Loans and borrowing

Information and guidance about securing a loan

When the cash flow budget indicates that a deficit in cash will occur during the year, a community and voluntary organisation faces a tough decision. Does the organisation attempt to borrow the funds, can it find new funding, or does it reduce projected payments?

The answer will depend on several factors: Is the deficit temporary? Will it reverse itself in a few months?

For a new organisation, interim borrowing may not be an option. For a mature one that is, for example, expecting to refurbish old buildings, there may be alternatives.

Securing a loan

Securing a loan requires good planning. It is easier to find solutions if short term indebtedness is recognised as a part of the budgeting process.

The budget itself probably shows that the situation will reverse itself with money expected to be received later in the year. For an organisation in this situation, preparing a business plan in order to make a formal application to a bank is a useful exercise. If a bank cannot be persuaded to make a loan, the organisation goes back to the drawing board and revises its budgets and/or finds new funding sources.

Capital acquisition

A cash deficit created by proposed capital acquisitions may have a simpler solution, as the tangible nature of a capital asset makes it suitable as security for a loan. Therefore, it may be possible, even for a new organisation, to borrow money needed to equip the organisation.

Foreclosing

Lenders expect to be able to get their security back if the organisation defaults on payments. However, lenders dislike foreclosing, particularly on a voluntary or commuity organisation, because of the bad publicity they receive. Therefore, they, will not rely solely on the security offered but will look to the longer-term cash flows.

Further resources

• Introduction to Loan Finance from the Sustainable Funding Project 
• Borrowing and loans from the bank
• Financial difficulties: managing a crisis