The good, the bad and the ugly myths about borrowing for impact

It’s about time that myths about borrowing for impact were lassoed and exposed for what they really are. Here are five myths about loan finance to help you separate fact from fiction when it comes to borrowing as a charity or social enterprise:

1. Size matters – small charities can’t borrow money

Size doesn’t determine who we lend to. We lend to very small local organisations as well as larger ones with activities across the country. What matters is that you can show you are delivering social good and would be able to repay a loan.

2. Trustees and directors need to act as guarantors

It’s not our policy nor is it common practice to ask or suggest that a trustee or director should guarantee a loan. Some charities use property to secure a loan, it is also possible to use other types of security, such as a cash deposit or a guarantee from a trading subsidiary set up to create revenue for your charity. You might be surprised to hear that you can even secure a loan with an Archimedean screw (a turbine that converts the potential energy of flowing water into usable electricity) commonly used in renewables projects. Not all loans need to be secured with assets in this way, but a long-term loan – anything over five years – would usually need to be secured.

3. Loans are a replacement for income

Loans are never a replacement for income. Loans can be used to unlock other sources of funding, from local trusts for example. Charities and social enterprises that use loans well, build them into long term plans to generate income. YMCA Heart of England used a loan from Charity Bank to help build a block of apartments for young people. The loan helped the YMCA to access a Homes and Communities Agency grant and to increase the income-generating capacity of the organisation through additional rent, a cafe and room hire.

4. Loans can work for all charities

Loans aren’t for all organisations or all situations. We approach lending with the view that debt shouldn’t be a burden so we work in partnership with our borrowers and only lend once we are happy that an organisation will be able to use a loan to their advantage, and has an ability to take on and repay the loan without negatively impacting them financially.

What this comes down to is:

• your aims – ‘what will you use the loan for?’
• your activities – ‘can you show you’re delivering social good?’
• your governance – ‘who is running the charity, how long have they been there and does the team have the right skills?’
• your income – ‘do you have diverse income streams and are they generating a surplus?’
• your business plan – ‘how do you aim to sustain and/or grow your organisation over the coming years?

5. Loans are all about supporting growth

Loans can be used for diverse purposes, with many organisations using loan finance to support their growth and in turn continue to serve people and communities.

Our borrowers are using loans to:

• Buy property, community assets and development sites
• Move from renting property to property ownership
• Develop social housing and community facilities
• Refurbish or extend existing property
• Fund new projects or increase the reach of an existing one
• Support running costs during the time it takes for a grant or other funding to arrive (bridge finance)
• Fund day-to-day operations (working capital)