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| Crunching
down on loans? |
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| One
might think that the global credit crunch and general economic
slowdown would make lenders hesitant to continue providing
loans to charities. This probably isn’t the case however,
finds David Adams, and loan finance should remain a viable
option |
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The
last few years have seen a marked increase in the numbers
of charities using loan finance, whether to buy property,
to begin a new project more quickly than if forced to wait
for slow-moving funders, and for various other purposes. Trustees
have become less nervous about debt, the number and capacity
of specialist lenders has increased, and more mainstream banks
have developed charity-specific products and services.
All this can be explained, in part, by charities and banks
developing a closer understanding, but other factors have
also been at work. For most of the last ten years economic
conditions have been favourable, and these have also been
years of change in the wider charity funding landscape.
The development of new government and sector-led funding initiatives,
alongside the sector’s increasing involvement in contract-based
public service delivery, have both encouraged many charities
to consider loan finance. Loans are also often now used in
combination with other forms of funding, partly because as
soon as the offer of one is confirmed it often becomes easier
to obtain the other. A number of mainstream and specialist
lenders, and some funding organisations, now also offer loans
alongside equity/investment arrangements – so-called
‘mezzanine’ finance.
But will the upward trend in loan finance for charities continue
indefinitely? Might it at least slow down as we enter a period
of economic uncertainty? The knock-on effects of the global
credit crunch are already being felt by those individuals
and businesses that are suddenly finding it harder to borrow
from high street banks and building societies. Might that
unwillingness to offer credit spread into banks’ dealings
with charities?
The credit crunch is already having negative effects in this
sector: in November the Northern Rock Foundation announced
that it would close four funding programmes and cut its grants
budget for 2008 to £7 million – about a third
of the 2007 budget. It will honour all current commitments,
and will remain a major grant giving organisation (assuming
that things don’t get even worse for its parent company),
but this will still surely have wider repercussions in the
sector.
At the same time, it is possible that charities experiencing
difficulties in an ever-more complex funding landscape, in
which many organisations now experience serious difficulties
when trying to plan around the delays or unexpected hiccups
sometimes associated with payments from funding bodies, might
be less bullish about using loans.
Sarah Portanier, sustainable funding officer for the NCVO’s
sustainable funding project, has yet to see any indication
of either charities or banks backing away from one another.
She believes the range of opportunities charities have to
access loan finance is continuing to increase, and that this
must indicate a continued appetite for loan finance in the
third sector.
Nigel Price, development manager at the specialist lender
Unity Trust Bank, concurs. “I think generally access
to finance, and supply of finance to the sector, has continued
to improve over the last five years, and I think that alongside
that there’s been a comparable increase in appetite
in the third sector for loan finance,” he says. “Where
there’s a need, and it’s a sustainable operation,
then it’s not denting confidence.”
In November, Unity Trust launched a new £50 million
social economy fund to provide loans to third sector organisations
experiencing “substantial growth”, that are looking
to borrow amounts from £500,000 to £5 million.
The bank said it was launching the fund in response to growing
demand from charities.
Having said that, as Price points out, it might be a while
before there are clear indications of any slowing or reversal
of the trend towards more use of loans by charities become
visible. “Most capital projects being undertaken by
charities and social enterprises have a long lead-in time,
and the decision making process was probably completed some
time ago, ahead of the credit crunch and increases in interest
rates,” he explains.
Nor does he believe that the rate rises have been particularly
significant: “Despite the markets, the forward interest
rate profile is one of falling off the peak we’ve got
at the moment,” he adds.
Other lenders also continue to report buoyant growth. Malcolm
Hayday, chief executive of Charity Bank, says the bank had
loan enquiries of £100 million in 2006, and had already
equalled that figure after ten months of 2007.
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But what about the possibility that some lenders might lose
some enthusiasm for the charity sector as the credit crunch
begins to bite?
“I have no doubt that there’s probably more impact
on the high street banks,” says Sue Cooper, senior manager
of the social banking team at another specialist lender, Triodos
Bank. “We take in deposits and only lend when we’ve
got deposits to lend, whereas in the high street they go into
the market to acquire more capital.”
She thinks it perfectly possible that some of these banks
may start to take a harder line when dealing with charities.
“I think there’s potential for that to happen
with charities, where income streams are perhaps not so easy
to define for a high street lender who doesn’t understand
the business model,” she says.
Mark Porter, senior manager of the national clubs and charities
centre at Lloyds TSB, is adamant that this is not the case
at his bank. “We’re certainly not backing away,”
he says. “Some of the recycling projects for which we
have provided finance recently we could easily have turned
down, because there’s no security or repayment track
record, but each case is assessed on its own merits, and in
context. We wouldn’t say we’ve tightened our lending
criteria.”
Robert Greene, head of origination, charities and the public
sector, at Royal Bank of Scotland, doesn’t see why any
bank would do this if there was a good reason to provide the
loan in the first place. “If the projects remain viable
then there’s no reason why funders would not continue
to support them,” he says. “For the right proposition
I don’t think the climate has necessarily changed that
much. The proposition would always need to be properly risk-assessed,
and to make business sense.”
Charity Bank’s Hayday doesn’t believe every high
street bank will be so positive about the sector. “Because
there had been a lot of liquidity in the banking system, a
number of banks that hitherto had not been very involved in
the voluntary sector had begun to dip their toes in, and were
coming up with some interesting prices for the big deals,”
he says.
“What I wouldn’t know is how long they’re
going to be there. We all know that the banks are fickle,
and it only takes one or two problems for them to retreat,
particularly if they have any concerns over credit quality.
There has to be a question mark over the long term commitment
of some of those banks to the marketplace. People like us,
Unity Trust and Triodos: we’re all here for the long
term, but I’m not so sure you can say that for all the
others.”
Many loans to charities are connected to purchases of property,
and with the property boom coming to an end that might also
give some lenders pause for thought. “You have to ask
what is going to happen to property prices,” says Hayday.
“Some of the buildings that charities borrow to purchase
can be used for a variety of purposes, which helps them retain
their value. But some [buildings] are quite specialised in
the way they can be used, so there could be a question over
whether the value of the property holds up.
“It may be that some lenders start to say they’ll
lend less as a proportion of the property value. We’re
not changing our loan to value ratios, but we are conscious
of what’s happening to property prices, and we would
not advise charities to overpay for a property. Because you
know how it is: sometimes this is the only property in the
area that fulfils a need, and people think they will pay more
than it’s worth to get it.”
RBS’ Greene isn’t so sure. “I think that
if the underlying reason for the loan is the right one, then
changes in property prices don’t necessarily affect
that decision,” he says. “It’s not as if,
most of the time, the charity is investing in a building with
the intention of getting a return. People are investing in
the property to use it for the services they provide. It perhaps
would have an impact in terms of the expected value of the
property in the event of it needing to be sold, but that shouldn’t
affect the overall decision. Also, I imagine that often the
scenario would be that the organisation is moving out of a
number of different units, so by investing in a new building
you’re actually creating efficiencies and reducing overall
costs.”
Furthermore, says Unity Trust’s Price, charities are
not necessarily so vulnerable to economic turbulence as are
many private companies. “If a charity’s revenue
streams are affected by the general economic climate then
obviously that will have some impact,” he agrees. “But
to some extent the charity sector is sheltered from mainstream
economic trends. A lot of charities are running services related
to health and social care, and those services have to be delivered,
regardless of the economic outlook.”
Not everyone would necessarily agree that there is a golden
rule on which a charity could always rely, but Greene does
think charities engaged in contract-based public service delivery
are becoming more attractive to lenders. As he puts it: “While
we might see the rest of the economy in terms of debt not
continuing to increase at the levels we’ve seen in the
past, in the third sector opportunities are increasing.”
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