Should your charity consider a loan?


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Loans are not right for all projects or organisations, but trustees and managers of charities and social enterprises need to understand what loan finance can offer to determine if it is right for them.

When should a charity borrow money?

In the right circumstances and with the right kind of structure, loan finance can help a charity to thrive, make a bigger difference and have greater control over its future.

So what are the key factors to take into account when considering loan finance?

Good debt

A loan can help organisations become more sustainable.

For example, it can allow you to buy a property rather than continuing to pay rent. This is one of the most common purposes for Charity Bank’s loans.

Loan finance can empower you to take advantage of new opportunities.

It can help you to grow and expand your services, diversify your income streams, or make the most of a newly available opportunity.

Loan finance could help you accelerate your plans.

Lenders can rarely give you instant finance, but if the circumstances are right, a loan can be arranged within weeks. Grants can take much longer to organise, and are sometimes paid at the end of a project – rather than at the beginning, when you often need it.

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 attract 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.

Loans are non-restrictive.

Grants are usually restricted to a specific activity or project. This tailors your charity’s work to the preferences of grant-making bodies – but a loan can give you more freedom. As long as your idea and your organisation is financially sustainable and delivers impact, you can choose the purpose for which you use a loan.

Loans can help smooth cash flow deficits.

This can make 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.

You don’t compete for loan finance.

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

Talking to lenders can open doors.

Simply talking to social lending experts can open doors: lenders know others in their field, and can sometimes collaborate with other organisations to offer blended funding packages. For example, a sports organisation was able to secure a £100,000 grant from a local trust which was identified by its social lender.

Things to consider

Whilst loans have many potential benefits it’s important to bear in mind the reputation of the lender as well as the cost, flexibility and affordability of a loan to make sure you make the right decision.

Loans aren’t suitable for all organisations.

All responsible lenders will want to ensure that a loan is suited to your organisation, by satisfying itself that you can afford the repayments..

A social lender would also require answers to the following:

  • The loan: ‘What will you use the loan for?’
  • Your impact: ‘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 you generating a surplus?’
  • Your plans: ‘How do you aim to sustain and/or grow your organisation over the coming years?
You’ll need to consider the cost of a loan.

The price of a loan will usually include an interest rate and arrangement fee. Always check with a lender what fees are involved over the course of the loan so that you don’t get any surprises.

You’ll need to consider legal expenses.

Borrowers are also required to pay for any legal and related expenses incurred (for example security valuation fees or costs associated with taking a charge over property).

You’ll need to be sure you can meet the financial requirements of a loan.

You can get a rough idea of whether you would be able to repay a loan by considering your ‘debt service cover ratio’, which is a measure of the cash-flow you may have available with which to make loan repayments.

This involves looking at the surplus income you have available, from any trading activities, rents and other unrestricted funding, to repay your loan. Once you’ve taken into account overheads, expenses and any plans to generate future revenue, will you have enough surplus available to create a realistic plan for paying back a loan?

You’ll need to consider and mitigate risks.

With any kind of loan finance there will always be an element of uncertainty. A well thought through business plan is important with mitigating actions and options available to reduce risks and access to funds in case things don’t go to plan.

You can reduce risk by stress-testing your plans against unexpected events and devising actions for best, difficult and worst-case scenarios. Read our guide to stress-testing your plans.


If you have any questions, you can talk to our team directly by calling us on 01732 441919 or sending us an email. You may also like to read our blog 5 legal considerations of taking on loan finance.

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