known as “CDFIs,” typically don’t operate at the national level, but you can reach out to local banks and nonprofit groups that have received CDFI funds to discuss low-cost business loans for nonprofits.

Corporate Giving Programs

A corporate giving program (CGP) is a program in which a business donates gifts, cash, or organizes fundraising campaigns to help a cause it believes in. While a CGP may not become a major source of funding for your nonprofit, it can be worthwhile to appeal to local small businesses and corporations who want to give back to the community. You may be surprised by how many companies want to offer their support.

Crowdfunding Sites

Crowdfunding is another way you may be able to raise capital for your nonprofit. Rather than securing a large lump sum from a loan or grant, crowdfunding focuses on collecting smaller amounts from a large number of people. Depending on the crowdfunding platform you use, you may be able to get free money (in the form of online donations) or a no-interest crowdfunded loan, which means you’ll only have to repay the principal on the loan.

Applying for Nonprofit Business Loans

Once you find a loan that may work for your organization, you’ll want to start preparing your application. The process will vary with each lender, but here’s how to get started.

Read the qualification requirements carefully. Nonprofit loans are a very specific type of financing, so you’ll want to make sure your nonprofit meets all the minimum requirements to avoid wasting time.

Write a strong business plan. Just like a for-profit business, nonprofits need to have a solid business plan in place when applying for financing. The lender will likely want to see details about how your nonprofit meets a need in the community, along with how you plan to use proceeds from a loan, including supporting research and financial documentation. They’ll also want to see that your organization can successfully raise funds.

Gather your documents. Whether you’re applying for a loan or a grant, you will likely be asked to submit a fair amount of paperwork. This may include:

•   Your organization’s fundraising case statement

•   Proof of 501(c)(3) (nonprofit/tax-exempt) status

•   Recent tax returns

•   Recent bank statements

•   Other financial documents (e.g., income reports, cash flow projections)

•   Proof of collateral

Recommended: Starting a Minority Woman Owned Business

Alternative Funding Options for Nonprofits

Besides the loans and grants listed above, you may want to investigate these other sources of business and nonprofit funding.

Online Loans

There are various types of online business loans that your nonprofit may be eligible for. Typically, online loans have more relaxed requirements and are much faster to fund than bank loans. However, they often come with higher interest rates.

Banks or Credit Unions

If you have a very strong credit history and your nonprofit is generating revenue, it may be worth applying for a loan through your local bank or credit union. Just make sure that the bank or credit union lends to nonprofits. Also keep in mind that interest rates from traditional lenders may be higher for a nonprofit than a for-profit business, due to higher risk.

Business Credit Card

With some research, you may be able to find business credit cards with low interest rates. Some cards even offer a 0% introductory APR (which may last as long as 21 months). This might allow you to cover an unusually high expense, then pay the card off before the usual interest rate kicks in.

Business Line of Credit

It may be possible for your nonprofit to qualify for a business line of credit, which is a pre-approved amount of money that you can access at any time and for any reason. You only pay interest on the money you actually borrow.

Recommended: Nonprofit vs. Foundation

Nonprofit Lenders

Nonprofit lenders can be a good source of funding for a charity.

What Nonprofit Lenders Are

A nonprofit lender is one that focuses on lending to nonprofits and mission-based small businesses in their community that have the potential to provide an economic impact. In addition to funds, nonprofit lenders also often offer training, education, and other resources to help nonprofits and small businesses make the right decisions for their development and longevity.

How Nonprofit Lenders Work

Many nonprofit lenders focus on offering smaller loans (typically $50,000 or less). While the application and underwriting process can often be involved and time-consuming, these lenders often offer low interest rates to organizations unable to access capital from traditional sources.

How to Find Nonprofit Lenders

Your local Small Business Development Center (SBDC) or SCORE office (a resource partner of the SBA) may be able to help you identify local nonprofit lenders. You can find these offices, as well as other helpful resources, using the SBA’s search tool.

Recommended: Guide to Grant Writing for Small Businesses

The Takeaway

It’s possible to find a business loan for a nonprofit organization, but it can take a bit of time and legwork.

If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.

FAQ

Can you get a business loan for a nonprofit?

Yes. Many traditional lenders, however, see nonprofits as risky and may charge a higher interest rate.

Does SBA give loans to nonprofits?

Not typically, but they do offer grants to nonprofits. To get a loan as a nonprofit, you can apply with banks, credit unions, and online lenders. Online lenders tend to have less stringent income and credit requirements, but may charge higher interest rates and more fees.

Do nonprofits have a credit score?

Yes, nonprofits can establish a credit history and build a credit score by getting a D-U-N-S Number, along with a bank account and credit card in the organization’s name.

Can a nonprofit be a small business?

No, to meet the definition of a small business, you must be organized for profit. A 501(c)3 is not organized for profit, so it does not qualify as a small business.

Photo credit: iStock/FG Trade

SoFi's marketplace is owned and operated by SoFi Lending Corp. See SoFi Lending Corp. licensing information below. Advertising Disclosures: SoFi receives compensation in the event you obtain a loan through SoFi’s marketplace. This affects whether a product or service is featured on this site and could affect the order of presentation. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider.

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Accounts receivable factoring, also known as invoice factoring or business receivable factoring, is a method of business financing that companies sometimes use to help manage cash flow and meet expenses. Factoring receivables involves a different process than taking out a bank loan, but the general goal for both is often the same: to provide the business with needed cash.

For clarity, a factoring company or factor is a lender that provides financing through the invoice factoring process. In other words, the lender gives the small business financing in exchange for unpaid invoices.

Learn more on what accounts receivable factoring is, pros and cons of this type of financing, and alternatives you may want to consider.

What Is Accounts Receivable Factoring?

Factoring accounts receivable is a method of financing that B2B companies that invoice their customers and vendors could consider when they’re in need of quick cash. Basically, the business gets a loan from a factoring company using its accounts receivables as security.

Typically, the factoring company will give the business a percentage of its outstanding invoices (the advance percentage, which is typically around 80%). When the invoices are paid by the customers, the factoring company gives the remaining 20% to the business, minus any factoring fees (which can be high).

Recommended: What Are Accounts Payable?

How Does Factoring Accounts Receivable Work?

Here’s a basic illustration to show how accounts receivable factoring works.

Let’s say that your business has issued $20,000 in invoices that haven’t been paid yet. Let’s also say that your business will be $10,000 short in meeting payroll if those payments aren’t made on time.

To address the situation, your business might decide to factor receivables in order to get enough cash in to pay your employees. This would involve selling the unpaid invoices to a third-party factoring company (or “factor”).

At this point, the factor would own the invoices and your business would receive a certain percentage of the dollar amount on them. This is called the “advance rate.” The advance rate that your business would receive would be based on how risky the transaction is for the factoring company.

The difference between the dollar amount on the invoice and the amount your business gets upfront is held in reserve until the invoices are paid. Once your customers have paid, the remainder is forwarded to your business, minus the factoring fee.

Factoring Accounts Receivable Example

To give some numbers to the example, let’s say that your business qualifies for an advance rate of 80%. To meet payroll expenses of $10,000, you decide to factor $15,000 out of your $20,000 in outstanding receivables.

The factoring company would then issue you 80% of the value of the receivables being factored ($15,000 x 80%): $12,000. You could then use $10,000 of the funds to pay your employees and have $2,000 left over for miscellaneous expenses.

The next step is for your customers to pay their invoices in full (that money goes to the factor, not directly to your business). Once paid, the factoring company will release the reserve amount (in our example, 20% of the invoice amount, or $3,000) minus the factoring fee charged by that particular factor.

How Are Factor Fees Calculated?

A factor may consider a number of things to determine what factor fee to charge your business. It might look at the industry your business is in, how many invoices are involved, your customers’ payment histories, and your company’s financials to determine what factor fee to charge you.

That said, typically these fees run from 1% to 3% of your invoices, but may go as high as 5%.

Bear in mind that you might have to pay a flat factor fee for each week that an invoice goes unpaid — 2% the first week, 2% the second week, and so on. But some factors charge a tiered factoring fee, meaning that the amount of your fee can go up if the invoice isn’t paid right away. So while the factor fee might be 2% the first week, it might rise to 3% the next week.

Recommended: Business Cash Management: Tips for Managing Cash

How to Qualify for Accounts Receivable Factoring

Qualifications for accounts receivable financing are much less stringent than for other types of small business financing, such as small business loans or business lines of credit.

With accounts receivable financing, the invoices serve as collateral, making it an attractive form of borrowing for businesses without strong credit histories. To qualify, you simply need to have outstanding invoices from reliable customers. The factoring company will look at the credit history of your customers as opposed to your business.

Recommended: Business Loans Based on Revenue

Pros and Cons of Accounts Receivable Factoring

Even companies that focus on cash management strategies sometimes need an influx of cash — and, for some of them, invoice factoring can be a good solution. Just as with other forms of small business financing, though, there are pros and cons to accounts receivable factoring.

Advantages of Accounts Receivable Factoring

Benefits may include the following:

•   No collateral is required, other than the invoices.

•   You can typically access the cash quickly.

•   Factoring can help your business manage cash flow.

•   Lenders typically focus less on the business’s or owner’s credit score and more on the creditworthiness of the customers owing on the invoices.

•   Some factors will work with startups.

•   Funds provided by a factor can typically be spent in any way the business desires, with no restrictions.

•   The factor company takes over collecting on the invoices, freeing up your business to handle other tasks.

Disadvantages of Accounts Receivable Factoring

Cons of accounts receivable factoring can include the following:

•   Rates can be relatively high. Plus, there can be a variety of fees, including application, processing, and service fees, which means that factoring can be a more expensive way of getting business funding. This can be especially true if the invoiced customers don’t pay on time.

•   The factoring company has control of the invoices after your business sells them. That’s why it’s important to choose a factor that will treat your customers fairly and with respect.

•   If customers don’t pay the invoices that were factored, your business may need to pay for those invoices, along with added fees.

•   If a business’s customers aren’t creditworthy, then it may be difficult to factor accounts receivable from them.

•   What a factor charges will depend on the creditworthiness of the invoiced customers, how old the invoices being factored are, the invoice due dates, and more. Just as with banks that make loans, it’s important to compare what different factoring companies would charge.

Recommended: Types of Small Business Loan Fees

Accounts Receivable Factoring vs Accounts Receivable Financing

Accounts receivable factoring gives the lender full control of the unpaid invoices. Your business no longer owns them; instead, the factoring company does. With accounts receivable financing, on the other hand, your business still owns the unpaid invoices.

To qualify for accounts receivable financing, or invoice financing, your credit score and financial history are taken into consideration. With accounts receivable factoring, it’s the credit history of your customers that’s taken into account.

Recourse Versus Non-Recourse

These are two different factoring models: recourse and non-recourse.

When a factor uses a recourse approach, this means that a company would be responsible for any factored invoices that its customers didn’t pay.

When factors are using a non-recourse approach, the factoring company is responsible for any unpaid invoices. There can be exceptions to this rule if certain conditions are met, though. For example, if an invoiced customer files for bankruptcy within a defined window of time or goes out of business, the business might not be held responsible for its invoices. Non-recourse factoring companies may charge a higher fee because they’re taking on more risk.

Recommended: What Is Traditional Income Statements Explained

Choosing the Right Factoring Company

Just as with any lender, you should check out factoring companies that you might want to work with carefully to make sure they’re trustworthy.

•   Is it registered in your state?

•   Does it have good reviews online?

•   What is its Better Business Bureau ranking?

•   Does it specialize in specific industries? (Some factoring companies work with very specific industries, such as medical or freight transport, while others are more general.)

•   What are its rates and advance percentages?

•   Is there a minimum number of factoring transactions required each month?

•   If there are no minimum requirements, will factoring a certain amount of invoices each month provide your company with a discount?

Once you settle on a factoring company, the factor will then conduct due diligence on your business and on the customers whose invoices may be factored.

After that review is satisfactorily completed, the factoring company will offer an agreement that should be carefully reviewed. Check the interest rate and fees, including whether there is a cancellation fee. See if any minimum factoring amounts are listed, whether there’s a contract term that you’re agreeing to, and so forth.

Alternatives to Accounts Receivable Factoring

While accounts receivable factoring is one way to get cash for your business, there are other ways, too.

Free Up Cash Flow: Ways to free up cash flow include cutting expenses, increasing pricing, and turning invoices into cash more quickly, perhaps by offering early pay discounts to customers and/or asking for a deposit when orders are made.

Business Line of Credit: Getting a business line of credit from a bank or online lender gives you access to a certain amount of funding decided upon by the lender that you can draw on at will. Interest is charged only on unpaid balances. Business lines of credit are typically revolving credit that replenish how much you can draw as you pay back whatever you owe.

Online Business Loan: Online lenders frequently provide loan options similar to those of a traditional bank. However, typically online lenders have a faster approval process. What’s more, they may offer more options for business owners with lower credit scores.

The Takeaway

Accounts receivable factoring is a method of small business financing where you sell your invoices to a factoring company. You receive a percentage of the invoices upfront, and the remaining amount (minus any fees) when the invoice is paid in full. However, depending on your situation, accounts receivable factoring may not be the best type of financing for your small business. Other options include traditional small business loans, small business lines of credit, and SBA loans.

If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.

FAQ

What is accounts receivable factoring?

Accounts receivable factoring is a type of small business financing where you sell your unpaid invoices to a factoring company. You receive a percentage of the invoices immediately, and once the customer pays the invoice, you receive the rest, minus any fees (which can be expensive).

How do you calculate AR factoring?

Accounts receivable factoring is calculated by first determining eligible invoices. Ideal invoices are no more than 90 days late and are owned by creditworthy customers. Then, the factoring company will determine how much of the invoice they’ll give you — typically 80-90% of the invoice total. Once the customer pays the invoice, the factoring company will give you the remaining percentage, minus any fees.

Photo credit: iStock/Thapana Onphalai

SoFi's marketplace is owned and operated by SoFi Lending Corp. See SoFi Lending Corp. licensing information below. Advertising Disclosures: SoFi receives compensation in the event you obtain a loan through SoFi’s marketplace. This affects whether a product or service is featured on this site and could affect the order of presentation. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOSB0424034

Having a felony record doesn’t block you from starting your own small business. When getting a business off the ground, you’ll have to follow the same best-practice guidelines as any other budding owner, from developing a well-thought-out business plan to presenting a strong financial profile when seeking financing.

In fact, becoming an entrepreneur could prove a solution to the problem of finding work. On some job applications, there is an option to check a box indicating whether or not you have a criminal record or conviction. Or the existence of a past conviction could come out in an employee background check.

According to one survey, 40% of employers will not even consider a job applicant for employment once they are aware that the individual has a criminal record. This is why a movement is growing called “Ban the Box,” a campaign by advocates for ex-offenders aimed at removing the check box that asks if applicants have a criminal record from hiring applications.

Business ownership is a direction some people are taking so that they can make a living. According to the Rand Corporation, more than 3.8% of U.S. small business owners have a criminal record, and about 1.5% have a felony record.

Read on to learn about exploring business loans and grants to help finance your business startup.

5 Small Business Grants for People With Felony Convictions

Loans and grants are not the same thing. Grants are non-repayable. They’re like a gift. They may be awarded by government departments, trusts, or corporations.

Small business grants for individuals with prior justice system involvement are available. There are no grants specifically set aside for those with criminal records, but certain grants are available for women, minorities, veterans, and rural residents, if any of those targeted groupings help. It’s also important to find out if the location of your small business qualifies you for special state, city, or corporate grants.

These are some of the places to check out for opportunities.

1. Grants.gov

Grants.gov, a portal website that allows you to search and apply for federal funding opportunities, is an important source. It is a government agency that maintains information about federal government grants that are available to small businesses which qualify.

All applicants for federal grants, such as small businesses, nonprofit organizations, and educational institutions, start with Grants.gov.

2. National Association for the Self-Employed (NASE)

NASE Growth Grants are offered to members of the organization who are trying to take their business to the next level. These grants are worth up to $4,000 and can be used for all types of activities.

3. Minority Business Development Agency (MBDA)

The U.S. Department of Commerce Minority Business Development Agency offers targeted grants to aid minority-owned businesses. The grants can be for securing capital, competing for a contract, identifying a strategic partner, or becoming export-ready.

4. The FedEx Small Business Grant

The FedEx Small Business Grant Contest offers corporate small business grants for growth. FedEx awards $25,000 in grants to 12 qualified applicants as well as additional services each year through their grant contest.

5. Amber Grant for Women

The Amber Grant has been giving money to female entrepreneurs monthly since 1988. They’ve expanded their grant-giving to include “Marketing Grants” and “Business Category Grants,” as well as two “$25,000 Year End Grants.”

3 Small Business Loans for People With Felony Convictions

Having a felony conviction record doesn’t automatically disqualify you from getting approved for a business loan. What lenders look for when considering a small business loan is strong credit, a solid business plan, and usually a business track record of at least a year. However, it’s possible that as part of the approval process, a lender could decide not to approve a loan because the applicant has a criminal record.

The reality is that people who’ve been impacted by the criminal justice system may have challenged credit. That can make it difficult to qualify for lenders that require certain credit scores and extensive business experience. The time spent in prison may have limited credit history or prevented gaining real-world experience. For these reasons, small business loans for felons are not easy to get.

Here are three types of loans to learn more about:

1. Small Business Administration (SBA) Loans

SBA loans are guaranteed by the U.S. Small Business Administration. The government guarantee is designed to encourage banks and lending institutions to loan money to small business owners who might otherwise find it difficult to qualify for affordable financing. You can use SBA loans to pay for almost any type of business expense.

Historically, a criminal justice background has made it difficult to get an SBA loan under certain circumstances. However, the SBA is considering removing this barrier to loans. In September 2023, the SBA said it was considering “updating regulations that would remove barriers to capital for entrepreneurs with certain types of justice involvement.”

As SBA loans come with attractive interest rates, it is worth monitoring the SBA and its latest policies to see if a criminal record is still an impediment.

2. Online Business Loans

Online lenders may offer alternative business loans with less stringent requirements compared to traditional banks or through the SBA. While approval and funding times can be fast, you still need to provide proof showing that you’ll be able to repay the loan.

Be cautious when considering subprime online business loans. They usually come with a very high APR and a shorter repayment term. There also may be a requirement for a personal guarantee, which means your personal credit score can be impacted for any late payments or delinquency — and your personal assets may also be at risk to pay back the loan if your business isn’t able to.

3. Invoice Financing and Factoring Loans

Compared with other types of business loans, invoice financing and invoice factoring can be easier to qualify for, even if you have bad credit.

Invoicing financing is a type of short-term business loan based on the outstanding invoices you have from your customers. Also called accounts receivable financing., invoice financing is considered to be secured funding because your company invoices serve as collateral for the funds you receive.

In addition to this traditional secured loan structure, there are several other kinds of invoice financing. One of these is invoice factoring, in which you actually sell your unpaid invoices to a factoring company for a percentage of the invoices’ face value The factoring company then becomes responsible for collecting from your customers.

Debt-Free Financing Ideas for People With Felony Convictions

Steering clear of debt — not just small business loans but business credit cards and lines of credit — is clearly desirable. But if you aren’t independently wealthy, how do you start and grow a small business, particularly if you have a felony conviction?

The answer could be equity financing, otherwise known as getting investors.

“Prison prepared me for entrepreneurship even more than I could have prepared earning an MBA,” Andrew Medal, who served a prison sentence and is now a podcaster and angel entrepreneur, said in an article published by Entrepreneur, “An inmate is forced to operate at his or her most optimal efficiency, leveraging those already-scarce resources. How does this apply to entrepreneurship? Bootstrapping is a vital skill for any newly formed startup.”

When you get investors, you offer shares of your company to family, friends, and acquaintances in your networks in exchange for money. Depending on the planned size and scope of your startup, you could be pitching your dream to venture capitalists (employees of risk capital companies who invest money in companies) and angel investors (individuals who offer their own money in exchange for a piece of the business).

The forms of equity financing are:

•  Crowdfunding (such as CircleUp, EquityNet, WeFunder, and Fundable)

•  Angel investors, high net worth individuals who provide capital for startups

•  Venture capital firms, individuals, or companies that invest in young businesses

The chief advantage of equity financing is that there is no obligation to repay the money acquired. However, you are giving up some control of your business. In order to gain funding, you gave investors a percentage of your company. You’ll have to share your profits and consult with your partners any time you make big decisions.

Resources for Entrepreneurs With Criminal Justice Background

To learn how to brainstorm, launch, and grow a small business, you can get free advice from both the Small Business Development Center (SBDC) and SCORE, which is affiliated with the SBA. A mentor can make a huge difference in whether you succeed.

These two organizations offer advice targeted to people who have been impacted by the criminal justice system:

Inmates to Entrepreneurs

The mission of Inmates to Entrepreneurs is to assist people with criminal backgrounds in starting their own business by providing practical education through in-person and online courses taught by entrepreneurs.

Help for Felons

Help for Felons “provides support and direction to felons, inmates, and ex-offenders in every aspect of life.” On its site, the group provides sources and directories for jobs, reentry, housing, and financial help.

The Takeaway

If you have a felony conviction, finding work can be a challenge. Some people solve the problem by becoming an entrepreneur. Through applying for business grants and connecting with angel investors, investigating small business loans, and seeking advice from qualified mentors, you can find ways to get your business off the ground.

If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.

Photo credit: iStock/Olivier Le Moal

SoFi's marketplace is owned and operated by SoFi Lending Corp. See SoFi Lending Corp. licensing information below. Advertising Disclosures: SoFi receives compensation in the event you obtain a loan through SoFi’s marketplace. This affects whether a product or service is featured on this site and could affect the order of presentation. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Are you determined to do some good in the world for a cause you are passionate about? Forming a non-governmental organization, or NGO, may be a potential avenue for you to achieve those goals.

Here, you’ll learn about the role NGOs play in society and, if you decide you want to form an NGO, the typical steps that need to be taken.

What Is an NGO?

The term NGO was first used back in 1945 when the United Nations was formed. There is no formal definition, but generally NGOs are thought of as nonprofit entities that support humanitarianism and the public good. They are independent from any government but may receive government funding. NGOs can be local, national, or international in scope.

Recommended: What Are Nonprofit Business Loans?

How Do NGOs Work?

NGOs are usually set up to serve a social goal such as human rights advocacy, protecting the environment, health care, education, support of the poor, or reducing violence, to name just a few examples. Some household name NGOs include Salvation Army and American Red Cross.

NGOs run on many types of funding, including private donations, dues, and government grants. There are two types of NGOs. Operational NGOs focus on designing and executive development projects while Advocacy NGOs promote a specific cause or public policy. Many NGOs are considered part of both categories at the same time.

In the United States, NGOs are regulated and must file returns that detail funding, management and activities.

While no laws state that NGOs cannot receive loans, since the probability of repayment is low, securing business finance is challenging.

Are NGOs the Same as Nonprofits?

Yes and no. Most NGOs are nonprofits, but many nonprofit organizations are not considered NGOs. NGOs are usually focused on promoting social welfare or the public good. Many nonprofits may be focused on those goals as well. But many others may be involved in the arts, or science, commerce or research, with professional goals, and thus would not be considered an NGO.

7 Steps to Start an NGO

If you’re interested in making a change and positively impacting the world, starting an NGO may help you achieve your goal. These steps can help.

Step 1: Figuring Out Your Goal

The first step in starting a successful NGO is to clearly identify what cause you are passionate about and what goals you hope to achieve to promote that cause. From there you can determine how much need there is for your NGO. There may be dozens of NGOs already working in the area you are interested in that may need your support. Or you may find few organizations are addressing your cause directly. Ideally you want to be filling a gap in the current NGO market.

If you haven’t already, be sure to work or volunteer for an NGO in a related area to gain knowledge and experience before starting your own. This will also help you find potential team and board members for your organization. (More on that below.)

And, consider taking one of the many free NGO courses available online to better understand NGO structure, governance and other key concepts.

Step 2: Create a Plan

Creating a plan for your NGO helps you clarify your vision and goals so you’ll be successful. In your plan you’ll explain the purpose and goals of your organization. These need to be realistic and achievable.

Work for world peace isn’t something that one NGO can handle on its own.

Your plan should include a specific vision statement, a list of goals and the steps you’ll take to achieve them. This statement is key because it will likely be the backbone of your website and fundraising efforts.

Your vision statement and overall plan should reflect the research you’ve done on the challenges, history, politics and other factors that are related to and impact the cause you’re supporting and the actions you’ll be taking.

Step 3: Recruit Your Board of Directors

Surrounding yourself with experts on accounting, fundraising, management, marketing, technology, and other areas is key to running a successful NGO. That’s where your board of directors comes in. You want a team that shares your vision and will provide the expertise you’ll need to make that vision come true. Having a board is also a vital element for registering and running a nonprofit organization.

Step 4: Register Your NGO

To make your NGO legal, you’ll need to register. Applications usually require basic information such as name, purpose, board members and organizational structure. You also may find drafting Articles of Incorporation and Bylaws a necessary part of registration. And this may also be a good time to get any necessary permits and/or licenses you need to operate.

Step 5: File for Tax Exempt Status

Because NGOs are by definition nonprofit organizations, they almost always qualify for federal and state tax-exempt status. In addition, many NGOs qualify for 501(c)(3) status, which allows donors to take their contribution as a tax deduction.

Applying for tax-exempt and 501(c)(3) status via the IRS can involve some time and paperwork (your legal counsel can help). And in some states, you’ll need to be registered with a state charity official. For instructions and guidelines check out the IRS website.

If you’re not ready to file for tax-exempt status yet, consider asking an established NGO to sponsor you under its umbrella. Tax-deductible donations and grants go to your host, care of your NGO. You receive the funds and your donors are still able to get the tax write off.

Step 6: Develop a Great Website

A compelling, inviting website is one of the best ways to convey your mission and attract donors. Don’t skimp on a good designer and a seamless user experience. This will be the place you send anyone you and your staff encounter to learn more about your NGO and potentially contribute.

Step 7: Create a Budget

Your mission is solid, your paperwork is done. Now it’s time to figure out how much money you will need to fund your projects, operations, staff salaries and other overhead costs.

NGOs are often fueled by volunteer workers, but that doesn’t mean you won’t need a solid operating budget to manage those volunteers. In fact, many NGOs have budgets in the millions, even billions of dollars. Understanding exactly how much money you’ll need to keep the doors open, manage volunteers and continue to fundraise is vital to making your NGO successful.

Recommended: Nonprofit vs. Foundations

Getting Funds for Your NGO

Once you’ve got that budget settled, it’s time to raise the money you need so you can execute your plan.

NGOs are funded in a variety of ways, from crowdfunding for donations to sales of goods and services. Which method or combination of methods you use will depend on your vision, structure, and reach. Here’s a look at the various funding options. You may find you use one, several, or even all of these methods to fund your NGO.

Grants

You can explore foundations that award grants to help fund your NGO.

Private donations

Whether it’s from individuals or other charitable organizations, donations can be large gifts from an established foundation or a large collection of small private donations.

Government funding

Many NGOs receive government funding but are still able to retain their independent status.

The Takeaway

NGOs come in basically two flavors. Operational NGOS focus on development projects and Advocacy NGOS promote causes. They are funded by a variety of sources including government funding, even though they are independent of governments. Starting an NGO can be one of the best ways to help society as long as you’ve done plenty of research and developed a solid plan.

If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.

FAQ

How can you create an NGO?

Starting an NGO entails having a vision and plan for an organization that helps promote community development or social good. NGOs are not affiliated with any government but may receive government funding. You’ll likely need to register your NGO, choose a board of directors and engage in fundraising.

What are the differences between NGOs and nonprofits?

An NGO is always a nonprofit but a nonprofit is not always an NGO. The main difference is that NGOs usually focus on social welfare and the public good. Nonprofits do that too but many are also focused on the arts, science, commerce, research, professions, etc.

How are NGOs funded?

NGOs are funded in a variety of ways. They may rely on large donors, small private contributions, member contributions, grants, sales of goods and services, or a combination of some or all of these sources. Some NGOs also receive government funding, although they are independent from any government.

Photo credit: iStock/SDI Productions

SoFi's marketplace is owned and operated by SoFi Lending Corp. See SoFi Lending Corp. licensing information below. Advertising Disclosures: SoFi receives compensation in the event you obtain a loan through SoFi’s marketplace. This affects whether a product or service is featured on this site and could affect the order of presentation. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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If your nonprofit is looking to start or expand its fundraising efforts, you’ve got options. While it can be easier for larger organizations to secure grants and corporate sponsorships, there are many other funding sources for nonprofits that are smaller or just starting out. Here’s a look at funding options for nonprofits of all sizes.

Why Do Nonprofits Need Funding?

While having a tax-exempt status can certainly help an organization save money, nonprofits still have a variety of costs they need to cover. Not-for-profit organizations typically need reliable revenue streams to fund their missions, develop education programs, and cover their day-to-day expenses (including rent, utilities, salaries, and supplies).

At the same time, nonprofits need to be careful about how they “earn” money. In order to maintain a 501(C)(3) status, any earned income needs to be directly related to the organization’s mission. Many nonprofits meet their budgets through a combination of external funding (e.g., donations and fundraising initiatives) and self-generated funds (e.g, sales of merchandise, fees charged for services, and membership fees).

11 Nonprofit Funding Sources

There’s no one-size-fits-all approach to nonprofit funding sources. Some methods might work for you that wouldn’t be a good fit for others, or something that hasn’t worked in the past could be a good option for your organization at this point in its growth. Here are 11 different nonprofit funding sources to consider.

Recommended: Nonprofit Financial Statements

1. Membership Fees

Membership fees can create a reliable, recurring source of revenue for your nonprofit. The structure can vary depending on your organization’s mission and target audience, but many nonprofits offer some sort of incentive to encourage potential members to join, such as online name recognition, a free subscription to your organization’s magazine or newsletter, or discounted tickets to events.

Membership also creates a sense of community and ownership among your supporters, which might encourage them to promote your nonprofit on your behalf.

2. Individual Donations

Individual donations are often one of largest sources of funding for nonprofits, so it can be smart to make individual donors a key focus of your fundraising efforts.

If you don’t have one already, you’ll want to create an online donation page that enables recurring donations.

Some ways to increase the support you get from individuals include:

•   Promoting your cause on social media

•   Leveraging text-to-give campaigns

•   Asking for donations at community events

•   Mailing out fundraising materials

•   Hosting charity events

•   Organizing peer-to-peer (P2P) fundraisers

3. Grants

Grants for nonprofits are often available from the government at the local, state, and federal levels, as well as from business associations, corporations, and foundations. While grants are essentially free money, they sometimes come with specific conditions as to how exactly you can use the money. Also, competition for these awards can be stiff.

When searching for grants, you can check Grants.gov, which is the largest database of federal grant opportunities. You may also want to look locally, as many grants targeted for nonprofits are offered at the state and local level.

Recommended: Business Loans vs. Personal Loans: What’s the Difference?

4. Earned Income

Unlike other forms of fundraising, earned income comes from the sale of products or services. Nonprofits can generate revenue by selling merchandise (such as t-shirts), offering instructional classes, selling tickets to events, creating and selling publications, or renting out their spaces for events. Just keep in mind that earned income must be related to the mission of the organization or it can be taxed as unrelated business income.

If you’re thinking about selling products or services to raise money for your nonprofit, it can be a good idea to consult a tax specialist who routinely works with nonprofits for guidance.

5. Volunteers

Recruiting volunteers won’t generate revenue for your organization, but it can still have a meaningful impact on your budget. When volunteers actively participate in fundraising, marketing, and program delivery, it can save your organization significant sums of money, making it equivalent to a major revenue stream. Volunteers can also bring valuable expertise to your organization.

6. Legacy Giving

Also known as planned giving, legacy giving is when an individual leaves a sum of money to a nonprofit in their will. This type of funding is typically associated with large, well-known nonprofit organizations. However, once you have a healthy list of donors and achievements, you might consider pitching legacy giving to your members. It will likely take time to establish, but once this strategy is in motion, it could potentially provide a significant portion of your nonprofit’s funding.

7. Business Loans

While you might think of a loan as a nonprofit funding option, nonprofits can sometimes qualify for different small business loans. If you have a strong credit history and your nonprofit is generating revenue, it may be worth applying for a loan through your local bank or credit union. Just make sure that the bank or credit union lends to nonprofits.

You might also want to look into online business loans, Online (also known as alternative) lenders tend to have more relaxed requirements and are typically much faster to fund than banks. However, these loans often come with higher interest rates.

When applying for small business loans as a nonprofit, you will likely need to provide financial documentation that proves your organization has sufficient revenue to pay back the loan. Because nonprofits are limited in how they can raise money, you may need to secure your loan with assets your nonprofit owns.

Recommended: How Much Does It Cost to Start a Business?

8. Sponsorships

Some corporations look for nonprofits to partner with and support. They may wish to fund specific initiatives, events, or fundraisers. For example, a business might offer matching donations as part of your fundraiser, or make in-kind donations in lieu of monetary donations.

While you may be reluctant to partner with a for-profit business, these days there are many socially responsible corporations. If you can find a business partner that is aligned with your nonprofit’s mission and values, this could be a valuable funding source. Corporate sponsorship can also provide free publicity to your nonprofit when the company announces and promotes your partnership, which can further boost awareness and revenue.

Recommended: How to Start an NGO

9. Donation Crowdfunding

There are many different types of crowdfunding, but the one most used by nonprofits is donation-based crowdfunding, which works by asking large amounts of people to donate small amounts of money. You can launch a crowdfunding campaign to raise money for a specific program within your organization or as a general donation to the cause. Crowdfunding can also dovetail with your social media campaigns and simplify online giving for your donors.

While donation crowdfunding can be a low-cost and effective way to reach potential supporters all over the world, keep in mind that crowdfunding platforms typically charge fees and it can take a fair amount of time and effort to create a compelling and successful crowdfunding campaign.

10. Resource Donations

As with volunteers, resource donations won’t provide your nonprofit with an influx of cash, but it may help you save some. Resource donations are when a business donates products to your nonprofit. Whether it’s chairs and tables for a fundraising event, or food for a food bank, these donations can take many forms.

To orchestrate resource donations, you’ll want to communicate with businesses well before important dates and events. There may be extra paperwork involved, and not every business you contact will be able to help, but you may create long-term relationships with businesses that support your mission.

Recommended: 11 Small Business Grants in Ohio

11. Events

Fundraising through events, either online or in-person, is a tried-and-true way to raise money for a nonprofit. Whether you host a walk-a-thon, hike-a-thon, gala dinner, concert, or online auction, a charity event can engage current donors and also attract new ones. Live events can also help raise your organization’s visibility and brand, as well as help build up your mailing list.

Which Funding Sources Are the Right Fit for Your Nonprofit?

The right fundraising model for your nonprofit will depend on its size and mission. Here are some steps that can help you home in the best sources of funding for your cause.

1.    Analyze your current approach to funding. Do your current nonprofit funding sources deliver a good return on investment? Are they all aligned with your mission, vision, and values? Is there room to add other funding sources? Are there some you may want to move away from?

2.    Explore your options. You may want to look at the funding approaches of other similar nonprofits. Are they doing something that could work for you? Also consider having a brainstorming session with your team, inviting them to get creative and think outside the box.

3.    Make a short list of feasible options. Once you have a list of possible new funding streams, you’ll want to narrow it down to options that are sustainable and replicable. Once you have a short list, you can evaluate how much each nonprofit funding source will cost, and how much money your organization could feasibly garner from each one.

4.    Select funding model(s) to implement. Based on the information you’ve gathered in the above steps, you’ll next want to decide on one or two funding models to implement and develop a plan to put these models into action.

Recommended: NC Small Business Grants

The Takeaway

Nonprofit funding can come from a variety of sources, and many organizations rely on multiple revenue streams to pay their bills and keep their programs funded. For example, one nonprofit might be funded 40% through grants, 40% through events, and 20% through a membership program. Another might be 70% funded through donations, 20% through grants, and 10% through events.

If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.

FAQ

What is the biggest source of funding for reporting nonprofits?

For many nonprofits, the majority of their funding comes from individual donations.

What are the 4 types of nonprofits?

A nonprofit organization can structure itself in one of four ways: an unincorporated association, a trust, a corporation, or a limited liability company (LLC).

How do you start a nonprofit without any money?

To start a nonprofit with no money, you’ll need to write a business plan, build a board of directors, find an online fundraising tool that’s free to start, gather donations (from friends, family, and board members), find an attorney willing donate their services to help you register your nonprofit, and plan free and low-cost of fundraising events.

Photo credit: iStock/South_agency

SoFi's marketplace is owned and operated by SoFi Lending Corp. See SoFi Lending Corp. licensing information below. Advertising Disclosures: SoFi receives compensation in the event you obtain a loan through SoFi’s marketplace. This affects whether a product or service is featured on this site and could affect the order of presentation. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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