If a charity is contemplating borrowing funds the first and most important consideration is to check the constitution of the charity to ensure that the Trustees have the power to borrow. If no such express powers exist the Trustees may need to amend their constitution (with leave from the Charity Commission) or risk facing personal liability for having acted beyond their powers.
In all circumstances the Trustees must demonstrate that they have acted prudently considering for example:-
- The size and term of the loan?
- How the loan is to be repaid?
- How secure the plan for re-payment is?
It will assist a charity in demonstrating this to have a well prepared financial plan – projecting income, expenditure etc.
There are particular issues to consider if a charity is proposing to borrow under a mortgage. Before a charity can take out a mortgage it must first secure express permission from the Charity Commission unless an exemption under Section 38 Charities Act 1993 applies, Section 38 provides that the Trustees can avoid seeking leave if before executing the mortgage they have taken “proper advice” in relation to:-
- Whether the proposed term is necessary to enable charity Trustees to provide the idea for which the loan is advanced
- Whether the terms of the loan are reasonable
- The ability of the Charity to repay the loan