It has been a while coming, but borrowing money is now forming an important strategic part in the way charities organise their funding. According to those banks which lend to charities, most of that money is used for buying, renovating or building property.

In the first six months of 2006, Charity Bank, for example, agreed almost £10 million worth of loans for charities across the country, and in the first ten days of July alone the bank received a total of 40 loan enquiries from various organisations.

Malcolm Hayday, chief executive at Charity Bank, says that 60 per cent of the loans the bank awards are for the purchase of assets, and the majority of those are property. The rest is borrowed to fund a variety of different aims. Some charities are looking for help to buy moveable assets such as IT systems, which are not always popular with grant makers. Others need to bridge the gap in cashflow when waiting for funds to arrive in the form of grants or covenants.

Some, like Iain Brown at Lomond Training and Environmental services (see case study two), need a cash injection for working capital for income generating activities, such as stocking a new shop.

“There are more and more who look at borrowing while they action a fundraising plan,” says Sue Cooper, senior loan manager at Triodos. What’s more, Julie Barnsley, relationship director in the charities team at Barclays says: “Loans have been used in the past for specific high profile fundraising campaigns and some charities are even considering whether they should borrow money to help them fund their pension deficits.”

It’s also worth noting that charities do not only borrow in the form of loans. Barnsley points out that traditional bank debt, such as overdrafts, revolving credit facilities and term loans, are not the only forms of finance available. “Technology leasing and other more conventional forms of asset finance are becoming increasingly common in the sector,” she says.

“The benefits of these forms of finance also extend to charities with healthy cash surpluses that would otherwise have utilised day-to-day working capital to finance non-core activities.”

Who is borrowing and how much?
Charities looking to borrow money come in all shapes and sizes. Charity Bank’s Hayday says the smallest charities the organisation has lent money to have had a turnover of just £5,000 to £10,000. Large charities, with turnover in the millions, often use borrowing more frequently and can usually secure a good deal with the mainstream banks – some banks have specialist teams working with those with a turnover of £25 million plus, for example. Smaller organisations may find specialist financial institutions more helpful.

Hayday tells the story of the Mull Fishermen’s Association, which needed to get the island’s pier in working order so that they could generate revenue from its use. The association had secured funding from Europe but it needed to match that by the end of the year. The group approached a mainstream bank and were offered finance, but the three-year term it came with was too tight. Charity Bank came up with a suitable deal, offering to lend the money over 10 years, but with no penalties if they were able to repay it sooner.

The size of loans is equally varied. “In theory the minimum we lend is £1,” says Hayday. “But in practice the smallest amount we have lent is £3,000.” The larger sums borrowed go right up to £3 to £4 million.

How to get a loan
Charities that have considered borrowing often worry that they will have trouble putting their case across to banks and so will not be able to secure a loan, however great or small. The banks all have their own procedures for application, but in general they say that the starting point is to discuss the plans and make sure both parties understand what is involved. And doing this in the initial stages may mean that you change tack altogether. “Ring first,” says Hayday. “Talk it through. A loan might not be the best course of action.”

If you decide it is, engage with your bank at the earliest point possible. Barclays’ Barnsley says: “Make an appointment to speak with your bank as soon as the idea is shaping into reality. Make sure that you have a clear idea of some of the basic elements such as the purpose of the facility, the amount required, the term of the loan, and how it will be repaid.”

To process an application the bank will need as much relevant information as possible. Some use a fixed format – Charity Bank, for example, has a summary form to fill in available on its website. Others will take what you offer and ask you for more if necessary. “There is no set format. Provide us with what you can and we will look and see if we need more specific information,” says Triodos’ Cooper.

You should also prepare your case carefully. “Feasibility studies, robust and suitable design and build contracts, detailed and realistic cashflow forecasting are essential,” says Barclays’ Barnsley. “It is useful to build the loan financing costs into the cashflow forecast to show that the charity can comfortably afford to repay the facility.”

Whether specialist or mainstream, financial institutions like to see evidence of what you plan to do with the money. If visits are not part of the normal application process – and they often are – get the loan manager to your site so that you can show them how you work, what you plan to change, and how the funding would help. Try to “give them a feel for the end result”, says Barnsley. As Iain Brown’s experience at Lomond Training shows, what can be hard to understand at a distance can simply click into place when you see a project in action.

Think, too, about liability. Charity Bank does not usually ask for personal guarantees when offering loans, but some banks might. You need to ask if that is a risk your organisation is willing to take. And if at any stage you run into problems at your organisation, don’t be tempted to brush them under the carpet. “Be totally transparent – because when something starts to go wrong it can happen very fast,” says Hayday. The issue may not scupper your plans, but, he adds: “We need to know to sort it out.”

The loan application process may take weeks, or it may take months, depending on your situation. If your need is urgent, make that clear at the outset – the bank may be able to speed up the process. And if a loan is the right way to fund your project, then the wait should be worthwhile.

Case study one: Brisol Cancer Care

Bristol Cancer Care offers a combination of support using complementary therapies, stress-reducing self-help techniques, and practical advice on healthy eating and lifestyle alongside medical treatment to people with cancer. The organisation was looking to expand its operations and build a new centre which would enable it to help five times as many people.

The charity borrowed £1 million from Triodos bank to help fast-track the building work at the new premises. The charity’s finance director Ian Turner said “The Triodos team understood our needs as a charity, namely to put short-term borrowing in place as quickly as possible – allowing us to reach as many people with cancer needing our services as soon as possible – but without putting the long-term financial viability of the charity at risk.”

Work on the new centre is due to be completed by the end of 2006.

Case study two: Lomond Training and Environmental Services

Lomond Training and Environmental Services in Dumbarton, Scotland, reconditions and recycles used white goods and electrical appliances, which can then be sold. The organisation has become the largest of its kind in Scotland. The organisation also trains and employs people who are, in company secretary Iain Brown’s words, “some of the people most excluded from society”.

The organisation had found a suitable shop to sell part of its output but needed cash to stock and fit-out the premises. Brown says: “We took a loan out for working capital.”
The group borrowed £30,000 over a term of 12 months, and repaid the money in the allotted time. “It has definitely helped us,” says Brown.

“We approached mainstream banks but they were not interested,” he explains. “We had only been trading just over a year. We’re a charity, the directors don’t get paid. We would not have been happy to give personal guarantees.” The high street banks
had trouble understanding what the organisation was about.

Even with Charity Bank, which is used to unusual situations, Lomond Training did not find the process altogether straightforward.

“The bank is based in Kent, there is no devolved branch in Scotland, and the physical distance made it more difficult for them to understand what we did,” he says.

Nevertheless, borrowing has formed a successful part of overall funding, so much so that the group has now taken out a second loan for the same amount. “We aim to expand and to be commercial in five years,” says Brown. “We are already making enough to meet our main aims.”

Top