Carolyn Sims, head of banking at our banking partner Charity Bank, provides a guide to charity loans and explains why many charities find loan finance empowering.

It is understandable why charities may be put off by the idea of taking on a loan when they face an uncertain future, particularly if much of their income comes from contracts with the public sector at a time when spending continues to be cut.

But, in the right circumstances and with the right kind of loan, debt can help a charity to thrive and to have greater control over its future.

Trustees and management need to understand what loan finance can offer in order to determine whether it is a suitable option for them.

How can debt be a good thing?

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 popular purposes for Charity Bank’s loans.

Loan finance can empower: it can help you to grow and expand your services, diversify your income streams, or make the most of a newly available opportunity.

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

Loans can help bring in grants. Charity Bank’s recent social impact study revealed that 41 per cent of the organisations to which it has lent were able to leverage additional funds from sources such as local trusts.

One of Charity Bank’s borrowers, Heron Corn Mill, received a £940,000 grant from Heritage Lottery Fund (HLF) as a direct result of its loan. An arts, education and heritage facility, the Mill borrowed just over £170,000 to provide working capital and to finance part of the cost of the purchase and installation of power generating equipment, so that it could become financial self-sustaining through generating hydro-electricity. Through demonstrating the sustainability of this income, the HLF agreed to provide a refurbishment grant.

Even if a charity receives grants, these are usually restricted to a specific activity or project, and so they mould the charity’s work to the preferences of the grant-making bodies.

Adding a loan to the charity’s funding mix can give an organisation more freedom. As long as your idea and your organisation are financially sustainable and deliver impact, you can choose the purpose for which you require a loan.

Loans can be very useful in the short-term, helping smooth cashflow deficits and making it easier to plan and manage your finances. They can also be used to bridge receipt of retrospective grants or payments under service delivery contracts.

And, unlike when they apply for a grant, you do not have to compete with other organisations when applying for a loan.

Why borrow from Charity Bank?

Your choice of your lender matters. Charity Bank was established in 2002 to be a different kind of bank, making simple loans and only to charities and other social sector organisations so that they have access to the money they need, when they need it. Charity Bank’s commitment to the sector is unrivalled:

• It is a social enterprise that exists to help social sector organisations to access loans; it is not profit-driven, has charitable objects itself and cares about social impacts
• It has already lent almost £200m to small and medium-sized charities
• 100 per cent of its borrowers would recommend it (out of 68 organsiations that responded to our 2014 borrower survey).

Loans to help you make a bigger difference

Recognising the benefit and popularity of borrowing to buy property, Charity Bank is refunding arrangement fees on new loans taken to purchase property that are drawn down in full by 31 March 2015. Call Charity Bank’s loans team on 01732 774050 or visit www.charitybank.org/charity-loans for more information, to discuss the suitability of loan finance for your organisation or to apply for a loan.

Carolyn Sims is head of banking for Charity Bank. She is also a trustee of a number of charities and sits on a regeneration advisory board.

The Charity Bank Ltd, 194 High Street, Tonbridge, Kent. TN9 1BE. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority No. 207701. Company registered in England and Wales No. 4330018.

With thanks to Charity Bank for their support for this blog.

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