Securing a loan for your Community Asset Transfer

IntroductionsJon FieldUnity Trust Bank

Matthew BrownWCVA, Communities Investment Fund

Presentation Outline

- Why use loan finance and what for?

- What are lenders looking for?

- How can loans help you?

- What’s good about loans and what’s not so good?

- What do you need to consider?

- What happens once you take a loan?

Loan FinanceWhy bother with loan finance?

• Changing funding environment• Sustainability encouraged through social enterprise• Desire for self-determination• Flexibility• Need to demonstrate risk-sharing approaches• Emphasis on asset development

Loan FinanceWhat can loans be used for?

• Asset development – purchase/renovate property• Purchase equipment and other capital assets• Finance cash flow (i.e. “revenue costs” or “working capital”)• Finance public sector or similar contracting• Set up new projects or ventures• Invest in growth opportunities

Applying for finance…

There's a huge difference between spending money on expenses and spending money to build an asset.

Ice at a picnic is an expense…

Once it melts, it's gone. Your electric bill, rent….these are costs of doing business, and you should rarely, if ever, borrow money to pay them

Applying for finance…

Assets, on the other hand, are things that sustain or grow in value, that you can use again and again, and that are ultimately worth more than they cost. 

Unity Trust will look to lend only when secured against assets but WCVA will consider unsecured lending.

Typical Loan to Value 75% and WCVAcan consider lending you your 25%Deposit.

Applying for finance…

As with all icebergs, the bulk, and the interesting stuff lies below the water, and that’s what we’re interested in ... because that’s what anchors the iceberg and gives it its shape.

There are many things that we want to know when you come to us with your proposal, and  your business plan and cash flow forecasts are just the tip of the iceberg.

Loan FinanceWhat do lenders want?

Loan FinanceWhat do lenders want?

LENDERS WANT TO GET REPAID!!

Loan FinanceWhat do lenders want?

Enough information to make a balanced judgement of the risks:

(1) good track record

(2) good people

(3) properly researched proposals

(4) financial forecasts supported by hard evidence and/or sound arguments

(5) clear exit routes (i.e. where repayment comes from)

Loan FinanceWhat do lenders want?

One method of assessing the risks is by using this acronym:

“CAMPARI”

Loan FinanceC = Customer/CharacterA = Ability to repayM = MarginP = PurposeA = Amount R = Repayment source

I = “Insurance”(i.e. Security)

Loan FinanceWhat is “security”?

Assets which can be sold as an alternative source of repayment if the loan goes wrong

Main types of security:

(1) charges (i.e. mortgages) over land and buildings

(2) all asset debenture charges

Loan FinanceHow can a loan help you?

Consider the following:

• will it allow you to achieve your mission, aims and objectives?• will the project generate enough income to meet repayments?• will the loan help to improve service provision or reaching more beneficiaries?• will the loan contribute to the future sustainability of the organisation by providing opportunities for further income generation?

You need to be clear about the business case before contemplating loan finance

Loan FinanceWhat’s good and what’s not so good?

PROS CONSFlexibility Repayable!

Independence Costs (interest, fees etc)

Quicker decision processes Legally binding agreements

Usually less driven by criteria Balance sheet liability

Usually less output monitoring Regular financial monitoring

Loans usually paid up front Credit checks

Improved business planning Lender may require security

Loan Finance

What should you think about?

(1) Incorporation - limits the liability of trustees and members

(2) Need to look at finances across the whole organisation - lender interested in the full picture, not just the project

(3) Financial management systems - ability to report performance

(4) Management and directors/trustees- business/financial skills?- quality of governance?

(5) Repayment term – sensibly matched to loan purpose?

Loan FinanceThe loan’s approved – now what happens?

(1) Loan offer and/or agreements issued

(2) If security is involved, solicitors instructed

(3) Preconditions need to be satisfied before funds drawn

(4) Once drawn, maintain repayments and provide management information

Loan FinanceThe loan’s approved – now what happens?

(5) If you hit problems, or you see them coming

TALK TO YOUR INVESTORS!!

Case Study

• NoFit State Circus

• Acquired 4 Elms, Roath, Cardiff via Asset Transfer from Cardiff Council

• Unity provided a mortgage of £250k alongside grant funding from Big Lottery Wales to support the redevelopment of 4 Elms.

Thank you

Any Questions?