Yes, nonprofits can get loans. A 501(c)(3) organization is a separate legal entity that can sign contracts, own property, and take on debt in its own name, and nothing in the tax code prohibits borrowing. What does trip people up is that the best-known small business lending programs — SBA 7(a) and 504 loans — are closed to nonprofits by federal regulation, so the useful question is not whether you can borrow but which lenders actually serve tax-exempt borrowers and what they will require.
The Legal Authority to Borrow, and the SBA Boundary
A nonprofit corporation is liable for its own debts as long as the corporate structure is maintained; individual board members, officers, and staff generally are not. Section 501(c)(3) requires that “no part of the net earnings” benefit any private individual, but it says nothing about prohibiting debt. Lenders care about whether your cash flow supports repayment, not whether you file as a charity.1Office of the Law Revision Counsel. 26 USC 501 – Exemption From Tax on Corporations, Certain Trusts, Etc.
Where the door is closed is at the SBA. Federal regulation lists “non-profit businesses” among the organizations ineligible for SBA business loans, and the 504 program specifically excludes loans “to businesses engaged in nonprofit, passive, or speculative activities.”2eCFR. 13 CFR 120.110 – What Businesses Are Ineligible for SBA Business Loans3U.S. Small Business Administration. 504 Loans The one narrow exception is the Economic Injury Disaster Loan, which is available to most private nonprofits in a declared disaster area that have suffered substantial economic injury.4U.S. Small Business Administration. Economic Injury Disaster Loans Outside a disaster declaration, if a broker or consultant suggests SBA financing for your nonprofit, that is a red flag.
Loan Sources That Actually Serve Nonprofits
Community Development Financial Institutions
CDFIs are mission-driven lenders certified by the U.S. Department of the Treasury to serve low-income and underserved communities, and nonprofits are among their primary borrowers.5Community Development Financial Institutions Fund. CDFI Certification They finance facility renovations, equipment, and operating capital. Because they exist to fill gaps left by conventional banks, CDFIs often work with borrowers who have thinner financial histories, smaller revenue, or less traditional collateral. Rates are typically competitive with or slightly above commercial bank rates.
Commercial Bank Loans and Lines of Credit
Many commercial banks make term loans and revolving lines of credit to tax-exempt borrowers on the same basic model they use for any business: they evaluate revenue, expenses, existing obligations, and collateral, then set a rate and repayment schedule. Expect a margin above the prime rate that reflects your organization’s risk profile. Nonprofits with real estate, endowment assets, or strong receivables will get better terms than those without hard collateral.
Bridge Loans for Reimbursement-Based Grants
Organizations that run programs on government reimbursement contracts know the cash-flow gap well: you spend, then wait weeks or months to be reimbursed. Bridge loans and short-term lines of credit cover that gap and are usually structured with either monthly payments or a single balloon timed to the reimbursement. CDFIs and some commercial banks offer bridge products designed for this pattern.
Program-Related Investments From Private Foundations
Private foundations can make below-market loans to nonprofits as program-related investments. The IRS describes PRIs as investments whose primary purpose is furthering the foundation’s charitable mission rather than generating a return, and gives examples that include low-interest or interest-free loans.6Internal Revenue Service. Program-Related Investments Rates can run as low as one or two percent. The tradeoff is that foundations set their own timelines and typically fund only projects that align closely with their charitable priorities.
USDA Community Facilities Loans
Community-based nonprofits in rural areas can borrow through the USDA’s Community Facilities Direct Loan Program to build or improve health clinics, childcare centers, fire stations, libraries, and community centers. Repayment terms run up to 40 years with no prepayment penalties. Interest rates are keyed to the median household income of the service area and ranged from 4.5% to 5.25% as of mid-2025.7USDA Rural Development. Community Facilities Direct Loan and Grant Program For a qualifying rural facility project, this is one of the best terms available anywhere.
501(c)(3) Tax-Exempt Bonds
For large capital projects, some nonprofits — hospitals, universities, and sizable charities — can access tax-exempt bond financing. A local government entity issues the bonds on the nonprofit’s behalf, and because the interest paid to investors is exempt from federal income tax, the borrowing rate is well below conventional loans. Issuance costs, legal fees, and compliance requirements make this impractical for small loans, but on multimillion-dollar projects the interest savings over the life of the debt are substantial.
What Lenders Will Ask For
Regardless of which lender you approach, expect to assemble a packet that proves the organization exists, operates legally, and can repay the loan.
IRS Documentation and Financial History
Every lender will ask for your IRS determination letter confirming 501(c)(3) status. Letters issued from 2014 onward can be downloaded through the IRS Tax Exempt Organization Search tool; for older letters, you submit Form 4506-B to request a copy or an affirmation letter.8Internal Revenue Service. EO Operational Requirements – Obtaining Copies of Exemption Determination Letter From IRS
Lenders also want at least three years of Form 990 returns, which show revenue mix, program expenses, compensation, and balance sheet. Audited financial statements provide the independent verification that underwriters use to decide whether your cash flow supports the proposed debt.
Collateral
Most lenders want collateral of some form. Common pledged assets include real estate, equipment, and accounts receivable from grants. Organizations with endowment funds can sometimes pledge a portion to secure a lower rate without liquidating the fund itself. A CDFI is generally more willing than a commercial bank to work with receivables or future grant commitments when hard assets are thin.
Watch for a negative pledge clause, which prevents you from using the same collateral to secure another loan. If additional financing is likely later, negotiate the scope of that clause before signing.
Bylaws
Lenders read your bylaws to confirm that the board has authority to authorize borrowing and that the approval process you followed was valid under your own rules.
Board Resolution and Conflicts of Interest
No lender will finalize a nonprofit loan without a formal board resolution authorizing the borrowing. Without one, the loan agreement itself can be challenged as unauthorized.
A properly drafted resolution identifies the maximum loan amount, the purpose of the funds, and which officers (typically the executive director or board treasurer) are authorized to sign loan documents. It must be signed, dated, and recorded in the official board minutes. If your bylaws require a supermajority vote for financial obligations above a certain threshold, the resolution needs to show that standard was met.
If any board member has a personal or professional relationship with the lender, your conflict of interest policy applies. The standard procedure has the conflicted member disclose the relationship, leave the room during discussion, and abstain from the vote, with all of it recorded in the minutes. Lenders reviewing governance documents look for exactly this trail, and its absence can delay or derail closing.
Personal Guarantees
This is where nonprofit borrowing gets uncomfortable. Although incorporation generally shields directors and officers from personal liability for organizational debts, commercial banks often ask for personal guarantees from one or more leaders. Signing a personal guarantee means agreeing to repay the loan from your own assets if the nonprofit defaults, which creates an exception to the limited liability protection that incorporation normally provides.
Not every lender requires one. Personal guarantees are more common for newer organizations, unsecured loans, and borrowers with limited operating history. CDFIs and government-backed programs like the USDA Community Facilities loan are less likely to require them than a bank extending an unsecured line of credit. If a guarantee is on the table, anyone asked to sign should understand exactly what is at risk and consider negotiating a cap on the guaranteed amount or a sunset provision.
Restricted Funds Cannot Repay Loans
Donations given with a restriction — money designated for a specific program or building project — are legally restricted to that purpose. You cannot redirect them to general debt service even if the budget is tight. The restriction is enforceable under state law, typically the Uniform Prudent Management of Institutional Funds Act, and violations can produce donor lawsuits, penalties, or loss of tax-exempt status. Releasing a restriction requires written permission from the original donor.
Underwriters know this, and they look at unrestricted revenue when evaluating repayment capacity. If a large share of your revenue is restricted, your effective borrowing capacity is smaller than your total budget suggests. Loan application projections should separate restricted and unrestricted funds clearly.
Tax Exposure on Debt-Financed Property
Borrowing to acquire property can create a tax bill that catches nonprofits off guard. Under Section 514 of the Internal Revenue Code, if a tax-exempt organization holds debt-financed property that produces income unrelated to its charitable mission, part of that income becomes taxable as unrelated business income.9Office of the Law Revision Counsel. 26 U.S. Code 514 – Unrelated Debt-Financed Income The taxable share is roughly the ratio of average acquisition indebtedness to the property’s average adjusted basis, and the tax is computed at regular corporate rates under Section 511.10Office of the Law Revision Counsel. 26 USC 511 – Imposition of Tax on Unrelated Business Income of Charitable, Etc., Organizations
Exceptions apply for property used substantially in your exempt purpose, land acquired for future exempt use within ten years (fifteen for churches), and debt incurred as part of performing an exempt function. If you plan to borrow for real estate that will not be used entirely for charitable purposes, get a tax advisor involved before closing.
Timeline, Closing Costs, and Life After the Loan
Once your packet is complete, underwriting typically takes 30 to 60 days, longer for complex collateral or bond issuances. Approval produces a commitment letter with the final rate, repayment schedule, covenants, and collateral requirements.
Budget for costs beyond principal. Origination fees commonly run from 0.25% to 2% of the loan amount. Legal fees for both sides add several thousand dollars, more for complex deals. Real property financing also brings appraisal fees, title insurance, and recording costs that vary by jurisdiction.
After closing, the debt has to be reported on your annual Form 990. Secured mortgages and notes payable to unrelated parties go on Part X, line 23; unsecured notes on line 24; loans from officers, directors, or other insiders on line 22, which triggers additional disclosure on Schedule L.11Internal Revenue Service. 2025 Instructions for Form 990 The 990 is public, so donors and grantors will see your debt load.
Most loan agreements also include financial covenants that continue for the life of the loan. The most common is a debt service coverage ratio minimum, often 1.2, meaning available income must exceed annual debt payments by at least 20%. Lenders may also require minimum cash reserves (three months of operating expenses is a common benchmark), timely delivery of audited financials, and continued tax-exempt status. Breaching a covenant can trigger a default even if you have never missed a payment, so track these benchmarks throughout the year rather than at audit time.