Borrowing money on a secured basis can be a normal part of running a successful charity. However, the legal documentation for these loans can be a bit overwhelming for some charities who do not enter into loans on a regular basis. To help charities with these arrangements here is our top five tips for a borrower charity:
1. Heads of terms
Before charities agree to be sent the loan documents ask for the loan heads of terms which should set out the main terms and conditions of the loan. This should detail all fees to be paid by the charity, what security is required, what are the main conditions that will need to be satisfied before it can actually borrow the money (for example, certificates of title or annual accounts) and the main undertakings and events of default that the loan documentation will contain. This should ensure there are no surprises or unacceptable conditions.
2. Complying with existing obligations – Charities Act and existing lender obligations
As well as the requirements in the proposed loan and security documents, charities will be required to comply with other obligations. If it is required to provide a charge over property then it will need to comply with the requirements of section 124 Charities Act. If it has existing secured loans, then they should check those loan arrangements to ensure it doesn’t need any consents to borrow further money or to enter into further security. This should be checked at an early stage so that any consents are provided in good time.
3. Realistic timeframes
It is normal for loan agreements to include requirements to provide information to the lender on a regular basis. These are called information covenants. From the lender’s point of view it wants to know how the charity is performing and that it is not doing anything significantly different from what it was doing when it entered into the loan arrangement. However, the charity needs to check that those timeframes are realistic so that it can comply with those requirements and that if it has existing loans, then the new provisions are consistent with its existing information covenants so that it is easier to administer.
4. Stress test
We are living in volatile times and a lot of organisations, including charities, are in a very different financial position to where they were 18 months ago. Interest rate rises and inflation have had a detrimental effect. It is impossible to know what the economic position will be like in the next 18 months and so charities should stress test their budgets to cover even those extreme scenarios to ensure that they can still comply with the loan agreement obligations.
5. Too restrictive
The provisions in the loan agreement and security documents are not supposed to overly restrict the charity being run in a way that is “business as usual” and in a way that the lender was happy with when they provided the loan or in accordance with growth plans that have been approved by the lender. Therefore, charities should carefully review the terms and conditions to check that they do not make it more difficult for it to comply with its purpose or meet any growth plans. The lender may say that the legal documents are “standard form” and so non-negotiable but if there are any restrictions that are too limiting then it should either ask for them to be amended or not enter into them. It is not good governance to enter into a contract that makes it very difficult for the trustees and/or executives to run the charity in accordance with its purpose.
For some charities, successful borrowing can be a game-changer, enabling them to achieve their missions and legal expertise can play a key role in this process. Lawyers specialising in charity law can provide invaluable guidance, ensuring compliance with regulations, protection of assets, and the structuring of loans to align with an organisation’s objectives.
By considering these top five tips and enlisting the support of legal professionals, charities can borrow with confidence, ultimately contributing to their long-term success and their ability to make a positive impact in the communities they serve.
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