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David Brown

Client Relationship Manager

Charities Aid Foundation


EIGHT THINGS FOR CHARITIES TO CONSIDER WHEN BORROWING MONEY

Borrowing can be an effective way to finance future plans for many charities and social enterprises, giving you the freedom to focus on your organisation’s mission. To get started it helps to understand how lenders think, so you can approach them equipped with the right information.

Here’s a list of the 8 key things you need to consider:

1 IS YOUR CHARITY READY FOR FINANCE?

To be considered for finance, you will need to demonstrate to lenders that you’ve reached the point of growth that warrants seeking outside investment to achieve your business goals.

If you decide that loan finance is appropriate, don’t wait until you urgently need it because the average loan application takes 3-6 months.  Do expect to be asked the following:

  • How much money do you need?
  • How do you intend to repay the loan and over what time period?
  • What form of security can you provide? Consider what assets might be used.

2 SELL THE EXPERTISE OF YOUR TEAM

Lenders will evaluate whether your charity has the appropriate experience to manage the project. We recently worked with a church, Christian Life Ministries (CLM) to refinance the loan that enabled them to build a new property to accommodate a larger congregation. The property also enabled them to diversify their income by offering banqueting and conferencing facilities within their new building. When approaching us, the charity was able to demonstrate a clear understanding of where their in-house experience was sufficient and where they needed to engage with third party specialists. This was evident in  employing an experienced and reputable firm of architects to oversee the property build.

3 BE CLEAR ON YOUR REASON FOR FUNDS

A common mistake charities make is not being able to explain clearly why they need funds. So what should you do first? Before you approach prospective lenders with initial proposals, you need to know:

  • what stage your business is at: are you a start up, growing, established, or are you succession planning?
  • why you need the finance: do you need finance for working capital, to buy equipment, to buy land, property or to expand and grow?
  • how you will spend the finance: have a business plan ready so lenders can see how a cash injection will be spent and how it will benefit your charity. For a free business plan template, visit Gov.UK https://www.gov.uk/write-business-plan
  • your cash flow projections: these should be provided for the next 12-24 months to demonstrate you can meet interest and loan repayments (you will also need to include a loan repayment figure in your projections)

4 DEMONSTRATE HOW YOU'RE GOING TO REPAY YOUR LOAN

Lenders are concerned with affordability. They need to know how you will pay their finance back and  that you can afford it, without it having a detrimental impact on your organisation. Will the repayment funds come from activity already being generated, from the project that’s being funded or a future project?

 Typically banks will ask for:

  • audited accounts from the last 3 years
  • cash flow forecasts for the next 12-24 months
  • up-to-date management accounts
  • a business plan
  • copies of your current business bank statements to analyse if the financial information provided demonstrates your charity’s ability to repay the loan.

Be conservative with your projections – can you answer the ‘what-if’ scenario? i.e. what will you do if there are unforeseen costs or not as much demand for a new service as you expected? You will be expected to provide numbers that take this into account.

Have you also considered external factors such as Bank of England base rate (interest rate) rises? This is not an exhaustive list so you need to make sure you have considered all the factors.

5 DO YOUR MARKET RESEARCH

If you want approval for a new project, lenders will expect to see detailed market research for the business benefits your project could have.

6 WHAT SECURITY ARE YOU OFFERING?

Consider the question of security carefully and present a clear message to the lender. There are costs involved with the placement of security such as valuation fees and legal costs.

7 WHAT CONTRIBUTION ARE YOU OFFERING?

A lender will expect a contribution towards the project work. For some property deals, the pledging of additional existing land and buildings can often be taken as the contribution rather than cash.

8 WHEN ARE YOU EXPECTED TO PAY BACK YOUR LOAN?

Repayment terms can be flexible, but often they will be determined by the financial projections in your business plan, therefore it’s your responsibility to ensure its realistic and sensible. Lenders will also have parameters to which they tend to work with and will often be able to guide you as to an appropriate repayment term.

David is a Client Relationship Manager at CAF Bank. Connect with David on LinkedIn here.

Find out more about secured loans through CAF Bank, or talk to a member of the team 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).