Charities 'a better loan risk than smaller firms'

Lower default rates among voluntary sector organisations, say lenders

Institutions specialising in loans to charities are reporting lower default rates than would commonly be found in mainstream lending to small and medium-sized commercial companies.

John Kingston, director of Venturesome, told Third Sector his organisation was now supporting riskier projects because it had seen far lower failure rates for its investments than predicted.

Venturesome, an initiative of the Charities Aid Foundation, provides advice and capital investment to charities and other social purpose organisations.

Other social lenders have had similar experiences. Charity Bank's latest accounts indicate that it expects a default rate of less than 3 per cent. Futurebuilders, which helps charities that want to deliver public services, has a default rate of 1.7 per cent.

"When the social investment market was first formed, we thought Venturesome would have a default rate of about 20 per cent," Kingston said. "The rate has been nearer 5 per cent. More conservative social lenders might have a default rate for charities of less than 1 per cent."

He said charities were not only a better risk than had been predicted, but had also proved a much better risk than small and medium-sized commercial firms.

James Brooke-Turner, finance director of the Nuffield Foundation, said he believed more research was needed to create an accurate picture of the risk involved in lending to the third sector. "Charities might face systemic risks that haven't yet come to light," he said. "A lot of charities have borrowed on an assumption of growing government contract funding, which may not now continue.

"On the other hand, charities have a lot of potential assets that aren't on the balance sheet, which is why they might appear a higher risk than they are. For example, legacies will arrive with a high degree of certainty."

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