If your charity or social enterprise is thinking about applying for a loan, it's helpful to know what lenders look for when deciding whether to approve your application.
In this guide we outline some of the important factors we consider in our loan approval process and share our checklist of documentation that we would expect social sector organisations to provide.
1. Income to pay it back
It may sound obvious, but the first thing lenders look for when making a decision about a loan is evidence that you can pay it back. The charity must be sustainable, ideally with diverse income streams to spread the risk and remove the reliance upon a sole source of income.
2. Good governance
They also look carefully at governance – who is running the charity, how long they have been there, and whether collectively they have a suitable skill set to manage the business.
3. Social impact
Where social lenders, like Charity Bank, differ from commercial banks is the attention paid to social impact. Social lenders will expect you to provide tangible examples that your organisation is delivering social good.
It is usual for property is be taken to secure a loan, but it is also possible to use other types of security, such as a cash deposit or a guarantee from trading subsidiaries. A long-term loan – anything over five years – would usually need to be secured, as the longer the term of the loan, the less certainty there is over future income. Security is provided as cover should the organisation be unable to repay the loan and usually attracts a lower interest rate thereby reducing the cost.
5. An early stage discussion
Above all if you are embarking on a project that is likely to require some form of loan finance we recommend that you engage with lenders at an early stage.
Checklist for loan finance decision-making
Our checklist below summarises the documentation social sector organisations need to provide as part of the loan process:
- Business development plan including financial projections (if available and relevant).
- Audited, internal management or other accounts for the last three years (if available).
- Key staff, trustee and director details (including the length of service and background skills/experience).
- Certified copy of the Memorandum and Articles of Association and Certificate of Incorporation, or Trust Deed, or equivalent. Incorporated organisations must have the ‘Power to Borrow’ and, where necessary, ‘To Charge Assets’. Unincorporated organisations may have general powers but will need a specific power to charge assets where appropriate.
- Bank statements for the last three months for all accounts held (copies).
- Fundraising strategy and fundraising appeal materials where appropriate.
- Property details, if available/applicable, including the full postal address of any property to be acquired and/or charged.
- Evidence of legal form (examples below):
- Companies limited by share capital or CICs: Certified up-to-date copies of Memorandum and Articles of Association, and Certificate of Incorporation, to be certified by the company secretary.
- Companies limited by guarantee with charitable status: Certified up-to-date copies of Memorandum and Articles of Association, and Certificate of Incorporation to be certified by the company secretary.
- Charitable Trust/Charitable Incorporated Organisation/Charitable unincorporated association: Copy of Trust Declaration/Deed, Constitution.
- Registered Societies: Copy of Rules, and of registration or equivalent with the Financial Conduct Authority, copy of letter from HMRC acknowledging charitable status (if appropriate).
- Housing Associations: Verification of registration with the appropriate body such as the Homes and Communities Agency (HCA).
- Local action/voluntary group, unincorporated societies: Copy of membership rules and constitution.
For more information or to discuss the suitability of your project for a loan, please call us on 01732 441919 or email us to speak with one of our experienced lending team.