Charities’ debts worth over £500m and rising as donations dry up
Thinktank warns charities of risks associated with turning to lenders to counter drop-off in traditional fundraising income
The disability charity Scope launched a £20m bond scheme last month to expand its fundraising programme and charity shops. Photograph: Graham Turner for the Guardian
Hard-pressed charities have taken on more than £500m in debt and are expected to more than double their borrowing in the next three years, research has revealed.
Fundraisers struggling with emptier collection tins are turning to lenders who expect an annual return averaging 10%, according to a survey for the Young Foundation thinktank.
The growth in borrowing by good causes is being backed by the government which has established its own fund, Big Society Capital, using £200m from the big four high street banks and £400m from dormant bank accounts.
Sir Ronald Cohen, the venture capitalist acting as the fund’s non-executive chairman, said it would boost social entrepreneurs “much as venture capital and private equity started to do for business some three decades ago”.
Scope, the disability charity, last month launched a £20m bond scheme to expand its fundraising programme and charity shops while Turning Point, a health and social care charity, borrowed £170,000 from Big Issue Invest, part of the group that includes the magazine for homeless people.
The loans are described as social investment and are intended to allow charities to roll out successful programmes more quickly than traditional fundraising allows, but growth in the sector has also sparked warnings about the risk to charities if the loans are mismanaged.
“Failing to make repayments may put the charity under financial pressure or, at worst, could force it to close,” said the authors of a report into the sector by New Philanthropy Capital (NPC), a charity thinktank. “Charities need to think carefully before taking on social investment.
“The loan portfolios of social investors in the UK are now worth more than £500m,” the NPC report said. “Government spending cuts and a decline in voluntary donations are hitting charities hard, and social investment is seen by some as a way out of this funding fix.”
Donations to the UK’s 500 biggest charities fell by £70m in real terms last year and donations to good causes with an income of over £10m fell by £855m, or nearly 11%, between 2007 and 2009, according to the Charities Aid Foundation.
“The danger here is that charities think social investment is a substitute for what they used to get from donations and grants,” said Dan Corry, the chief executive of NPC. “You have to pay this money back. Charities should not leap onto this because they cannot see money coming from anywhere else.”
He said, however, that the loans also have the potential to encourage charities to innovate and would allow good ideas to be scaled up and so deliver much-needed new revenue streams.
Sir Stephen Bubb, the chairman of Social Investment Business – which was set up in 2009 and has loaned £300m to charities – said having to repay a loan made charities more efficient and focused than if they are gifted money.
He cited the Alt Valley Community Trust in Croxteth, Merseyside, which received a £3m loan at an annual interest rate of about 6%. It bought an old people’s home, a row of shops, a farm building and a church and is now paying back the loan with the proceeds of public sector contracts.
Will Norman, the director of research at the Young Foundation analysed the market and warned of a disconnect between the lending banks and charities.
“The danger is that the skills and experience in the charity sector don’t match those of the lender,” he said. “The lenders might expect certain returns and that is not always possible to achieve. There’s a question about how business savvy some people are in the third sector.”
One secured loan has been granted with an expected return of 13%, while an unsecured loan was expected to deliver 19% a year, the Young Foundation discovered.
Geetha Rabindrakumar, the director of finance at Scope, said it was important to have “the processes, skills and experience in place to manage these investments effectively”.
“Maximising the finance we can raise is essential if we want to continue and grow our work with disabled people and their families,” she said. “The social investment market offers us the opportunity to speak to a new network of prospective supporters and offer them an additional way of investing alongside traditional donations and philanthropic loans.”