Top tips for applying for a loan

Carolyn Sims, Banking Director at Charity Bank, offers top tips for applying for a loan and reveals most common mistakes made.

A loan can be a valuable tool for a charity, not for profit or social enterprise looking to expand its services, grow its assets and secure financial sustainability. Taking out a loan is similar to applying for a mortgage and it’s essential to be well prepared and to fully understand the process and requirements involved. In this blog post our Trusted Supplier Charity Bank give their top three tips to successfully apply for a loan along with the two most common mistakes that charities and social enterprises tend to make.

Top three tips

1. Produce a solid business plan

Lenders will want to see a comprehensive and well-thought-out business plan. This should clearly detail who you are, what you want to achieve, your intended social impact, and your governance and management structures. It should also show a detailed cashflow forecast that has been stress tested. You need to demonstrate that you can repay the loan, how you will do so, and that you have included all the costs in your model. Lenders will want to you to stress test your plans against unexpected events. Are there adequate finances available if the project is delayed by six months? What would happen if costs are 10% higher than budgeted?

2. Engage with lenders early

Lenders can provide you with advice, practical tips and solutions to possible problems that may come up. They can also advise on what conditions and requirements you can expect to encounter.

3. Understand your loan agreement

When it comes time to sign a loan agreement, it is essential to ensure you thoroughly understand what it entails. Can you deliver on all the terms and conditions? Can you meet the financial ratios/targets required? What would happen in the event of a loan default? Just like with a mortgage, you need to ensure that you’re aware of exactly what you’re committing to.

Pitfalls to avoid

1. Assuming things will happen quickly

The process of applying for a loan can take a long time. Lenders have to go through credit approval processes and all documentation needs to be gathered and approved. Then the lawyers need to document everything and take the security.  It can take anywhere up to six months so it’s important to allow sufficient time.

2. Selectively choosing which information to share

Deciding to only share certain information with a lender can slow down the process further. It’s important to be transparent about the nature of your business and what it is you’re trying to achieve. If you’ve been turned down by another lender before, for example, don’t leave this information out. To secure the right lender and loan for you, the most important thing is to be completely open.

Finding the right lender

As a social organisation, your mission and social impact could be one of your main strengths when applying for a loan. A number of socially-motivated banks exist in the UK and the benefit of working with this type of lender is that they tend to have a greater understanding of the sector and the way charities operate.

Charity Bank is one example of a social lender. Charity Bank is an ethical bank owned by and dedicated to supporting charities and social purpose organisations. Charity Bank lends to charities, social enterprises and other organisations where the loan is being used for a social purpose. To find out more, visit Charity Bank’s website.