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David Brown

Client Relationship Manager

Charities Aid Foundation


NINE CHARITY FUNDING MYTHS DEBUNKED

There are a lot of myths associated with loan finance for charities, but it can be an effective way of financing your future plans, giving you the freedom to focus on your organisation’s mission.

Here we debunk some of the popular myths:

1 CHARITIES SHOULD NOT BORROW

There is a belief that your charity should be self-funding, and rely just on donations or government grants. But in some instances, loan finance could help you realise your plans this year rather than in five.

A loan could help you expand into new ventures, own a property you currently rent or provide additional resources or services to your beneficiaries. All these things could be achieved sooner through loan finance, such as bridging a grant, rather than waiting for donations and grants to come in.

2 BANKS DON'T UNDERSTAND CHARITIES

Most banks do have an understanding of charities, but the degree of understanding can vary considerably. For example because of your charity’s size, you may be dealing with staff that don’t have that specialist knowledge of the charitable sector and how charities work.

Unlike businesses, your success is also measured through your beneficiaries and not the amount of profit made – charities are after all ‘not-for-profit’. An appreciation of this is important when considering a loan application.

3 THE APPLICATION PROCESS IS COMPLEX

Any lender that fully understands the sector and the underwriting process will be able to support and work with you to help you understand every step.

4 A DECISION TAKES MONTHS

With the right lender, a decision in principle can be quick.  The drawdown process can take time depending upon the legalities involved, so knowing what to expect in advance will help speed up the process and possibly reduce the cost of legal fees.

5 LOANS ARE EXPENSIVE

Typically there are two types of costs associated with the loan process. These are:

  • Pricing – interest rate, arrangement and valuation fees;
  • Legal – both the charities and lenders solicitor fees.

A loan can seem expensive but you have to weigh-up the pros and cons. You should consider both tangible and intangible benefits as loan finance could provide additional services to your beneficiaries that otherwise may not exist.

6 LOAN TERMS ARE NOT NEGOTIABLE

Your lender may be open to negotiation on the rate and fees (pricing). The stronger your proposal is, the better the terms you can negotiate, such as the length of the loan period.

7 MY CHARITY IS TOO SMALL FOR A LOAN

If your  proposal is strong and clearly set out and the business plan and financials reflect this, no charity is too small.

The proposal and the strength of the business plan is very important and can make the difference to your application. For a free business plan template, visit Gov.UK https://www.gov.uk/write-business-plan

8 REJECTION WILL DAMAGE MY CREDIT RATING

Some banks assess an application based on the strength of the proposal and business plan prior to undertaking any credit reference searches.

One rejection shouldn’t have a detrimental effect, but if you put in numerous applications for a single proposal, you might end up with several footprints on your credit record, which could have a bearing on future credit applications.

9 LOANS ARE RISKY FOR CHARITIES

With any kind of loan finance there will always be an element of uncertainty, and you need to weigh up the risk to opportunity. However it can be reduced by having the right knowledge, a solid proposal and a robust business plan including contingencies.

CAF Bank has developed an easy-to-follow loan process guide to help you through the process. It highlights everything you will need when applying and what costs you may incur during the application process.

Read our Loan process guide to find out more

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

For more information call 03000 123 420 or visit our CAF Bank loans page.

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).