Seven charity funding myths demystified

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 demystify 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 a bridging grant, rather than waiting for donations and grants to come in.

2. Banks don't understand charities

Picking the right bank is an important part of borrowing successfully. Its important to identify potential lenders that have proven experience in lending to charities, and to understand their experience with projects and organisations such as yours.  

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 and difficult to understand

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 of the way. The information a bank needs will often be similar to that required by your trustees to fulfil their legal obligations.  

Your proposal should be strong and clearly set out the business plan and reflect the historic financials.

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

4. A decision takes months

With the right lender, a decision in principle & headline terms to help you with your planning can be quick.  This will then move to a formal approval and a legal process to complete the documentation and the loan collateral. This process can take time depending upon the details of the transaction involved, so regular communication and appropriate timelines are important in achieving your aims. 

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.

You should consider both tangible and intangible benefits as loan finance could provide additional services to your beneficiaries that otherwise may not exist; as well as the cost of other options such as leasing. In many cases lending will form part of a project package of funding with donations and retained surplus.

6. Rejection will damage our 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. 

7. Loans are risky for charities

With any major project 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. A loan can help you have a robust funding package and maintain a level of reserves. 

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. 

CAF Bank loans are non-regulated products.

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.