Social enterprise loans for CICs, charities and community businesses

Sometimes, and the loan is made to the founder rather than to the company. The government backed Start Up Loans programme, run by the British Business Bank, lends to individuals aged 18 or over whose business is based in the UK and has traded for up to 60 months. Each founder can borrow up to £25,000 at a fixed 6% a year over one to five years, with no more than £100,000 lent into one business, and each borrower is personally liable for their own loan. Registered charities are excluded. Community interest companies and other not for profit social enterprises with a sole community focus are considered case by case, so a CIC that trades, charges for its services and can show how the founder will repay is a better fit than one that relies on grants. Where Start Up Loans is not available, or the amount needed is larger, we source lenders that lend to the CIC itself, through unsecured loans, asset finance for vehicles and equipment, or loans backed by the Growth Guarantee Scheme.

Can a community interest company pay interest on a loan?

Yes. The asset lock stops a CIC giving its assets away for less than full value except to another asset locked body or for the community benefit, but paying interest on money borrowed at a commercial rate is a normal cost of running the business. Since 1 October 2014 the cap on performance related interest, where the rate goes up and down with profit or turnover, has been 20%, and a CIC limited by shares cannot pay out more than 35% of its distributable profits as dividends. A plain term loan at a fixed or variable rate linked to a base rate is outside the performance cap, so ordinary business lending sits comfortably with CIC status.

• Founder liability. A Start Up Loan is a personal loan, so the founder repays it even if the CIC closes, and the money is then lent or invested into the company.
• Mentoring. The programme includes a business plan, a cash flow forecast and a personal survival budget, and successful applicants are offered free mentoring alongside the loan.
• Directors' guarantees. Lenders to the CIC itself often ask directors for personal guarantees, which sit uneasily with volunteer boards, so the size of any guarantee is worth negotiating before the offer is signed.
• Grant income. Lenders count contracted income and trading sales first and treat one off grants as support, so a forecast should show the loan being repaid from earned income.

The British Business Bank sets out Start Up Loans eligibility, and GOV.UK records the CIC dividend and interest caps. Our start up business loans page covers new organisations, unsecured business loans explains lending without property, and Growth Guarantee Scheme loans covers the government backed route. Instant Quotes matches a CIC to panel lenders for an unsecured loan before anyone runs a credit search.

Yes. A CIC is a limited company, so it can buy a building with a commercial mortgage and give the lender a first legal charge in the same way any trading company can. The asset lock allows this because the CIC receives full value for the security it grants. Lenders look at the deposit, usually 25% to 40% of the price, at whether earned income covers the repayments with room to spare, and at the value of the building to a buyer outside the social sector if the loan ever had to be recovered. A community hub with a café, room hire and lettable space is easier to fund than a single use building that only the CIC could occupy. We arrange commercial mortgages for CICs, community benefit societies and charity trading companies, and we brief the lender on the structure and the asset lock at the start so it does not surface as a question at the legal stage.

Can a social enterprise borrow against a building it leases from the council?

Only if the lease is long enough and allows it. A lender taking a charge over a leasehold wants enough unexpired term to outlast the loan comfortably, a lease that can be assigned or charged, and a rent that leaves the building with a market value. A short lease, a ban on charging or a clause letting the council take the building back if the community use stops all limit what can be borrowed against it, and in that case the loan is usually unsecured or secured on equipment instead. In Scotland, Part 5 of the Community Empowerment (Scotland) Act 2015 lets a community transfer body ask a council or other public body for ownership or a lease of land or buildings, and the authority must agree unless it has reasonable grounds to refuse. In England and Wales, community asset transfers are agreed council by council, so the terms are negotiated case by case.

• Negotiate the lease first. Ask for a term, an assignment clause and a right to charge before signing an asset transfer, because these are much harder to add later.
• Clawback clauses. A transfer at below market value often carries a clawback if the building is sold or the use changes, and the lender will read it closely.
• Repairs. Older community buildings come with repair liabilities, and a condition survey helps size both the loan and the reserves.
• Mixed funding. A capital grant toward the works with a smaller mortgage alongside is a common shape, and the grant terms must allow the lender's charge.

The Scottish Government explains asset transfer requests under the 2015 Act. Our commercial mortgages page covers buying premises, secured business loans covers borrowing against property already owned, and social enterprise finance sets out the wider options. Instant Quotes lets a CIC compare panel lenders for premises with your credit file left untouched.

It is worth being straightforward about the market. Much specialist social investment, from social lenders, community development finance institutions and blended grant-and-loan funds, is arranged directly with the organisation rather than through brokers, and some of it is only open to charities or asset-locked bodies. If your organisation is early-stage, grant-reliant or wants patient capital with flexible repayment, approaching social investors yourself may be the right first step.

Where a broker adds value is for social enterprises that already trade like a business: a track record of earned income, filed accounts and a clear use for the money. Those organisations can often be assessed by mainstream lenders on our panel on the same basis as any small company, which can widen choice and sometimes speed up a decision. Many organisations end up using both routes.

• Bridging the wait for payment on public sector contracts, which are often paid monthly in arrears after invoices are approved
• Mobilising a new contract or service before income starts
• Vehicles, kitchen equipment, recycling machinery or training equipment
• Buying or refurbishing a building the organisation trades from
• Replacing grant funding that is ending with a trading model that needs upfront investment
• Smoothing cash flow where grants are paid quarterly or in arrears against claims

Debt is right only where it will be repaid from income the organisation can rely on. Borrowing to replace a grant that has ended, without a trading plan that covers the repayments, simply delays the problem. Trustees of charities have particular duties around financial resilience, set out in the Charity Commission's guidance on managing a charity's finances.

Alternatives include grants for capital projects, community share offers for societies, and equity from social investors for CICs limited by shares. Our guides to grants versus loans and debt versus equity explain the trade-offs.