Expert View: Finance and IT - Loan funding - Seven steps to successful borrowing

The landscape of third sector funding is changing, with a shift from grant funding to loan funding, where the decision-making process can be entirely different. This can be challenging for investees, especially if this is the first time an organisation has looked for loan funding as opposed to a grant.

As a rule, grant makers concentrate on what the grant buys - notably activities, outputs and impacts. The long-term success of an organisation is often of less importance than the success of the project being funded. Grant funders invest for one, two or three years, which often means that additional funding has to be found after the money has run out. This can be a major waste of resources and can cause peaks and troughs in service delivery.

Traditional commercial loan financers normally invest over 10 or more years to create sustainable organisations that can service their debt. Some commercial lenders use an old-fashioned but very useful acronym to guide their decisions: campari, which stands for character, ability, means, purpose, amount, repayment and interest. Borrowers can use the same approach to answer a lender's concerns.

Character is about the people in the organisation. Are the management and staff competent and committed? Ability is about whether the organisation can do what it says it can. Means looks at the assets the charity has and whether there is security on them. Purpose takes into account what the money will be spent on - is the amount too little or too much? Are multiple funding streams being used? Repayment looks at whether the business will able to afford the loan. How secure are the income streams? And finally, interest is about deciding what rate is appropriate, given the risks and the potential for success.

As a mission investor in the third sector, Futurebuilders tries to blend the best aspects of grants and loans to help organisations become sustainable enough to deliver public services on a long-term basis. Like a grant maker, we help organisations deliver large impacts; like a loan funder, we offer long-term sustainability. We are risk investors who back projects that are fundable but not bankable, and 58 per cent of our full investees have not borrowed before, so we are keen to make the process as easy as possible.

But investments are about more than money. It is important to realise that finance is not enough to make an organisation strong and successful, and we believe that the relationship between investor and investee must be a long-term one.

 - Sue Peters is managing director of investments at Futurebuilders England

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