How does my club or charity borrow from the bank?

A voluntary organisation may need a loan to set up a project that will generate income, or to invest in equipment or property. Whatever the reason, you will need to go through certain preliminary processes. This guide explains the key steps that you will need to take.

Is my club or charity allowed to borrow?

Charities and other organisations have to operate under strict rules laid down in their governing document. Before even considering the possibility of a loan, the trustees of the charity must therefore check that their governing document gives them the power to borrow. It will then be necessary to debate the issue at a meeting in order to obtain a clear set of minutes containing the resolution to borrow money. The resolution will need to set out the main reasons for borrowing the money.

The reasons for borrowing should include: 

• Why the organisation needs money.
• Why it has decided to borrow money rather than look elsewhere for the funds. 
• Why a particular form of borrowing and a particular lender have been chosen.

Competitive quotes from several banks or other sources should be obtained before going ahead.

What sorts of questions will the bank ask?

Banks, generally, have standard questions they will ask if you want to borrow money. The bank will want to know what you want the money for, what it’s going to do for your organisation, how long you want to borrow it for and how you will repay it, for example. The bank will also need to see a resolution or evidence from the charity that they have agreed to the loan. In addition, accounts and/or details of your track record and other documents will almost certainly be asked for before the bank approves the loan.

Do we need a business plan?

It may not be necessary for charities or small organisations to present a business plan. A small organisation may not have the time or resources to do one. However, a business plan can be a useful tool and may ultimately dictate whether the lender is prepared to offer you a loan, as well as what terms it is prepared to offer.

As a general guide, your plan should include: 

• General information about your club or charity, its aims and objectives. 
• The legal form of your organisation and proof that it has the power to borrow. 
• Details of the organisation’s assets and liabilities. 
• Brief details of the people running the organisation. 
• Details of the project and why you need a loan for it. 
• A cashflow forecast for the next 12 months showing how you intend to repay the loan. 
• A current balance sheet. 
• Accounts for the past three years. 
• Details of any previous borrowing.

Who can we borrow from? 

• High-street banks and building societies. 
• Charitable trusts and foundations established to give support to voluntary organisations by way of grants or low-cost or interest-free loans. 
• Charities Aid Foundation. It runs Venturesome, which offers help and advice for charities in need of high-risk loans. Call 01732 520029 or visit www.cafonline.org. 
• Charity Bank works to provide flexible and affordable finance solely for charitable purposes. Call 01732 520029 or log onto www.charitybank.org.

Checklist for choosing a lender 

• Research all the possible sources of funding. 
• Contact those that appear the most appropriate and find out what kind of information they require from you when applying for a loan. 
• Submit your application with business plan, if appropriate, and other documentation. 
• Draw up a shortlist of lenders that are offering the most favourable terms and conditions. 
• Make a final decision based not only on the terms and conditions, but also on your relationship with the lender. Will you feel comfortable borrowing from this particular source, for example? Is there room for flexibility in the agreement if your organisation hits harder times?

What are my personal responsibilities for the borrowing?

It is in your own interests to find out the extent of your personal liability and to be comfortable with this. Treasurers and other trustees are under a general duty to act always in the best interests of their organisation. This applies just as much to borrowing as to any other matter. So you need to be very sure of the benefits of borrowing.

If your organisation gets into problems in repaying the loan, then there could be serious problems. Some voluntary organisations will have a separate legal identity ie if the organisation has been incorporated and in these circumstances the officers will have limited liability. Others, such as small groups or clubs, which may not be incorporated, will not have a separate legal identity and can only take action through the committee of individual officers. In these circumstances the officers’ names will appear on the loan document and they are personally responsible for the loan. In a worst-case scenario, this means the lender could sue them personally to meet the liabilities of the organisation. Accordingly, the officers may wish to obtain an indemnity from the organisation and/or its members.

Useful contacts

Charity Commission

Harmsworth House,
13-15 Bouverie Street,
London EC4Y 8DP

T: 0870 333 0123
W: www.charity-commission.gov.uk

National Council for Voluntary Organisations

Regents Wharf,
8 All Saints Street,
London N1 9RL

T: 0800 2798 798
W: www.ncvo-vol.org.uk

Charities Aid Foundation

25 Kingshill Avenue,
Kings Hill,
West Malling,
Kent ME19 4TA

T: 01732 520000
W: www.cafonline.org

The Charity Law Association

Ros Harwood,
Rollit Farrel & Bladon,
Rowntree Wharf,
Navigation Road,
York YO1 9WE

T: 01904 625 790
W: www.charitylawassociation.org.uk