Can a charity borrow money from a bank?

01 July 2024

Can my charity borrow money from a bank? Is borrowing possible for a charity? Does a charity need express power to borrow? We go through the first things to consider when a charity is thinking about taking out a loan.

Can a charity borrow money from a bank?

One of the first things to consider when thinking about borrowing money is finding out whether a charity has the power to borrow or not.

A charity’s governing document will state whether it has the ability to borrow. If the charity has an express power written into its constitution, then it is permitted to borrow money from a bank.

If the express power to borrow is omitted from a charity’s governing document, then a charity may be able to rely on a “catch-all” power in its governing document which states that trustees have a general ability to further its objects, however not all banks will accept this.

If both express power to borrow and a “catch-all” power are not stated, a charity may be able to rely on an implied power to borrow, where it is supported in both statute and case law depending on structure of the charity. For clarity, charities should always refer to their own legal advisors.

Most banks, (including Charity Bank) will need to see an express power to borrow in a charity’s governing documents rather than an implied power to borrow. It is therefore the first thing a charity should look into before getting involved in the borrowing process.

What if the express power to borrow is not stated in a charity’s governing document?

Most charities will have the express power to borrow. However, if your charity’s governing document does not include an express power to borrow it may be worthwhile amending its governing documents so that borrowing is expressly permitted (providing that such an amendment is not expressly prohibited under the charity’s constitutional document.)

If this is something the charity and trustees want to pursue, the Charities Act 2011 can be used to include the express power to borrow .

It is worth noting that these changes are not to be undertaken lightly; they may be time consuming and will require consent from the Charity Commission or a third party. It is best to consult your legal advisor if you are considering making this change.

What else should a charity know before starting the loan application process?

It’s important to note that section 124.2 of the Charities Act 2011 requires a charity to have ‘obtained and considered proper advice’ when borrowing funds, and in particular when securing them against charity assets.

Who this advice must come from isn’t prescribed. However, it must be from someone who can reasonably offer advice to the trustees and has the experience to evidence it, such as an independent financial adviser, accountant or other qualified professional. It may be another trustee or a staff member of the charity.

Why should a charity consider taking out a loan?

Whilst fundraising and grants are useful in helping a charity reach its goals, additional financial support in the form of a loan can help a charity meet its unique needs and ambitions.

In comparison to grants and fundraising, loan finance can benefit charities by helping them to:

  • Speed up plans
  • Diversify income streams
  • Have more freedom planning
  • Make impact sooner

Borrowing money from a bank should be viewed as one of several beneficial options available to help charities raise money to develop and grow.

Charity Bank loans have helped charities:

  • Increase their assets and facilities
  • Improve their financial resilience
  • Give the green light to projects that would have not otherwise been able to go ahead
  • Increase what they can offer to beneficiaries

You can find out more about how our loans have helped charities across the UK here.

If your charity has the power to borrow and think that a loan could help further your social mission get in touch with a member of our lending team by emailing [email protected] or call Charity Bank on 01732 441919.

About Charity Bank

Charity Bank is the loans and savings bank owned by and committed to supporting the social sector. Since 2002, we have used our savers’ money to make more than 1,200 loans totalling over £450m to housing, education, social care, community and other social purpose organisations.

Find out more about us here.

Nothing in this article constitutes an invitation to engage in investment activity nor is it advice or a recommendation and professional advice should be taken before any course of action is pursued.

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