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Types of finance available

Reviewed by Peter Tobin March 2015

This page sets out the various types of finance that you could use to buy a building, along with the associated advantages and disadvantages:

 

You are likely to use a mixture of these different types of finance to fund your building purchase.

Grants

There are many different grant funders. Each has their own:

  • eligibility criteria
  • application and assessment processes
  • conditions for funding
  • payout processes

Follow this link for information on how to find grant funders who might be interested in investing in your project. 


         Pros                       

 Cons

Grants are free money (in the sense that they don’t need to be repaid)

Beware of grant chasing.  It can be tempting to alter your business plan to fit the eligibility criteria for a particular grant. If your business plan is to succeed, you need to be focused. Even if you appear to fit the criteria, the pot of grant money will be limited so you may not be successful in your application. So avoid wasting time and energy

 

Grant funders may require you to provide reports that show how the investment is meeting their objectives. If the funder’s objectives are closely aligned with your own, this may be a useful process. However, reporting can be quite onerous

 

Grant application processes can be slow - or the window for application and assessment may not fit with your timescale

 

A grant offer may include a ‘clawback’ condition which means that the money has to be repaid if, for example, the building is no longer used in a way that fits with the objectives of the grant provider. In principle, this probably wouldn’t be a problem for your organisation but could make it difficult for you to successfully apply for a bank loan – a bank will want to know that their money will be repaid first if, for some reason, your organisation fails in the future

Donations

These may be raised from individuals or businesses.  Donations to help with the purchase of a building are likely to be one-off contributions, although donors may also be willing to make regular contributions to support your organisation into the future.

 

 Pros

 Cons

Like grants, donations are free money (in the sense that they don’t need to be repaid)

Unless you are approaching established supporters who know and understand your work well, this can be a time-consuming and expensive process

Donations can demonstrate the strength of your support network to grant and loan funders. This can help to create confidence that your organisation will be successful in the future

Some donors want to impose conditions that may not be acceptable to the Charity, for instance naming a building after someone.

Supporter Loans

Individuals and organisations may not want to give you money for your project but may have cash available that they are willing to lend to you. 

 Pros

 Cons

The supporter may be willing to lend the money without charging interest or by charging a low interest rate. For example, they may choose to set the interest rate as the rate of inflation so that their money retains its value

Loans have to be repaid

A supporter loan may provide you with the deposit you need in order to access a bank loan.  In this case, the supporter loan would need to be unsecured, or secured by a second charge over the building

There may be a cost in the form of interest payments

Supporter loans can demonstrate the strength of your support network to grant funders and banks. This can help create confidence that your organisation will be successful in the future

There may be legal costs involved if the supporter wants a formal agreement. If a bank loan is also part of your funding mix, the bank will want to see the terms and conditions of the loan. A formal agreement is also important for both your organisation and for the supporter because it can prevent misunderstandings arising in the future

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Bank Loans

 

It is a good idea to speak to a range of lenders early in your project planning process. This will allow you to find out:
  • which ones (if any) would support you
  • what their application process is
  • how long the application process takes
  • what information they will require
  • what arrangement fees they might charge you

There are several types of lenders you could consider including:

  • social banks – who specifically lend only to organisations and businesses with social or environmental    objectives
  • high street banks – you will be familiar with these from your personal banking
  • other loan funds - for example government-backed loan finance programmes such as Futurebuilders or the Adventure Capital Fund

 Pros

 Cons

If you provide all the right information to the bank, a quick decision is possible

The money needs to be repaid

Once you have bought the building and completed any refurbishment or renovation work, the bank is likely to require very little reporting. You will need to provide a copy of your annual accounts each year and your relationship manager may call or visit you to discuss how things are going. Reporting requirements will depend on the size and complexity of your organisation and the size of the loan

You will pay interest on the loan

 

 There will be costs associated with setting up the loan, including the bank’s arrangement fee, the valuer’s fee, and the legal costs involved in providing the building as security to the bank (follow this link to the What costs are involved? page for more information

 

The bank will 'take a charge' over the building as security for the loan. So if you are unable to make your loan repayments, you may lose the building


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Your cash reserves

 Pros

 Cons

The money is already there, so you don’t need to spend time and money raising it

In the future you may need your cash reserves to manage, for example, a short-term cash-flow issue
 

 

You lose your income from interest

 

You may want to invest some of your cash reserves in developing your organisation. For example, there may be an opportunity to develop a new activity


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