Loans
A loan is simply borrowing money, which you have to pay back over a set period with interest.
Loans can be ‘secured’ against an asset (like a traditional mortgage) or be ‘unsecured’. Secured loans generally have more favourable terms, because the investor is taking less of a risk.
Once you know your specific financial needs, you will need to identify potential financial providers, and make a formal application. High Street banks are more nervous of the third sector than ever. First ports of call are generally members of the Community Finance Development Association – check out your local providers. Big names in the field include:
Also bear in mind – Futurebuilders (public service delivery),Social Enterprise Investment Fund (health provision) and Communitybuilders (asset transfer – launching summer 09). All provide loans with a minority grant element and offer cash to help you develop your proposal.
One of the big attractions of these sort of lenders is that they will want security on the building (though perhaps won’t insist on being at the front of the queue of creditors), but will not require personal guarantees from the directors.
The finance provider will conduct a desk review (i.e. a review of papers without interviewing you or visiting your enterprise), and may subject the application to an initial internal decision.
Please note that most lenders have a limit on the percentage of the development they will fund (generally 70 – 80%).
If successful, this initial decision will lead to ‘due diligence’, which is a more thorough analysis highlighting the perceived risks that need to be evaluated and possibly mitigated in the financing structure. This typically includes an on-site visit of the enterprise, as well as a more detailed financial and qualitative analysis of information gathered during the on-site visit.
Just as important as the business plan are the people. Bank won’t invest in flakers, however brilliant their ideas. Assemble your best team to meet them, rehearse and don’t be afraid to pull in professional support.
If all goes well, the provider will then approve your application for funding, having recommended a structure that includes terms such as amount, length or term, product type, pricing/interest rate, conditions that must be met to draw funds, and covenants that must be maintained throughout the life of the funding.
The main goal of financial analysis is to determine whether the enterprise and its business plan are viable and to determine what financial risks may affect the enterprise and put the funds provided at risk. The bank want to see the evidence behind the sales projections and will be very keen to see sensitivity analyses – what happens if your projected income is lower than expected?
Data from competitors or similar organisations in similar environments elsewhere provide convincing evidence.
A lender will want to assess the capacity of the enterprise to repay the loan. The financial analysis can impact the financial terms – the amount, the maturity and the conditions under which the funding can be used, as well as the decision whether to provide finance at all.
Bear in mind…
- Loans have to be paid back – with interest, so you need to be confident that the development will generate enough new income to support any repayments.
- Does your constitution include the power to borrow and pledge assets? If not you need to seek expert advice to ensure your organisation can undertake borrowing.
- Watch the terms. Low interest rates can disguise large arrangement fees and administrative charges. Some banks also attempt to extract the entire interest on the loan from the amount they give you.
- Ask for as long a period as possible without a) any repayment and b) capital repayment. Are there ways to structure the loan so that repayments only kick in when surpluses are being generated?
- Are there any penalties for early repayment?
- Fixed interest deals are now very attractive (though probably unobtainable!)
- You may be forced into borrowing from multiple lenders to get started. Consider repackaging the loans once you are up and running (borrowing from one lender on more favourable terms and paying off all the other lenders).
Technical Aspects of Borrowing
Community Development Finance Association