Secured loans

WHAT CHARITIES NEED TO CONSIDER BEFORE APPLYING FOR A LOAN?

So, you think a loan might be a good option for your charity? Here’s what you need to consider before you apply.

It makes sense to do your homework to make sure you enjoy a smooth application process. Lenders will have lots of questions to reassure themselves that you’ll be able to pay back what you borrow. So will you be able to answer them?

 

WHEN SHOULD I APPROACH THE LENDER?

If you’re considering a loan, it can be worth talking to potential lenders early on in the process, before you start an official loan application. They have lots of experience and may be able to offer you advice on the best way to present your case. If you want, you can have a no obligation chat with our expert loans team. Get in touch now.

ARE YOU READY TO BORROW MONEY?

To get a loan, your charity needs to have permission to borrow money. Your governing documents – the legal documents that set out your charitable purpose and how your charity is run – might specifically exclude you from being able to take out a loan or not mention them at all.

If loans are not specifically allowed in your charity’s rules, you’ll need to get your governing documents updated and approved to permit this. It's best to start this process early before applying for a loan as your lender is likely to check.

If you want a secured loan, you'll also need to check the governing documents to see if you can borrow against your assets, for example on a building you own. Some governing documents also set out a maximum limit that can be borrowed. Will your loan request fit this, or will limits need to be officially increased?

See the Charity Commissioner’s guidance on Changing your charity’s governing documents

HAVE YOU GOT A PLAN?

Your lender will want to see how you’ll pay back the loan on time.

Put together a proper business plan with projections of income and expenditure with evidence, such as financial statements, market research or statistics, to back it up. Consider your current and future sources of income and their sustainability. What potential risks are there and how would your organisation respond?

Lenders will also need to see how the project fits with existing plans for income and expenditure to check that you’re not cutting things too fine.

HAVE YOU STRESS-TESTED YOUR PLAN?

You’ll need to consider how resilient your plan would be if your finances were to change over the term of the loan.

You can do this by trying out different worst case scenarios, such as your income reducing or your costs rising steeply and check if you will still be able to repay the loan. If you’re building or refurbishing and there’s a problem, will you have enough contingency? If interest rates go up, will you still be able to afford the repayments, or do you need to scale back?

HAVE YOU GOT THE RIGHT SKILLS IN YOUR ORGANISATION TO MANAGE THE LOAN AND THE PROJECT?

Lenders will also want to make sure strong internal processes, management and governance are in place. So while your project is evolving, make sure you have the right mix of skills to manage it. So consider whether:

  • you have the financial and project management skills needed?
  • you’re aware of the strengths and weaknesses in your management processes?
By doing this you’ll flag areas that you need to pay particular attention to. You might find that you need to bring in additional skills, possibly on short-term contracts, such as project managers, finance experts and legal professionals and consider how they will be managed. These costs will also need to be factored into your plans.

Check the Charity Commissioner’s guidance on Internal financial controls in practice

ARE YOU CLEAR ON THE SCOPE AND SCALE OF THE PROJECT?

We've all seen TV shows where the potential cost overruns on a build or refurbishment project. You need to be realistic about what you’re planning to do, and be willing to adjust your plans accordingly.

ARE YOU TALKING TO THE RIGHT LENDERS?

You’ll also need to make sure you’re talking to the right lenders. If you’re taking out a mortgage, you need to have a relationship that will continue to work for up to 25 years. Ideally, it’s best to work with lenders who have an in-depth understanding of charity finance and the needs of the sector. Some banks take a ‘tick box’ approach to lending and base lending decisions on a formula. But if you have a particular project, you may find it helpful to work with a lender who evaluates each application on its own merits.

They’ll also know about all the options available, including social investment, and may be able to suggest alternatives if your planned project is not suitable for funding with a secured loan.

NEXT STEPS

If you think a loan could be the right solution for your charity, talk to our charity finance experts about a free consultation on 03000 123 444.

Loan applications subject to credit assessment. Security will be required.

Charity assets may be at risk if you do not keep up with the repayments for a mortgage, loan or any other debt secured on them.

If you're thinking of consolidating existing borrowing, you should be aware that you may be extending the term of the debt and increasing the total amount you pay.

CAF Bank Limited (CBL) is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Registered office is 25 Kings Hill Avenue, Kings Hill, West Malling, Kent ME19 4JQ. Registered under number 1837656. CBL is a subsidiary of Charities Aid Foundation (registered charity number 268369).


Charities Aid Foundation © 2017 | Registered Charity Number 268369
25 Kings Hill Avenue, Kings Hill, West Malling, Kent ME19 4TA Telephone: 03000 123 000
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