With donations and local government funding both falling off in the ongoing economic crisis, charities are increasingly looking for ways to bridge the gap.
Borrowing money can help some charities to progress with their activities and mission. Before applying for a loan, here are five questions to consider:
1) How will borrowing help your charity achieve its objectives?
Are you looking for funding simply to sustain your day-to-day activities until your income picks up? If so, borrowing may not be the answer unless you have a clear, workable plan for increasing your income and paying off charity loans in future.
If, on the other hand, you’re borrowing to support a specific project, you should be clear on how that venture will contribute to the success of your charity. Will it make your organisation more sustainable and financially stable in the longer term? Will it raise your profile and help to drive future donations or commercial revenue?
2) Can your charity commit to repaying the loan?
The advantage of charity loans is that you will be able to access the money relatively quickly. The downside is that you will eventually need to pay the money back. Unless you have been able to arrange an interest-free loan privately with an individual supporter, you will need to factor in interest payments as well.
If your charity owns a property, you may be able to use that as security for the loan. An unsecured loan will generally come with a higher rate of interest and a shorter repayment term.
Before applying for a loan consider carefully how you will accrue the money to pay it back. Will you need to make changes to the way you currently do things?
3) Are you confident that your mission won’t suffer as a result of the debt?
You have a duty of care to your charity’s mission. Before you commit to charity loans you should make sure that your objectives won’t suffer due to a shortage of funds for repayments.
4) Will your trustees be personally liable for the debt? And if so, are they willing to take on that burden?
Whether your trustees are personally liable for repaying charity loans will depend mainly on the way the organisation was originally set up and its governing document. For example, if your charity is set up as a company limited by guarantee rather than as a charitable trust, the charity itself is a legal entity and is responsible for its own debts. This usually protects the trustees from personal liability.
Either way, it’s wise for your trustees to seek legal advice before committing to taking out a loan. The UK Government guidance document, The essential trustee: what you need to know, warns: ‘If trustees do not seek advice on matters on which they are not themselves experts, they could be regarded as having acted imprudently. This may leave them personally liable for the consequences.’
Following the guidance in The essential trustee will help your trustees safeguard their interests, as well as protecting the future of the charity.
5) Are you confident that the ethical and social goals of the lender align with yours?
Bearing in mind that you will be paying the loan back with interest, you may want to consider whether you, and your supporters are happy with the ethical standing of the lender.
A benefit of going to a social lender such as an ethical bank is that the staff have a good understanding of the charity sector and should be able to provide you with targeted advice and guidance.
If you’re considering charity loans, first ask yourself:
- How it will help your charity achieve its objectives
- Whether you will be able to make the repayments
- Whether there’s a risk that your beneficiaries will suffer as a result
- Whether your trustees are comfortable with any personal liability they may incur
- Whether the lender’s ethical stance is a good fit with your charity
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