*Originally posted on LinkedIn, May 12, 2026
A nonprofit is told to take a $500,000 loan to buy equipment.
They are told grants will pay it off.
No grant is awarded.
The debt remains.
This scenario is not rare. It is growing. Many organizations are being introduced to “bundled” funding models that combine loans with promised grant support. The pitch sounds strategic. The risk is often hidden.
This article separates what is allowed from what is being sold.
The funding landscape has shifted. Foundations now want to know the return on investment (ROI). They want to know what each dollar funds, what the outcome is, and what impact it has on the community.
General operating support is harder to secure. It still exists, but it is no longer the norm.
For many nonprofits, this creates pressure. And without a clear strategy, that pressure turns into fear.
I have seen this conversation happen more than once. Each time, the outcome depends on whether leadership understands the risk before they sign. Recently, I came across a grant writing company working directly with a loan company. When I looked into the company, I learned not one person in leadership had nonprofit experience.
That matters more than most people realize.
Without a clear fundraising strategy, many organizations begin looking for immediate solutions. Especially when they need to fund capital expenses or purchase large items.
At that moment, loans feel like the answer. And when someone says, “grants will pay it off,” it feels like a plan.
It is not a plan.
It is a short-term response to a long-term problem. And that problem can only be solved with strategy.
Can grants pay off loans?
Sometimes. Rarely. Under strict conditions.
Grants and loans are not interchangeable.
Grants fund specific, approved activities.
Loans must be repaid.
Most funders do not provide money to eliminate debt. They fund work. They fund programs. They fund outcomes.
That distinction matters more than anything else in this conversation.
In very rare cases, grants may cover a portion of debt. But in most cases, foundations clearly state grant funds cannot be used to pay down debt or cover past expenses.
Grant funds are generally limited to costs incurred after the award is made.
So what does that actually mean?
It means you cannot take out a loan today and assume a grant will cover it tomorrow.
This is where confusion happens. Because grants and loans can absolutely work together.
Many nonprofits use donor funds, grants, and financing to complete capital projects. That is not the issue.
The issue is expectation.
The difference is not whether you use both. The difference is understanding what each one is responsible for.
Loans must be repaid through reliable revenue.
Grants support defined pieces of a project.
When those lines blur, risk increases.
What Grants Actually Fund
Most institutional funders are very clear about what they will and will not fund.
They typically fund future program expenses, time-limited project costs, equipment tied to a funded program, or defined capital investments
In some cases, they may allow a portion of debt service tied to an approved project.
But most do not allow, general debt payoff, refinancing existing obligations, paying off loans taken before a grant award, or retroactive reimbursement unless explicitly stated
Grant funds are restricted by both purpose and timing. If it is not written into the guidelines, it is not allowed. I teach my clients and students, if in a grant application you request funds to purchase Granny Smith Apples, and once awarded, there are no Granny Smith Apples within a 100 mile radius, you cannot buy Cosmic Apples without written permission from the foundation.
And here is where many organizations struggle.
Most leaders are not taught how to read grant guidelines. They rely on assumptions. They rely on others. Or they assume someone else knows. And, even more frightening, the board of directors lacks this knowledge as well or simply do not involve themselves in the grant writing and award management.
This is where real mistakes happen.
To understand what a grant will cover, read the RFP. Read the NOFO. Read the website. Call and ask questions. Foundations are incredible resources. And, here is the biggest secret, they want you to be successful. Call, ask the questions, they are more than happy to answer.
Because at the end of the day, a grant will only cover what you applied for, within the time period approved.
Nothing more.
The Sales Pitch Problem
There is a message that is becoming more common:
“Take the loan now. We will secure grants to pay it off.”
I understand why this is appealing.
When funding is uncertain, a clear answer feels like relief. It feels like movement. It feels like progress.
But relief is a feeling based on an assumption. It is not a strategy.
This model does not hold up.
No grant is guaranteed.
Grant timelines rarely match loan repayment schedules.
Funds cannot be used outside of approved purposes.
And the nonprofit carries all of the risk.
Grant success rates often fall between 20% and 30%. That means most applications are not funded.
That is not a risk most organizations can afford to take.
Strong nonprofits do not rely on one funding source.
They diversify.
Funding should come from donors, sponsorships, programming, events, and grants. Each one plays a role. Each one supports the others.
And behind all of that, there must be a strategy.
Messaging should align.
Goals should align.
Asks should align.
And relationships must be built and maintained.
Donors change priorities. Foundations shift focus. Leadership changes. Funding is not static.
Simple actions matter, quarterly updates, annual reports, and clear communication. All in addition to the required grant reporting.
These do not need to be complex. They need to be honest.
Show what you raised.
Show what you spent.
Show what is still needed.
As a former nonprofit CEO, and now a business owner, I understand why taking a loan can feel like the right decision. It can feel like forward movement.
But that feeling does not last.
And a feeling will not carry an organization through repayment.
Red Flags to Watch
Based on what I have seen, these are clear warning signs:
- A lender and grant writing firm offering a combined package
- Language that implies guaranteed funding
- Pressure to make a quick decision
- Vague or unclear grant strategies
- No discussion of worst-case scenarios
When a grant writer is financially tied to a lender, incentives change. The loan can move forward whether or not funding is secured.
The nonprofit is left holding the responsibility.
In fundraising, pressure is always a signal to pause.
Take a step back.
Bring in your board.
Review everything.
Ask questions.
You are allowed to slow this down.
When It Can Be Done the Right Way
There are situations where grants and loans work together.
Capital campaigns with bridge loans.
Large projects with confirmed funding sources.
Structured financing plans.
But these situations have something in common.
The plan exists before the loan.
Not after.
Grant guidelines are clear.
The project is defined.
And the organization can repay the loan without the grant.
Debt should never depend on uncertain funding.
Be cautious.
Understand exactly how the debt will be repaid.
And never count on a grant.
Board and Leadership Responsibility
Boards are responsible for the financial health of the organization.
That includes understanding risk.
Before approving debt, leadership must understand how it will be repaid, evaluate full exposure, question assumptions, and demand clarity.
If the grant does not come through, the debt remains.
That does not change.
And this part is important.
The board is responsible for fundraising. And the board carries the fiduciary responsibility of the organization. In short, if repayment on a loan fails, the board is on the hook for the loan.
Not just the staff. Not just the development team.
The board.
They must be part of these conversations. They must be part of relationship building.
This is not optional.
Ethics in Grant Practice
Ethical grant work is grounded in truth.
Budgets must reflect reality.
Narratives must reflect actual plans.
Guidelines must be followed.
Grant writing is not about getting money at any cost.
It is about alignment.
As I tell my clients, if you did not ask for it in a grant budget, you cannot buy it.
A Practical Decision Checklist
Before taking on any loan tied to potential grants, ask:
- Do the guidelines allow this use of funds?
- Is funding confirmed or projected?
- Can we repay the loan without the grant?
- Who benefits if funding does not come through?
- Has the board reviewed the risk?
If the plan depends on a future grant, stop.
If something is unclear, pause.
And I will add this clearly.
Do not work with a fundraising company that suggests this model.
Perspective from the Field
I have raised more than $30 million in grant funding and led organizations through growth and challenge.
One thing remains consistent.
Strong strategies are built on clarity.
Grants are powerful. They expand programs. They increase impact.
But they are not a safety net for financial risk.
There is nothing wrong with debt. But it must be smart debt.
I have inherited organizations with debt. I have had funders say clearly they will not cover it.
That is the reality.
If a funding model depends on a future grant to justify present debt, it is not a strategy.
It is a gamble.
Nonprofits deserve better than that.
What are you seeing in your community?
Have you been approached with a “grants will pay for it” pitch?
If you are considering debt or evaluating a funding strategy, take the time to understand it before you sign. One decision can shape your organization for years.