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Eight things for charities to consider when borrowing money

Borrowing can be an effective way for many charities and social enterprises to finance their future plans. 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 eight 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 can take between 3 to 6 months.  As part of the application, you will be asked:

  • How much money you need
  • How you intend to repay the loan and over what time period
  • What form of security you can provide.  You will need to 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. CAF Bank worked with one particular 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 made by charities, 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 are 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. CAF Bank helped Howletts Wild Animal Trust, who initially invested in overnight camping. Howletts realised there was a much bigger market for ‘glamping’ (or luxury camping) holidays and wanted a bank loan so they wouldn’t have to rely on grants, donations or existing reserves to complete the project. The loan enabled them to provide thirteen tents and become a bigger player in the UK glamping holiday market. 

 

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.

CAF Bank has developed an easy-to-follow guide to how repayable finance can help fund a better future for your charity or non-profit organisation.
This guide is packed with expert insight:

  • Stories of charities who used loan finance to amplify the power of good
  • A clear summary of different types of repayable finance
  • Tips on what lenders look for and how to make your business case
    If you are considering loan finance then our Financing the Future guide will help you get started. 

If you are considering loan finance then our Financing the Future guide will help you get started. 

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.

CAF Bank Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority (Financial Services Register number: 204451).

CAF Bank Limited Registered office is 25 Kings Hill Avenue, Kings Hill, West Malling, Kent ME19 4JQ. Registered in England and Wales under number 1837656.