In this guest blog, Peter Kelly, Business Development Director at Charity Bank, discusses what loan finance can offer as well as an introduction to what lenders look for when considering a loan application.

As a bank that is owned by the social sector and exists to help the social sector, Charity Bank has seen firsthand how organisations have been able to expand their services and reach, through a loan.

Of course, loans are not right for all situations and careful consideration of the financial commitment should always be taken. In the right circumstances, however, loans can be a valuable tool for a charity to further its charitable mission.

How could a loan help your organisation?

A loan can help organisations become more sustainable. For instance, it can allow you to buy a property rather than continuing to pay rent. This is one of the most common uses of Charity Bank loans.

Loans can help a charity to grow its income. Borrowing to invest in a new activity that increases income can be a fast track to growth, with the additional income helping to repay the loan. In this way, loans can reduce reliance on grants and donations whilst allowing you to broaden your range of services.

Loans can help attract grants. In Charity Bank’s latest social impact study 46% of respondents from its existing borrowers reported that the loan helped to unlock funding they couldn’t have accessed otherwise.

Loans can be useful in the short-term. A loan can also be used to bridge the receipt of retrospective grants or payments under service delivery contracts. This can help smooth cashflow deficits and make it easier to plan and manage your finances.

In short, in the right circumstances a loan can empower charities to: seize opportunities, extend their reach, smooth cashflow, improve financial sustainability and leverage additional funds.

Aiding rehabilitation through a loan

Extern is just one of the organisations that has benefitted from taking out a loan with Charity Bank. Extern is a social justice charity which provides support to adults, and vulnerable young people and their families, working across Northern Ireland and the Republic of Ireland to reach over 15,000 people every year. As part of their work they address homelessness and addictions and rehabilitate offenders to build safer communities.

In 2016, Charity Bank approved a loan to support Extern’s new initiative Extern Homes. This new project consisted of purchasing ten properties in Belfast to offer affordable homes to those who are homeless, or at risk of homelessness, giving them a chance to get on the tenancy ladder and rebuild their lives. These life-changing tenancies come with wraparound support services, including access to training and employment opportunities.

Declan Morris, Project Manager with Extern Homes, said: “Taking out a loan with Charity Bank allowed us to bring this much-needed project to life. Through Extern Homes, we are enabling people to not only get back the key to their own front door, we are also empowering them to unlock a whole new future for themselves and their families. We hope that after the success of this initial pilot we will be able to continue working with Charity Bank to further expand these services.”

What do lenders look for?

Before applying for a loan, it’s useful to know what a lender will look for when considering a loan application. Some of the key factors considered in the due diligence process are as follows.

1. Can the charity afford a loan?
First and foremost, a lender will be looking for evidence that a borrower can afford to repay the loan. The charity will need to be sustainable and ideally have several streams of income so that repayment isn’t reliant on any one source. The charity will also need to demonstrate that it can continue to repay the borrowing following external events such as rises in the general level of interest rates. As part of the loan process, a lender would expect to see a business plan including financial projections. Once overheads, expenses and any plans to generate future revenue are considered, will the charity have sufficient surplus income available to afford the loan repayments?

2. Skill set
The governance of a charity is important and will be taken into consideration: who are the management and trustees, how long have they been involved, and do they collectively have the breadth of experience and skills to manage the organisation? A skills audit will capture the current skills of the trustee board and highlight possible gaps in trustee skills or where professional guidance is required. Reach Volunteering provides a template to allow you to perform a skills audit with your board.

3. Legal powers to borrow
A lender will need to see evidence that a charity’s governing documents (this may be a Trust Deed or Articles of Association) give the legal powers to borrow and, if necessary, to pledge assets as security for the loan. This is not always clear, so you may need to take professional advice. Unincorporated organisations have an implied power to borrow but may still require a specific power to charge assets. Changing your powers to allow borrowing or the giving of security is usually a relatively straightforward process and your legal advisers will be able to guide you through this.

4. Use of loan and impact
Social lenders, such as Charity Bank, will also wish to understand the social impact of a charity and of the proposed use of the loan. They will want you to provide evidence of the good work your organisation is doing with tangible examples that it delivers social benefit.

5. Security
Loans will usually require security. Examples of security offered against a loan could be property, cash deposits or a guarantee from a trading subsidiary.

First steps

Whatever your situation or proposal, the best guidance we can give is to open a dialogue with potential lenders at an early stage. This will give you the best possible chance of finding a loan that’s suitable for your needs and of ensuring you have sufficient time to get it approved.

To find out more about Charity Bank please visit www.charitybank.org/charity-loans or contact pkelly@charitybank.org