RISKS AND MITIGATION
Of course, the obvious risk is that if a new project or activity
does not yield the anticipated income, then charities may find
themselves unable to pay without compromising other activities. In
unincorporated charities, the trustees may even become personally
liable for the debt. This is why it is critical that charities make
sure they prepare thoroughly before taking out loans and only do so
in the right circumstances.
A spokesperson at CAF Bank (owned by Charities Aid
Foundation), says they've been approached by charities with
unmanageable debts in the past, but the root cause is usually that
they didn’t take out the correct loan for their needs.
“Often charities have resorted to loans because they have driven
down their reserves too much, find themselves running short, and
aren't getting as much money through the door. In this situation we
would suggest a recapitalisation, or perhaps a social investment
bond or social lender such as CAF Venturesome which would be
prioritising the social impact”.
“Alternatively, if they had considered loan finance before
spending their reserves and made sure they used it to generate new
income, they may not have found themselves in that situation.”
Most lenders are looking for evidence that a charity will be
able to repay their loan. However, charities cannot rely on lenders
to protect them, and must protect themselves by having a robust
business plan. As Ian Mansfield, CAF Bank,
puts it:
“One of the things we would hope to see is the 'what if'
scenario. 'What if interest rates rise in the next two years?'
'What if the charity doesn't get the income it's expecting?' This
sort of planning gives charities a bit more leeway – if they're
right up against it at the start, there's only one way afterwards
and that's down.”
Mansfield also emphasises strong internal structures and processes
for sound decision-making:
“The first factor for success is what the charity's executive
management team looks like. Do the people running the charity have
the skill set to properly account for loan financing? The second
point is whether they have got the governance controls in place to
make sure they can oversee what the money is going to be used for.
And finally, have they asked questions? There are no wrong
questions and trustees should always interrogate the
executive.”