Borrowing for impact

Borrowing for impact
Expert advice

Borrowing for impact

Finance | 10 Feb 2016

Charities need to balance financial sustainability and positive impact. Dave Matkin runs through the main considerations for charities when borrowing.

As pressure grows from the public and the media on charities to demonstrate that they are funded in a sustainable and responsible way, they face a challenge in balancing their growth and aspirations with an appropriate form of income which befits their role as a charity. It would seem that over the next few years the charity and voluntary sector will be faced with a decline in grant income, while at the same time being asked by central government to fulfil a greater role in the provision of services previously provided by the state. Like it or not, the sector is slowly but increasingly being forced into the commercial world. The current government spending restrictions will also increase the level of need in the under-privileged groups in our society at exactly the same time as the grants designed to meet this need are being pared down.

For both these reasons charity and voluntary organisations will be forced to take a more commercial and sustainable view of their businesses if they are to have more than a limited lifespan and continue to meet their social missions in the longer term.

In the face of these larger strategic aims, borrowing money may not appear to be a priority although the immediate investment from a loan may, indeed, provide a way of achieving the longer-term goals of the charity. Banks encourage customers to plan for the future. By having a robust and achievable business planning process the charity will be prepared for most eventualities no matter how unpalatable.

Having an up-to-date, well written and meaningful business plan will always provide a solid foundation with which to start negotiations in all business situations. Whether you are requesting a bank loan, applying for grants, tendering for contracts, seeking credit from suppliers, merging with another organisation, motivating staff and giving them a say in the future of the organisation, or merely because it is good practice to have a plan.

In common sense terms any recipient of your business plan will want to be reassured that:

  • You are good at what you do.
  • You can deliver on your promises.
  • You are special and your products and services are better than anybody else’s.
  • You are good at business and are not likely to fail in the foreseeable future.

Try answering these simple questions for the place in which you work:

  • Where are we now?
  • Where are we going?
  • How do we propose to get there?
  • Is it worthwhile?

Once you have the answers to these questions you have the rudiments of a business plan from which to hang all the detail.

So, how do you start the process of business planning?

  • Have an initial discussion at board level to get buy-in for the business planning process.
  • Establish what the vision and mission for the organisation is. If this has never been discussed it may be an idea to seek the views of your staff, your customers, commissioners and any other stakeholders such as the local community. You will be very surprised at how differently your organisation is viewed by each group.
  • Once you have decided upon the vision and a mission you need to establish how your organisation will achieve it.
  • At this point you could undertake an analysis of the organisation’s strengths, weaknesses, opportunities and threats: the SWOT analysis. Views from across the whole organisation should be collated. You may identify some quick wins, which require no further planning, although most will have to be assessed as part of the longer-term business plan.
  • The issues highlighted in the SWOT will then enable you to assess the broad headings to be addressed in the business plan such as the market for your products and services, the staff and other resources required, the effectiveness of the management structure, an assessment of the customers and the competition.
  • Remember, your business plan will be a dynamic document which you should update regularly.
  • If it is kept up-to-date it can be used regularly for a variety of purposes. It should drive the agenda for your board and management meetings, be adaptable to the needs of fundraising, staff briefings and raising finance.
  • The business plan should also include audited accounts, the latest management accounts, the latest budget for the 12-month period and projections for at least three years’ integrated profit and loss, balance sheet and cashflow forecasts.
  • To demonstrate that you have considered all the pitfalls, pick the major risks to the business and sensitise your projections to show that the organisation can take the hits. The uncertainties may be a fall in turnover, the loss of a contract, a rise in costs or wages, or rises in interest rates. While all these eventualities will not happen at the same time you must show that you have considered their effects and given some thought to the consequences.

If there is one piece of advice that is vital, it is this: Be enthusiastic about your charitable mission and your business plan. If it is obvious that you enjoy what you do, your enthusiasm is likely to inspire others.

Having formulated a business plan, an interesting dilemma may become apparent relating to the balance between grant funding and arranging a repayable loan. On the face of it, grants offer great attractions, but also some unexpected disadvantages. Grants do not need to be repaid. They can be utilised to cover costs in a start-up situation, they can be used in some circumstances to purchase income-generating assets and as revenue support to fund non-income-generating activities especially those with a high social impact.

However, grants are often short-term which makes long-term financial planning difficult. Many grants are paid in arrears and may come with restrictions tying them to specific projects. There is increasing competition for grants as investment returns have fallen. There are some organisations who adapt their programmes to meet grant criteria rather than fulfilling their objectives (known as mission drift) and the application process is often bureaucratic, with long lead in times and inflexibility if the project changes.

Alternatively there is commercial finance, which can be considered a source of funding where charities can achieve sustainable funding in a responsible way. Commercial finance, in general, tends to be more flexible than grant funding (there may be conditions but they probably won’t be as onerous as those attaching to grants). It will probably be for a longer term which will free management from the need to constantly fundraise.

Loans are given on the understanding that they are repaid with interest. But, they are usually approved quicker than grants, they can be put to more flexible uses and loans are usually assessed on their own merits rather than in competition with other applications as grants are. While lenders will generally look for security and will charge interest, in comparison, you need to consider the hidden costs of grant funding.

Dave Matkin is director of commercial banking at Unity Trust Bank

Charity Finance wishes to thank Unity Trust Bank for its support with this article 



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