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 are the eight key things you need to consider.
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 between three and six 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.
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.
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
- Your cash flow projections: these should be provided for the next 12 to 24 months to demonstrate you can meet interest and loan repayments (you will also need to include a loan repayment figure in your projections)
Demonstrate how are you 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 three years
- Cash flow forecasts for the next 12 to 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? For example, 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.
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. We recently helped Howletts Wild Animal Trust, who initially invested in overnight camping a few years ago. 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 13 tents and become a bigger player in the UK glamping holiday market.
Bob O’Connor of The Howletts Wild Animal Trust said “once we had the decision and written our business plan, we needed access to funds quickly. We were very passionate about our proposal and with a bank loan from CAF, we have been able to turn this into a success story.”
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.
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.
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.
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.
David Brown is a Client Relationship Manager at CAF Bank, and helps small-medium sized UK charities who are looking for finance. CAF Bank is owned by Charities Aid Foundation (a registered charity, number 268369). CAF Bank lend to charitable organisations. Connect with David on LinkedIn here. Or call 03000 123 420 or for more information visit our website.
Content on this page is paid for and provided by the Charities Aid Foundation sponsor of the Guardian Voluntary Sector Network’s Charity Money hub.
