Seb Elsworth: Where a loan might help, and where it might not

During this pandemic, a loan might help a charity get through the coming weeks and months. But they are not suitable for everyone

Seb Elsworth (Photograph: Claudia Leisinger)
Seb Elsworth (Photograph: Claudia Leisinger)

We have seen government spring into action to support businesses through the current crisis with a package of £330bn, including loan guarantees, via the Coronavirus Business Interruption Loan Scheme. While we continue to await news of specific support for the charity and social enterprise sector, for those with a need for cash now it is worth considering how loans might be able to help and, equally, to be clear about when they will not. 

The CBIL Scheme is delivered through 40 accredited lenders, including all the major banks. It supports small and medium-sized businesses with annual turnovers of up to £45m to access loans, overdrafts, invoice finance and asset finance of up to £5m for up to six years. The government also makes a business interruption payment to cover the first 12 months of interest payment and any lender-levied fees, so businesses have no up-front costs and lower initial repayments.

In addition to these 40 lenders, the social impact investor Big Society Capital has indicated that it is working to establish a £100m emergency loan fund for the sector using the scheme. And beyond these new initiatives to support the sector specifically through the crisis, many existing social investment funds are providing loans to charities and social enterprises now to help with cash-flow needs. Good Finance is the best place to see what’s available.  

So could a loan help you now as you seek to steer your organisation through the challenges that the Covid-19 outbreak and the social-distancing policies are presenting?

The first, obvious, challenge is that a loan has to be repaid. Most lenders will be offering capital and interest repayment holidays during the lockdown period because they recognise that income for potential borrowers will be challenging until restrictions begin to ease. But at some point over the coming years it will be necessary to find surplus cash to pay the lender back. For a loan to help, you need to have a clear idea of how you’ll be able to make these repayments. 

For some organisations the cash-flow need might be short term, so it will be relatively easy to see how the loan will be repaid. For example, if you have agreed to furlough a number of staff you can be confident that you will receive a grant to cover 80 per cent of their salaries through the Coronavirus Job Retention Scheme. But this payment might take a number of weeks to arrive and a short-term loan or overdraft facility could help yout through this period. More simply, you might want to explore having a loan facility to fall back on in case cash flow gets really tight over the coming weeks: for example, if a commissioner is delayed in making a payment, even if you don’t end up using it. 

However, in other cases repayments will be much further in the future. Organisations that generate a significant amount of their income from trading might have an opportunity to borrow now while they pivot their business models, and repay the loans with future revenue. For example, a community bakery that employs people far from the labour market will be reluctant to furlough staff, but its shop has had to close. A loan could help it to buy a small fleet of bicycles and set up an online delivery service to allow it to continue to trade. Once social-distancing restrictions are lifted and customers come back to the shop, the bakery might find that it keeps additional customers on a delivery basis and overall revenues actually rise, helping it to repay the loan more quickly. 

In some cases you might be able to access a blended investment, part loan and part grant, which will help to ease the pressure on future margins. 

For organisations with significant assets, it might make sense to consider taking a loan now to support cash-flow challenges in the short term and which you could then consider refinancing on a longer-term, secured and more sustainable basis once the crisis is over and you have more clarity on future income.

If you already have a loan you should speak to your lender about how it can support you both with repayment holidays and also with further cash if you need it. 

Let's be clear, though: for many charities a loan will not be an appropriate tool to support their financial challenges relating to the crisis, especially where future income is hard to predict. Income lost now is unlikely to be made up in the future and additional indebtedness will only harm the balance sheet. That’s why a major grant scheme for the sector is critical. Social investment can play its role in supporting parts of the sector with business models that are suitable for repayable finance, but it will probably be for only a minority.

Seb Elsworth is chief executive of Access, a foundation that helps to widen access to social investment for charities and social enterprises

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