Charities and social enterprises are increasingly turning to borrowings in order to further their objects and to better delivery of their chosen impact. Equally there is an increasing capacity and willingness from high street banks and social lenders to make facilities available to this sector. Yet, it is common ground that the process of putting in place loan facilities between lenders and charities or social enterprises can be far more fraught than similar arrangements with commercial entities.
Stone King has therefore started an initiative to explore with high street banks, social lenders, charities and social enterprises why this is the case and what can be done to ease the process.
- The lender’s perspective
Lenders will tend to favour borrowers who are likely to complete a transaction within a reasonable timeframe, with lenders’ systems dividing the loan process into three distinct parts - from first contact to the point of obtaining credit approval; the period from credit approval being given to the point of drawdown during which period due diligence enquiries are completed and the documentation settled and post-drawdown, monitoring, compliance and (if required) enforcement.
Charities and SEs, not surprisingly, do not overtly make the same distinction and are more concerned about achieving the end of stage two and drawdown of funds.
Key issues arising include:
- Too often a lender is presented with a flawed or unrealistic plan of the potential borrower and there is a lack of professional input before submitting a proposal to a lender causing delays and misunderstandings.
- The inexperience and insufficient understanding of the borrower can cause delays and frustrations, in particular, unrealistic expectations as to the timing of a transaction.
- The responses from and decision making by trustees tends to be very slow.
- Weak governance of the potential borrower.
- Monitoring: A bank may be able to offer help to a borrower as to the requirements as to format and content of financial reports provided under the financial covenants.
- The borrower’s perspective
The frustration from charities often stems from a lack of understanding and expectations of time.
Key issues arising include:
- Consistency: The need from the charities’ perspective is to build up a long-term relationship with one or, possibly, two individuals within the bank so that they have consistency, a relationship manager who understands charities and has full understanding by the lender of the charity’s position, modus operandi and needs.
- Mutual understanding: Lenders and their lawyers are not aware of the restrictions under which charities/social enterprises generally operate and/or those which might apply to a particular charity. This leads to delays and increased costs and heightened tension as lenders and their lawyers are educated at the borrower’s expense.
- Inflexibility: Inflexibility of lenders is an issue e.g., one bank insisted on security over real estate thereby adding to the professional costs which would
- be incurred whereas security over a portfolio of investments (non-restricted funds) was available.
- Governance: Banks and their lawyers move at a different pace. There is a need to educate both the management and trustees of charities that expectations of both parties are different when compared to a commercial borrower and arrangements take longer than in a commercial world.
- There is also the issue that charities and social enterprises tend to borrow only once and so do not benefit from repeat experience.
- An intermediary’s view includes:
- The recommendation is to go to a lender likely to lend i.e. consider the nature and risk appetite of the lender and take into account any existing relationship.
- Have a plan that is creditable for the charity.
- It must be robust and not subject to change.
- It should indicate and demonstrate likely consequences: if you are given x, you can achieve y; and having achieved y you are likely to go on to achieve z.
- Ensure that the trustees are of the same mind as the management submitting the business plan and that they understand and support that plan.
- A commercial borrower need only convince a lender that the business plan stands up to testing and that the management has a vision and understands their market. A charity or social enterprise also has to convince the bank that they understand the need to generate sustainable profit in order to repay the loan as well as pursuing their objects and that they have the systems in place to be able to do so.
- Lenders worry about the cost and other consequences of complying with charity law and Charity Commission requirements. A commercial entity can easily recover from the consequences of a bad year’s results through subsequent good performance but a charity whose reputation has suffered takes much longer to recover and is often subject to continued scrutiny from the Commission.