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The potential role of loans in the ADHC funded NGO Sector: Summary report Department of Family and Community Services: Ageing, Disability and Home Care

28 April 2014

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This activity is funded by the National Disability Insurance Agency Sector Development Funds.

Department of Family and Community Services: Ageing, Disability and Home Care The potential role of loans in the ADHC funded NGO Sector: Summary report | 28 April 2014

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Contents

1 The project considers NGO loan finance in the context of change in disability service provision .... 1

1.1 The project is considering the potential role of loans to support ADHC funded NGOs.......... 1

1.2 Access to loan finance can assist sector growth and productivity.......................................... 1

1.3 The diversity and changing context of the disability sector creates specific funding requirements........................................................................................................................... 3

2 There are a range of loan products and providers available ............................................................. 6

2.1 Commercial finance providers offer a wide variety of lending products................................ 7

2.2 Social financial service providers offer products that are designed to meet the needs of social sector participants ........................................................................................................ 8

2.3 Philanthropy and guarantees can enhance NGO access to loan finance.............................. 10

2.4 Loans are a viable option to supplement NGO funding needs ............................................. 11

3 NGOs are using loan financing to further their social goals ............................................................ 12

4 Options to improve access to loan financing are available ............................................................. 17

4.1 Actions to increase the demand for loan financing are required ......................................... 17

4.2 Attributes of the sector discourage suppliers of loan products ........................................... 21

4.3 The relevance of barriers varies by the type of financing required...................................... 23

4.4 The barriers to demand and supply can be reduced to expand the use of loan financing... 24

4.5 Further innovation in loan financing is possible ................................................................... 27

5 Expanding the use of loans is possible for some, but not all, NGOs................................................ 28

5.1 Some NGOs are excluded from accessing loan finance ........................................................ 28

5.2 NGOs follow a similar journey in accessing loan financing................................................... 29

6 Recommendations........................................................................................................................... 31


Glossary of key terms Assets Economic resources owned or controlled by an organisation, such as cash and property.

Balance sheet Financial statement with an organisation’s assets, liabilities and equity at a point in time (also known as the Statement of Financial Position).

Broker An intermediary that assists in sourcing and arranging loans between a borrower and lender.

Capital Financial assets, such as cash, that are used to support operations or for investment.

Cash flow Revenue or expense streams that result in the movement of cash in and out of an organisation.

Collateral Asset or assets that a borrower offers a lender as security for a loan.

Covenant Terms in a financing contract that specifies the extent to which certain activities may or may not be carried out, such as limits on any further borrowing.

Default A loan is said to be in default when a borrower has been unable to make loan repayments when they fall due.

Equity A claim to ownership of an asset or organisation, after all other liabilities are paid.

Financial literacy Knowledge and understanding of financial matters and concepts.

Guarantee An agreement under which a third party takes responsibility for a debt should the borrower be unable to make loan repayments.

Impact investment Investment made with the intention of generating measurable, beneficial social, cultural and environment impact alongside some measure of financial return.

Interest The cost of borrowing funds, typically expressed as an annual percentage rate.

Lease An agreement under which one party agrees to rent an asset from another party.

Liquidity A measure of readily available assets, such as cash and assets that can be readily converted to cash.

Loan An agreement to provide access to finance, on condition that the loan amount and interest are repaid under specific terms and agreed timeframes.

Market rate The cost of borrowing on the open market.

NFP For this report, the term not‐for‐profit organisation (NFP) is used when discussing the broader Australian non‐government sector.

NGO For this report, NGO refers to an ADHC‐funded non‐government organisation, which is a subset of NFPs.

Opportunity cost The cost of the best alternative forgone in order to pursue a certain action.

Patient finance Debt products that provide long term returns, often with below market or zero return in the short term.

Philanthropy Charitable donation undertaken with a desire to improve human welfare.

Profit and loss Financial statement with an organisation’s revenue, expenses and net result over a period of time (also known as the Statement of Financial Performance).

Reputational risk The risk to the lenders reputation from having to take action should an NGO be unable to make loan repayments, such as from negative publicity.

Social finance/ investment

An approach to lending money or investment with the intention of delivering a social benefit and some level of economic return.

Transaction cost Costs associated with undertaking a transaction.

Working capital Short term assets available to cover day to day operations.




Executive summary The project is considering the potential role of loans in the ADHC funded NGO sector

In November 2013, Ageing, Disability and Home Care (ADHC), commissioned Nous Group to provide advice on the potential role of loans in the ADHC funded non‐government organisations (NGO1) sector, and recommend approaches to address barriers to NGOs gaining access to loan finance. The project is one of a series of initiatives that ADHC is undertaking to support and build the capacity of the NGO sector. This summary report outlines the project's key findings and recommendations.

There is a growing recognition that social investment and access to debt financing can assist the sustainability and responsiveness of the NGO sector. In recent years the Productivity Commission, the Australian Senate Economics Reference Committee and others have highlighted opportunities for encouraging social investment and increasing access to debt financing.

The ADHC funded NGO sector is highly diverse, provides a wide range of services to the community, and has a long history of supporting people with disability. The National Disability Insurance Scheme (NDIS) represents a profound reform, providing a significant increase in funding that will benefit 460,000 Australians with disability, and expand the capacity of the disability services system to meet their needs. A range of other NSW Government reforms, such as Ready Together, are also aiming to deliver improvements in the lives of vulnerable groups through a range of initiatives and changes to funding arrangements.

ADHC funded NGOs require finance, and loan products and providers are available to support their needs

These reforms require new thinking by NGOs of the service models they use. NGOs require access to capital to invest in assets (such as property, vehicles and equipment) and organisational capability (such as staff development and systems), and to provide working capital for day to day operations. Loan financing has potential to assist with these financing needs, and can enable NGOs to make a step change in the value they deliver to their clients. However, the interest in and use of loan finance by the sector is variable, and the majority of NGOs have not previously considered using loan finance.

There are a range of loan products available. Traditional lenders, such as banks, credit unions and building societies supply loan products at standard market rates. These products include loans to purchase or construct buildings, acquire equipment and other assets, and cash flow products such as overdrafts and lines of credit. More specialised commercial lenders also provide products such as financial leases, invoice discounting and factoring, and revenue based finance.

A variety of social finance providers, such as Community Development Financial Institutions (CDFIs) and some specialised banking providers, offer products that seek a blend of financial and social returns. These include submarket loan options, patient finance and equity‐like debt products that are designed with the needs of social organisations in mind. The expansion of the social finance sector, particularly as a result of the Commonwealth Governments Social Enterprise Development and Investment Funds (SEDIF) initiative, has increased the pool of funding available to NGOs, and is also providing greater support to NGOs to explore their financing options.

There are a range of examples of NGOs who have and are successfully using loan financing as part of their funding mix.

1 For ease of reading, throughout this report, references to the NGO sector refer to the ADHC funded NGO sector. The acronym NFP is used when discussing the broader Australian not‐for‐profit and non‐government sectors.


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There are barriers to loan financing

There are a range of barriers to both the demand for and supply of loan finance. Figure 1 below outlines the key characteristics of supply and demand, and barriers that impact NGOs accessing loan finance.

Figure 1: Characteristics of demand and supply of loan financing

Demand for loan finance Supply of loan finance

Supply barriers

Evidence of financial strength

Reputational risk

Transactional and opportunity costs

Sector knowledge and products

Demand barriers

Financial strength (Cash flows, Assets)

Willingness to engage in loan

finance

Governance, leadership and decision making

Strategic and operational planning

Financing needs Products

Market return:• Cash flow lending• Asset lending• Leasing• Socially responsible investments

Blended financial and social return:• Sub‐market loans• Equity‐like • Revenue based• Peer to peer• Loan guarantees

ProvidersTraditional:• Banks, credit unions, building societies

• Cash flow lenders• Private, institutional lenders

• Lease providers

Social / specialist providers:• Specialist financial intermediaries

• Social impact investors

ADHC funded NGOsDifferentiated by:

Financials Structures

Scale Products and services

Client Geography

SkillsFinancing of investible

propositions

Capital for organisationalcapability

development

Working capital

Capital for asset investment

The impact of barriers is not evenly distributed, and varies depending on an NGO’s specific characteristics and its external environment. In general, larger NGOs with diverse products, multiple funding sources, existing asset bases, skilled and effective boards, and capability in financial management experience are better able to access loan finance than other NGOs.

There are a range of options to address these barriers

The primary barrier to both demand and supply is the ability of NGOs to understand and demonstrate their future cash flows. Without evidence that future cash flows will be sufficient to enable loans to be repaid, neither NGOs nor lenders are willing or able to enter into loan finance. Improving strategic planning and business planning, as well as looking to improve internal efficiencies, can assist in improving cash flows. Planning is also critical so that NGOs can maximise the benefits from the move from block funding to individual funding arrangements.

The transition to the NDIS is creating a temporary challenge to NGOs in understanding and evidencing their future cash flows. NGOs are experiencing difficulties in determining what their future pricing and client volumes will be, as well as the impact that changes in the competitive environment may have. As a result, they are less able to understand their future cash flows and are less inclined to enter into loan finance during the transition. Similarly, lenders are cautious about lending within this environment.

This situation is temporary, and will reduce as the NDIS is rolled out in each area. Options to address this barrier include disseminating information about the NDIS market as it develops to better inform sector participants and lenders, establishing a SEDIF style fund to support NGOs make the transition, and introducing a temporary, carefully structured and time limited guarantee arrangement to free up the flow of finance during the transition. These options will require further exploration, and participants in the social finance sector may be well placed to support further work in this area.

Other barriers to the demand for loan finance can broadly be addressed through education initiatives. These should address improving strategic and business planning as a precursor for improving financial strength. Education can also enable better understanding by NGO boards and management teams of the potential for loan financing to support their organisation’s social purpose, the loan products and


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providers that are available to them, and the steps they can take to be positioned to access loan finance that is suitable to their needs.

Measures to address demand side barriers during the transition to the NDIS will also address many of the barriers to the supply of loan finance. Further options available to address supply barriers include publishing information about the NGO sector so that financial service providers can make more informed investment decisions.

Further innovation in loan finance is possible

There are a range of innovative approaches that have been identified through the review. One NGO has identified opportunities to use the savings of its own clients as a way to secure loan financing, in the process improving both the client’s experience and financial footing. There may also be potential for establishing an investment fund that leverages surplus funds held by NGOs for lending across the sector. Additional opportunities include the development of combined social and financial return products by commercial lenders, and the potential for a Canadian stock exchange based lending initiative in the Australian context.

There is a pathway for NGOs to gain confidence in loan financing, though some exclusion to loan finance will continue

Addressing the barriers to loans should enable more NGOs to access finance, however some NGOs may still be unable to access loans. Loan financing is not suitable to all organisations, and loans should only be entered into where there are clear benefits for doing so.

Examples from NGOs who have and are using loan finance demonstrate a journey through which NGOs gain access to loan finance. This begins with building consensus and planning for the future, building reserves and exploring the investment options, followed by trialling and expanding the use of loans as confidence in their use develops.

Recommendations to expand the use of loan finance

The project identified three overarching recommendations to better enabling NGOs to access loan finance. The focus of these recommendations is to reduce the barriers to the supply and demand of loan financing that limit NGO access to loans, and to better enable the transition to new funding arrangements. The overarching recommendations are as follows:

Recommendation 1: Develop resources and tools to assist the NGO sector to understand and better access loan products

Recommendation 2: Engage with the financial services sector to promote the understanding of and opportunities for NGO sector lending

Recommendation 3: Further enable NGOs to successfully transition to new funding arrangements through additional initiatives


1 The project considers NGO loan finance in the context of change in disability service provision

The NGO Loan Financing Project has built on previous reviews to identify the potential role of loans in the ADHC funded NGO sector. The project has been undertaken in the context of a diverse disability sector, and a number of major reforms that are underway across the sector. The following pages discuss the background to the project, recent work regarding finance for the not for profit sector, and the investment in disability support that is currently underway.

1.1 The project is considering the potential role of loans to support ADHC funded NGOs

Ageing, Disability and Home Care (ADHC) commissioned Nous Group to undertake the NGO Loan Financing Project, provide advice on the potential role of loans in the ADHC funded non‐government organisations (NGO) sector, and recommend approaches to address barriers to NGOs gaining access to loan finance. The project is one of a series of initiatives that ADHC is undertaking as part of its focus on supporting and building the capacity of the NGO sector, and is funded through the DisabilityCare Australia Sector Development Grants.

This summary report outlines the projects key findings in terms of:

the potential role of loans in supporting the ADHC funded NGO sector; including as a potential response to cash flow issues of disability NGO’s moving from block funding to individual funding under current reforms

the type of debt financing institutions and products available

barriers for NGO’s to accessing debt finance and how these may be addressed

the potential of new/innovative approaches to providing debt financing and accessing debt finance.

1.2 Access to loan finance can assist sector growth and productivity

Interest in using loan finance as part of the funding mix for NGOs has received more attention in recent years. In particular, recent reviews have highlighted:

the potential for loan financing to supplement NGO capital sources, better enabling capacity building and growth in services and the social value delivered

that access to loan finance has been a barrier to sector growth, with smaller NGOs facing greater levels of financial exclusion as a result of a range of barriers

the role that social finance providers can play in developing capability and increasing the supply of loan finance to the sector.

These factors are discussed in more detail below.

This activity is funded by the National Disability Insurance Agency Sector Development Funds. nous g r oup . c om .au | 1 |


The Productivity Commission identified a need to develop a sustainable market for NFP debt

The Productivity Commission (PC) released its report on the Contribution of the Not‐for‐Profit sector in 2010. The report considered ways of improving the efficiency and effectiveness of the sector in response to the changing nature of relationships between government, business and Not‐for‐Profits (NFPs). The PC identified a lack of access to finance as an inhibitor on sector growth, as well as a factor that reduced the sector’s ability to innovate and compete against for‐profit providers.

The PC noted the importance of developing a sustainable market for debt finance as a key mechanism to increase the finance available to the NFP sector. Access to finance was also identified as being inconsistent across the sector: while most larger NFPs have ready access to capital from conventional lenders, other NFPs have difficulty in meeting lending criteria and often experience difficulties in accessing capital.2 The PC also noted the emergence of specialised financial intermediaries, such as community development finance institutions (CDFIs), and the role these organisations have in improving access to capital.

The Senate highlighted the role of CDFIs in enabling a sustainable market for social finance

In response to the Productivity Commission’s report, the Senate Economics Reference Committee (ERC) investigated the barriers and options to developing a capital market for the social economy in Australia in its 2011 report titled Investing for Good: The Development of a Capital Market for the Not‐for‐Profit Sector in Australia.

The ERC identified that loan financing is an important element of the funding mix that will be required for the ongoing growth of the sector and to enable the sector to address the demand for services. The report also noted a range of barriers that limit the flow of finance to the sector, and highlighted the role of financial intermediaries, such as CDFIs, to connect financial investors and mainstream financial institutions with social economy organisations. This includes the development and promotion of tailored financial products to social economy organisations, such as new debt instruments, equity‐type investments and long term ‘patient finance’. CDFIs were also seen as best placed to engage with social economy organisations to build financial capacity, provide knowledge about the finance options best suited to the organisation, and help to link them to suitable sources of capital.

Other projects have identified barriers and opportunities to the use of loan financing

A range of other projects3 have been undertaken that explore, either directly or indirectly, loan financing for the NGO sector. In summary, these have reaffirmed the work of the PC and the ERC, in particular:

the potential benefit to the NFP sector and their clients of loan financing as a mechanism to increase the finance available.

exclusion from access to finance is still a major factor, with larger, more sophisticated NGOs better able to access commercial finance than smaller NGOs. This is a concern both in Australia and internationally.

the development of CDFIs is seen as a key element in enabling the growth of social finance and addressing exclusion, both in terms of lending to traditional NGOs, as well as supporting the development of social enterprises.

2 Productivity Commission 2010, Contribution of the Not‐for‐Profit Sector p. 185

3 Such as Ingrid Burkett (Commissioned by NAB), Finance and the Australian Not‐For‐Profit Sector (Foresters Community Finance, March 2011), Rosemary Addis, John McLeod and Alan Raine, Impact Australia: Investment for Social and Economic Benefit (DEEWR and JBWere, March 2013) and Coro Strandberg, Scaling the Social Finance Pipeline: Challenges and Opportunities (Strandberg Consulting Report, November 2013)



philanthropic lending is another area that is seen as having potential for expansion, however this is as yet relatively underdeveloped in the Australian context, with a preference for philanthropic giving rather than lending predominating.

there are barriers to the supply of and demand for loan financing that need to be overcome to enable the expansion of finance. Matching demand with supply requires the development of both suitable financial products and providers, and the development of investible propositions by the NGO sector.

Increased access to finance is dependent on an expanded social finance sector

A key finding of previous reviews has been the need to grow the Australian social finance sector to better enable NFP access to finance. This recognises that social finance in Australia is generally seen as an emerging area.

There are a number of providers that offer lending services tailored to NFPs. These include impact investors such as Foresters Community Finance (Foresters), Social Ventures Australia (SVA) and Social Enterprise Finance Australia (SEFA). There are also a number of banking services that seek a mix of social and financial benefits, such as Bendigo Bank’s Community Sector Finance and bankmecu.

The Social Enterprise Development and Investment Funds (SEDIF) launched by the Australian Government in 2010 have resulted in the three new funds in the Australian market managed by Foresters, SVA and SEFA. The funds were established through a $20 million grant by the Australian Government, with an additional $20.6 million provided through private capital arranged by fund managers4. In its most recent progress report, the Australian government identified that there had been strong interest in the funds, with almost 600 enquiries from social enterprises, which led to over 125 engagements with fund managers and 50 progressing more fully through the loan application phase.

Overall, CDFIs in Australia have close to $150 million under management. 5 This represents a substantial pool of capital that is accessible by NFPs. Comparisons with markets in the US and UK highlight the potential for further growth in this area. For example:

In the US, targeted development in the CDFI sector since 1994 has resulted in long term growth, with 808 certified CDFIs as of December 20136.

In the UK, CDFIs have developed since the late 1990s. In 2012, 53 CDFIs were in operation, and provided £225m in new loans to 33,300 individuals and organisations7.

1.3 The diversity and changing context of the disability sector creates specific funding requirements

The NGO sector in NSW is large and rapidly growing. NGOs provide vital disability, home and carer services to support vulnerable people in NSW to live independently and lead fulfilling lives. The NGOs who support people with disability are diverse in terms of the services they provide, the groups they serve and their funding bases.

4 DEEWR 2013, The Social Enterprise Development and Investment Funds: Progress Report June 2013, p. 1

5 Social Ventures Australia Scoping Study, Community Development Financial Institutions (CDFIs), A new option for addressing financial exclusion in Australia, Social Ventures Australia, 2009

6 US Department of Treasury, CDFI certification data http://www.cdfifund.gov/docs/2014/Cert/CDFI%20List%20‐%2012‐15‐13%20v6.xls accessed 2 January 2014

7 Community Development Finance Association 2012, Inside Community Finance: CDFIs in the UK 2012


http://www.cdfifund.gov/docs/2014/Cert/CDFI%20List%20-%2012-15-13%20v6.xls


The disability support sector is undergoing significant reforms. In particular, the NDIS and Ready Together represent historically unprecedented growth in disability funding which will reach $3.3 billion by 2018‐198. The reforms will dramatically change the way people access support. New arrangements include commitments to individualised packaging and person centred service approaches which empower recipients to have greater control over what services they require and how the services will be provided.

These factors are discussed in more detail below.

The NGO sector is a large and diverse group

ADHC supports vulnerable people in NSW including older people, people with disability, their families and carers. In funding organisations, ADHC’s aim is to provide better and more integrated services to these groups. In 2012‐13, ADHC provided a total of $1.3 billion in funding to 579 NGOs, with an additional $41 million provided to 117 councils.9

Funded NGOs can operate across multiple sectors, be specialist disability service providers, home care or carers support service providers. The services provided to people with disability, their families and carers enable them to pursue meaningful lives. Funded services provide essential support to allow increased community participation, maximised wellbeing and independent living. A diverse range of services are provided by NGOs to people with disability, their families and carers.

NGOs range from small, niche organisations that are wholly reliant on ADHC funding to provide a service to a handful of clients at a single location, through to state wide and national organisations offering an array of different service offerings to clients across a range of communities, drawing on multiple different revenue sources.

Characteristics of NGOs indicate larger organisations are better placed to secure loans

Analysis conducted through the project indicates that a number of characteristics of NGOs are significant when considering their capability to secure and sustain loan arrangements. In particular:

medium and large NGOs generally have assets that can be used to secure loans, while smaller NGOs are less able to provide assets as loan security

NGOs are heavily reliant on government funding. Analysis of the 2011 NSW Disability Services Quality Systems Survey identified that ADHC grants accounted for 50% or more of income for nearly 70% organisations, and 75% or more for over 40% of the NGOs.10

NGOs hold varying cash reserves. Some NGOs hold sizeable reserves as a buffer against future events, while others prefer to invest all available resources into immediate services delivery.

smaller NGOs are more likely to lack financial skills, as they have less access to staff and board members with specialist financial knowledge.

The sector does not make substantial use of loan financing

NGO interest in loan financing is variable, and loan finance is not widely used across the sector.

Consultations throughout the project indicated that many NGOs have yet to engage with the idea of using loan finance. A survey conducted through the project identified that 56% of NGOs had not considered using loans over the past three years, and 19% of NGOs had made applications during this

8 Department of Family and Community Services 2013, Ready Together: a better future for people with disability in NSW p. 7

9 Department of Family and Community Services Annual Report 2012‐13

10 PwC 2011, Potential contribution of the NGO sector to deliver more and better services to people with a disability, p. 15



time. Analysis by ARDT of a concurrent project identified similar results, with 58% of NGOs surveyed not having considered loans previously11.

Significant reforms are growing disability and aged care services

Significant reforms to disability and aged care services in Australia are currently being implemented, reshaping both funding and service delivery arrangements at state and federal levels. Key reforms are outlined below:

The NDIS represents a profound reform to supporting people with disability, their families and carers, and will dramatically change the way people with disability are empowered to control how and what services they require, enabling a better quality of life and increased social and economic participation. The NDIS will deliver a significant increase in funding, with the Australian Government providing $19.3 billion over seven years from 2012‐13. Once implemented, the NDIS will benefit 460,000 Australians with disability who are aged 64 years or younger.

Stronger Together is NSW’s ten year plan for major disability sector reform and service expansion. Building on the previous five year, $1.3 billion investment, Stronger Together Two includes a commitment for a further 47,000 new ‘places’ and introduced an additional focus on person centred approaches which enables people with disability to be the determinants of how their support resources are used.

Living Longer Living Better details the Commonwealth’s commitment to aged care reforms, which includes $3.7 billion in funding over five years. These reforms aim to significantly expand home care to assist people to remain living at home for as long as possible, and to introduce more choice and flexibility for people receiving care at home through Consumer Directed Care (CDC).

Sector reforms are likely to impact the demand for loan funding

The reforms will result in significant growth in the disability sector, which will require greater capacity to service the additional demand. The introduction of reforms will have implications on service providers, the markets they operate in and the way services are provided. Some of the key implications are as follows:

Growth of sector(s) and the new market opportunity – the sectors will experience unprecedented levels of investment and growth, which will require adequate capacity to meet the demand created. For NGOs this growth represents an opportunity to provide services to a larger market and increase their scale of operations. The increased investment is also likely to result in an increasingly competitive market which attracts new entrants, merging and partnerships. Increased competition may result in some providers losing market share.

Introduction of individualised funding arrangements – sector reforms are empowering individuals with greater choice and control to determine what and how they apply their resources. This change in funding approach will require service providers to design appropriate services that attract consumers to achieve funding security instead of relying on ‘block funding’ arrangements.

Person centred service models – providers will be required to develop new service delivery methods and support systems. The sector reforms either directly empower consumers to choose the services they require or mandate the use of new service delivery methods that are delivered in more person centred ways (e.g. Consumer Directed Care). Providers may require funding to acquire new systems or develop new service models to retain or attract new market share.

11 ARTD, 2014, Evaluation of the Community Asset Building Project (Draft Report), p.34



2 There are a range of loan products and providers available

Loan financing can be useful as part of an NGOs overall funding mix. There are a variety of loan products and providers available, and in some instances this variety provides a broader range of options than is the case for many for‐profit organisations.

Loan products include generic products that are available at market interest rates, to more specialised products that can be at sub‐market rates. There are also a variety of lending providers available, from mainstream banks, credit unions and building societies, through to more specialised social finance providers that seek to achieve a mix of financial and social returns.

Table 1 below provides an overview of the various financing options available, both within Australia and examples of emerging specialist providers internationally. For ease of understanding, financing options are classified as commercial finance (i.e. lending that is available to any business or organisation, generally at market rates) and impact investment and patient finance, which aim to achieve a mix of both financial and social benefits.

Table 1 : Overview of financial products and providers

Products Traditional providers Social / specialist providers ‐ Australia

Social / specialist providers ‐ International

Commercial finance Cash flow lending and short term loan products (secured and unsecured loans, credit cards, lines of credit, overdrafts)

Asset lending (against inventory, property, plant and equipment, construction etc.)

Financial leases Invoice discounting and factoring

Revenue based financing

Authorised deposit‐taking institutions (banks, credit unions, building societies etc.)

Private, corporate and institutional investors

Cash flow lenders Lease providers Brokers

Impact investment and patient finance

Similar products as those in commercial finance, as well as:

Sub‐market return loans (zero interest, structured lower return)

Equity‐like investments and patient debt

Supplier finance Peer‐to‐peer loans

Private, corporate and institutional investors

Banks (through foundations) Superannuation funds (particularly ‘ethical’ super funds)

Specialist financial intermediaries e.g. Social Enterprise Finance Australia (SEFA), Foresters, Social Ventures Australia (SVA),

Community Development Financial Institutions (CDFIs)

Social investment funds Impact banks, e.g. Community Sector Banking (CSB)

Impact investors, e.g. Small Giants, Impact Investment Group

Specialist financial intermediaries, e.g. New Hampshire Community Loan Fund – USA

Impact banks, e.g. Triodos Bank ‐ Netherlands, Charity Bank ‐ UK

Impact investors, e.g. NESTA, Bridges ‐ UK

Impact‐first stock exchange platforms, e.g. SVX – Canada

Peer‐to‐peer lending platforms, e.g. societyone.com.au, zopa.com, kiva.org

Each of these is discussed in more detail in the following pages.



2.1 Commercial finance providers offer a wide variety of lending products

Commercial finance is lending available to businesses and organisations, usually at market rates. Lenders enter into loans to generate a financial return from the investment, with interest rates varying based on the investment’s risk profile. Accessing commercial finance requires that an organisation can evidence that both the loan principal and interest can be repaid when they fall due.

The main products available in this category are outlined in Table 2 below.

Table 2: Types of commercial lending products available

Product type Commentary

Cash flow lending

Cash flow lending helps organisations to smooth their cash flows and can also provide temporary relief against unforeseen financial events. These can take the form of:

Credit cards: credit cards enable organisations to make purchases, and in some instances receive cash advances. Minimum repayments are usually required each month. Credit cards may have higher interest rates than other types of loans, as they can be more risky for lenders.

Lines of credit: lines of credit provide a facility that the borrower can draw from up to a maximum agreed amount. This is advantageous to the borrower as no interest is paid on the unused credit.

Overdrafts: an agreement under which the borrower can withdraw money from their bank account beyond the balance of the account (i.e. below zero). The borrower pays interest on this negative balance.

Business investment term loan

Business investment loans enable organisations to borrow a fixed amount for investment in different aspects of their organisation’s operations, such as investing in new IT systems, purchasing minor equipment, or developing a new enterprise offering. Loans of this type generally take the form of:

Secured loans, where the lender takes a charge over an asset in order to protect themselves in the event of a default.

Unsecured loans, here the lender does not have a charge over an asset. This type of loan poses a higher level of risk to the lender and therefore the interest rate payable is generally higher.

Asset lending Lending that uses an asset as collateral for the loan. If the loan is not repaid, the asset is taken by the lender, and can be sold to recover the balance of the loan (known as foreclosure). Loans for which the collateral is inventory or accounts receivable are more commonly used for working capital. Larger loans against more significant assets, such as property, plant and equipment, are often used for development or investment. In some cases, the development itself may be used as collateral for the loan, such as the construction of a new property.

Financial lease A financial lease is a commercial arrangement where the borrower (lessee) obtains the use of an asset which is purchased and owned by a finance company or third party (lessor). The lessee makes a series of payments to the lessor for use of the asset, which covers the purchase cost of the asset plus any additional interest. The lessee may have the option to acquire ownership of the asset at the end of the lease. This is most commonly used for the purchase of motor vehicles or major machinery items.

Invoice discounting

Invoice discounting can be used to improve an organisation’s cash flow by reducing the lag between invoicing a client and receiving payment. Under an invoice discounting arrangement, finance is provided by a lender against the value of the goods and services provided by the borrower to a third party. The lender provides a proportion of an invoiced amount to the borrower when the borrower issues an invoice to a customer. The remaining percentage (less interest and fees) is available to the borrower to draw against once the customer has paid the invoice in full.

Factoring Factoring operates similarly to invoice discounting. However under a factoring arrangement the lender takes responsibility for maintaining the sales ledger, credit control collections and, in some instances, the management of bad debt.




Revenue based financing

Finance is provided in return for a percentage of ongoing gross revenues until the initial principal amount, plus any additional amounts, is repaid to the lender. Borrowers generally enter into revenue based financing when they do not have the asset base to support a commercial loan, and interest rates are generally higher than for lending secured against assets.

Commercial finance is available through a broad range of traditional, generally for‐profit providers of varying sizes and sophistication. An overview of major provider types is as follows:

Banks, credit unions and building societies represent the main providers of commercial finance. Major Australian banks have specialist teams that focus on the NGO sector, though they may refer smaller NGOs to their local commercial bank managers. Credit unions and building societies also provide loans on more or less favourable terms than major banks, depending on a range of factors, including their own costs of capital and their priorities in terms of purely financial or mixed financial and social benefits.

Cash flow lenders are specialist financial service providers that provide cash flow finance and solutions to small and medium sized enterprises. Clients are typically in the $250,000 to $10m turnover range and borrow amounts ranging from $50,000 to $1m.

Financial leases can be obtained through the financing or leasing arm of a commercial bank, or directly from the provider of the product or service (e.g. heavy machinery can be leased from the manufacturer). Alternatively, a broad range of independent lease providers also exist, who generally specialise in providing lease agreements for a particular type of asset, such as motor vehicles.

Finance brokers are an intermediary that can assist organisations source appropriate lenders, and educate and assist organisations through the loan application process. Brokers tend to be more relevant for smaller and medium sized organisations that do not have regular access to expert financial advice, and have limited knowledge of the finance sector.

Private, corporate and institutional philanthropic funds are a significant source of capital for the social sector. The level of lending through these arrangements is generally lower than in comparable markets, such as the United States, due to the preference for philanthropic giving rather than lending.

2.2 Social financial service providers offer products that are designed to meet the needs of social sector participants

Social financial service providers have developed a range of products that are aimed at the funding needs of social sector participants, and can be better aligned with the financing needs of NGOs. These products can broadly be seen as impact investment and patient finance products.

Impact investment is a form of socially responsible investment that is ‘made in companies, organisations and funds with the intention to generate a measurable, beneficial social, cultural and environment impact alongside some measure of financial return.’ Impact investment targets a range of financial returns from below‐market to above‐market rates, depending on the circumstances and the relative weighting of social impact versus financial return desired by the investor12.

12 IMPACT‐Australia, Investment for social and economic benefit, March 2013, p.2.



Patient finance refers to debt products that provide long term returns, often with below market or zero return in the short term. The borrower may not be required to make any repayments on these loans for the initial years, but make higher or equivalent payments in the later years.

Impact investment and patient finance loan products can be similar to commercial finance products, however impact investment aims to address social, cultural and environmental challenges with the funds. For patient finance, the difference is the structure of the repayments, with the delayed returns representing an investment in capacity building.

The additional products available in this category are outlined in Table 3 below.

Table 3: Impact investment and patient finance products


Sub‐market return loans

Sub‐market return loans are products provided at below‐market interest rates. These may take the form of:

Zero‐interest loans: loans on which the lender does not charge any interest. Structured lower return loans: loans, typically negotiated on a case‐by‐case basis between social investors and borrowers, designed to provide a blend of social and financial return that reflect the priorities of the investor.

Equity‐like investments

These are products that are structured like equity investments, but do not necessarily reflect an ownership stake in the borrower. These may take a variety of forms, such as:

Subordinated loans, whereby repayments are only made after higher priority debts have been serviced.

Patient debt is a long term investment and capacity building product in which the return to the investor may be nil or low for an initial period and then increases over time.

Supplier finance Supplier finance is an arrangement whereby funds are provided by a large organisation to one of its suppliers in order to support the operations of the supplier. In such cases, the lender is generally reliant on one supplier (the borrower) for input into their product development or service delivery, and supporting the supplier is mutually beneficial to both parties. These loans can be at nil, low or market rates.

Peer‐to‐peer (P2P) loans

P2P lending involves private donors providing loans directly to individuals and ventures rather than through a financial institution or investment fund. The structure and financial returns for these loans are determined on a case‐by‐case basis.

It is important to note that some commercial providers also offer sub‐market return products. For example, banks may provide lending at sub‐market returns through foundations, while some credit unions and building societies may seek a mix in social and financial returns and are therefore willing to undertake loans at sub‐market rates of return.

In addition, there are a range of other organisations that provide finance for NGO lending, either directly or indirectly. In particular:

A small number of specialist financial intermediaries exist in Australia that are not‐for‐profits themselves and focus on lending to social enterprises and not‐for‐profit organisations. These organisations provide commercial financial products (such as loans) comparable to those offered by traditional providers, and may also provide education and assistance with the loan process.

Community Development Financial Institutions (CDFIs) are emerging in Australia, providing credit and financial services to underserved markets and populations. CDFIs can take various forms, including community development banks and credit unions, and community development loan funds.


http://en.wikipedia.org/wiki/Community_development_bank


Social investment funds are a particular type of financial intermediary that manage funds to invest in social finance organisations and target social investment opportunities.

Impact banks are public banking institutions that make selective investment and lending decisions based on their founding principles to achieve positive social, environmental or cultural impact. In Australia, Community Sector Banking is one example of this approach.

Impact investors are individuals or organisations that engage in impact investment. However, in the context of this report, impact investors are individuals or organisations that specifically invest, as opposed to lend, for social impact. As such, this refers to equity investors and venture capitalists that provide financing to organisations that create positive social, environmental and cultural impact in exchange for an ownership stake.

Impact‐first or social stock exchanges are exchange platforms that enable debt or equity investments for social good. They operate similarly to regular stock exchanges. There are currently no exchanges of this type in Australia, and this represents a potential area for innovation and development.

Peer‐to‐peer (P2P) lending platforms have emerged as an innovative means of credit provision to small social enterprises and new ventures in developed and developing countries. It is usually managed through a commercial online platform such as societyone.com.au (Australia) or zopa.com (UK), though P2P lending can occur offline as well.

While not a direct lender to NGOs, superannuation funds do provide funding to the sector via social finance intermediaries. Some superannuation funds have a mandate to make social investments at either market or sub market rates of return. For example, Christian Super partnered with the Australian Government and Foresters Community Finance in 2011 to establish the Community Finance Fund, which aimed to enable community organisations to transition from rented accommodation to their own premises.

2.3 Philanthropy and guarantees can enhance NGO access to loan finance

Philanthropy can play an important role in lending to NGOs

Philanthropy can take the form of donations or sponsorships, both on a one off or ongoing basis, and can involve individual giving or through organisations. Philanthropy is not a form of loan financing. However, philanthropic giving can be an important source of pre‐lending finance, as:

it can provide the basis for a deposit for a loan

developing a cash reserve through regular saving can in itself provide comfort to lenders of an ability for financial discipline, which reduces the risks to the lender, increasing their willingness to lend

it can be a practical addition to loan financing, and evidence of the backing of a lender can be leveraged to encourage charitable giving.

Some forms of philanthropic funding are:

Philanthropic foundations: Funding from these organisations can take the form of grants or donations, as well as venture philanthropy to support the establishment of new social ventures.

Local community foundations and cooperatives: These are geographically concentrated funds that channel funds from institutional and retail investors seeking to make values driven investments that benefit local communities.



Ancillary funds: Public and private ancillary funds make distributions to deductible gift recipients, such as registered not‐for‐profit organisations. Primarily philanthropic in nature, ancillary funds may provide money, property or benefits and are required by law to disburse 5% of their funds under management annually13.

Crowd funding: Crowd funding online platforms enable a large number of individuals to contribute small sums towards organisations, projects or product development. A range of platforms focus on fundraising for NGOs, including crowdrise.com, indiegogo.com, razoo.com, justgiving.com, weeve.it and firstgiving.com.

Loan guarantees are a further option that can enable access to loan finance

Loan guarantee arrangements are a form of additional security, and can be used to enable lending to organisations that are otherwise precluded from entering into loan finance. Guarantees can take a variety of forms:

Government guarantee schemes: Governments may undertake different types of guarantee arrangements to enable lending, particularly where a market failure exists in the supply of loan financing. Such schemes are a common tool internationally used to increase access to credit for small yet viable organisations14, and have previously been used in the Australian NFP context.

Guarantees by other organisations: Other organisations may be willing to provide a guarantee for a loan to an NGO, generally arranged through the personal relationships of management or board members. The other organisation would agree to take over the repayments of an NGO that was unable to meet its loan obligations. By providing this security and reducing the risk involved, a lender may be more willing to lend, and may also be able to lend at a lower interest rate.

Personal guarantees: The requirement for personal guarantees by board members is common practice for lending to NGOs and small businesses by commercial banks. Social finance providers have recognised that this can be a barrier for NGOs to undertake finance, and offer loan products that do not require director guarantees.

2.4 Loans are a viable option to supplement NGO funding needs While many different types of loan products exist, the purpose of all loans is similar; to provide additional or supplementary cash to an organisation in order to fund operations or expand activities. In a simple loan, a borrower receives funds from a lender, with the repayment of the original capital and interest made at agreed points of time in the future.

In taking out a loan, an NGO’s expenditure increases over the period that the loan is being repaid, but the loan ultimately benefits the organisation through an increase in revenues over the longer term. In turn, this enables the organisation to increase the investment it can make in the products and services it provides.

A prerequisite to taking out a loan is having the ability to repay the capital and interest when they fall due. As such, NGOs need to demonstrate to lenders that they can generate sufficient future cash flows to make repayments.

13 Australian Charities and Not‐for‐profits Commission, Factsheet: Private and public ancillary funds and the ACNC, 2013.

14 NSW Business Chamber, Small Business Access to Finance, 2013. P 96



Different types of lending represent different levels of risk to lenders. As risks increase, the interest rate at which lenders are able to provide finance also increases. Additionally, increasing risk levels also affect the size of loan that a lender is willing to enter into, and whether they are able to provide finance at all.

Reducing the risks faced by lenders is a major factor in accessing affordable loan finance. Providing loan collateral (such as a property under a mortgage or different types of loan guarantee), evidencing a history of savings or previous successful repayment of loans, and clear plans about how loan finance will be used are common approaches to reducing lender risk.

3 NGOs are using loan financing to further their social goals

A wide range of NFPs are using loan finance as part of their funding mix and to further their social goals.

Loan financing represents an opportunity to create a step change in the social impact that NGOs can achieve. Figure 2 below illustrates the theoretical impact of loan financing on an NGO’s ability to deliver social impact, moving from incremental growth using available revenue streams, through a step change as additional loan finance enables service expansion and enhancement.

Figure 2: Illustrative example of impact of loan financing on NGO social impact

Time

Social im

pact

Long term trajectory of growth in social impact

Social impact growth through leveraging additional finance

Step change in social

impact from additional finance

While Figure 2 is illustrative only, it is broadly consistent with the experiences of NGOs that have explored finance in the past, and the experiences of social finance providers working with the not for profit sector nationally. Some examples of the way in which organisations have used loan financing are outlined in the case studies on the following pages.



Case study 1 – Childhood disability NGO expands into new building

When a neighbouring property came up for auction, a childhood disability service provider decided to explore whether it could purchase the building to expand its operations. The board had previously agreed to purchase a property as part of its long term strategy to expand services, and after more than a decade of saving a deposit of almost $300,000 was available.

The CEO approached a range of lenders. While some lenders were not able to provide a loan, a commercial lender agreed to enter into a mortgage following from lobbying by board members and management.

The service provider successfully purchased the property, and is now helping more families and children through its new building. The loan is progressively being paid off, and the board and management have a new confidence in using loan finance.

The loan is also being used as a working capital facility. All revenues are being paid directly into the mortgage account, reducing the interest costs. Day to day cash needs are then transferred to the service provider’s transactional account each month, which is helping to smooth out cash flows.

Case study 2 – Day program provider uses line of credit for new vehicles

This organisation provides a range of supported day programs to people with disability. It has a small fleet of vehicles that it uses to transport its staff and clients to day program venues. The vehicles were getting old, and it was decided that finance was needed to renew the fleet.

The service provider used a loan broker to help find a suitable loan. After looking at multiple loan options, the broker identified and supported the service provider to apply for a $100,000 line of credit facility. The service provider successfully applied for the line of credit, and purchased some new vehicles. The line of credit is still in use, and is now used to smooth cash flows. Any income received is used to pay off the line of credit to reduce interest costs.

Case study 3 – Supported day program NGO overcomes short term funding need

This NGO provides early intervention and day care programs for children with disability and learning difficulties. In the lead up to the Christmas period, the organisation identified a need for additional funding due to some unexpected expenses and an inability to withdraw cash from a trust account.

Based on the upcoming payment of grant funding and the collateral in the trust account, the NGO was able to access an overdraft facility that was sufficient for their immediate needs. The overdraft was then repaid once the next grant funding was provided early in the new year.

Case study 4 – NGO uses mortgages and client savings to deliver social benefits

This not‐for‐profit community organisation provides a range of support services for people with disability, and has been using loan finance for over a decade. This provider has built up a sizeable property portfolio to support its operations and provide housing for its residential clients, and has used mortgage finance to purchase ten properties.

Key aspects to this organisation’s approach have been: Taking the view that property should be viewed on a “why not buy” rather than “why buy” basis Engaging with the board to develop trust in management recommendations about property purchases, which enables rapid decisions to be made when good purchase opportunities are identified

Developing a strong, trusting relationship with their bank manager, making sure that they are well aware of the financial position of the organisation

Undertaking valuations of the property portfolio every 3 years, so that the true value is understood and can be used as the basis for further property purchases

Being prepared to sell properties if they no longer meet the needs of the organisation



Using any surplus funds to reduce the amount of interest paid, by parking any additional funds in loan accounts.

The management team and board have found this approach to be highly successful. Initial property purchases enabled it to “snowball” its efforts in purchasing additional properties that further support its services. The close relationship with the bank has also enabled the bank manager to waive some of the usual loan application fees, as well as offering competitive interest rates.

Case study 5 – Group housing provider expands its services through loans

This small disability services provider was set up by a number of parents to establish a group home for children with intellectual disability. Following some years of financial difficulties, and facing challenges in meeting the maintenance needs of the group home, the board agreed to sell an undeveloped block of land and use the proceeds to invest in a new property.

Using the proceeds from the sale and a $60,000 loan from a bank, the service provider purchased a neighbouring property. The new building was initially rented out in the private rental market until the loan could be paid off. Having gained confidence through the purchase, the service provider then took out another loan to pay for an extension to the group home.

Once both the property and the extension were paid off, the service provider decided to extend their operations further, and recently entered into a $300,000 loan to purchase another property. With rental income and client contributions, the service provider has established equity for the future, and has also developed a cash reserve to help with the transition to the NDIS.

The service provider is now considering when it will be in a position to purchase additional properties to provide group housing support for additional clients.

Case study 6 – NGO transitions from property rental to ownership15

arbias provides a range of supports to people with an acquired brain injury in NSW and Victoria, including training, education, accommodation and community programs. When the lease on a small house arbias was renting was due to expire, the NGO saw this as an opportunity to act on their plan to both enhance the quality of and grow their services by purchasing a property.

arbias sought and were approved for a loan from Community Sector Banking to purchase, renovate and customise a property. This enabled the organisation to build tailored consulting and training rooms to meet their needs, provide hot‐desking facilities to help travelling carers remain connected, deliver higher quality case management and counselling services, and provide a healthier environment to support better client and staff wellbeing.

Case study 7 – Child care provider purchases a property to enable affordable access16

The Murilla Community Centre provides services and support for the residents of the small town in which it is situated and those of the surrounding districts. The Centre recognised the community’s need for dedicated community based child care and support, and sought to address this need through purchasing a property so that it could provide this service.

The Centre worked with Foresters Community Finance over a period of eight years to determine ways to enhance the Centre’s long term financial and social sustainability and to obtain a loan to finance the purchase of property. Once the Centre had secured ownership of a child care centre, this enabled them to both deliver on their community development objectives by providing affordable child care, and secure further funding to ensure the future of the child care centre.

15 Drawn from a Community Sector Banking case study, real stories: supporting people affected by brain injury, available at http://www.communitysectorbanking.com.au/news/case_studies/real‐stories‐supporting‐people‐affected‐by‐brain‐injury

16 Drawn from a Foresters Community Finance case study, Investing in the community, available at http://foresters.org.au/case‐studies/investing‐in‐the‐community‐cas‐92


http://www.communitysectorbanking.com.au/news/case_studies/real-stories-supporting-people-affected-by-brain-injury

http://foresters.org.au/case-studies/investing-in-the-community-cas-92

http://foresters.org.au/case-studies/investing-in-the-community-cas-92


Case study 8 – Lending enables a social enterprise to extend its impact17

Better Life Communications (Better Life) is a social enterprise that provides risk free mobile phones to low income earners. These phones involve no contract, no start‐up costs and no additional costs.

Optus offered Better Life a contract for mobile phone plans which they could then on‐sell. Better Life required finance to enable them to secure this contract, but had difficulty borrowing funds from the banks despite having a documented business plan and commercial approach. Instead, Better Life obtained a loan from Foresters Community Finance to enable it to fund its business development and be awarded the Optus contract.

Case study 9 – Lending supports the capital base of a social enterprise18

Food Connect Brisbane (Food Connect) is a social enterprise that distributes locally and ecologically grown seasonal food within a 400km radius of Brisbane. The business is underpinned by the principles of ‘community supported agriculture’, empowering farmers to grow their produce ecologically by creating a stable customer base and to set a fairer price through the distribution model.

Food Connect’s market has continued to grow and it required more money to expand its operations. Food Connect secured a loan from Social Enterprise Finance Australia which has allowed the business to grow, improve management of its seasonal cash flows and better deliver on its intended social and environmental outcomes.

Case study 10 – An NFP extends its social agenda through lending19

Team Wild is an NGO that runs a program called ‘Rights of Passage Entitlements’ (ROPE) which primarily uses outdoor recreation to re‐engage disenfranchised young people and decrease recidivism in young offenders in Cairns.

Team Wild sought to become financially sustainable without government funding and decided to purchase a sailing tourism business on the Great Barrier Reef. To do this, Team Wild obtained a loan from Social Enterprise Finance Australia to finance the purchase of the business and joined with a number of social impact investors who provided the equity to pay for the balance of the acquisition costs and refurbishment of the boat. The sailing business will finance the ROPE program ongoing.

Case study 11 – NFP leverages lending to expand affordable retirement housing 20

Myrtle Park Retirement Homes (Myrtle Park) is a not‐for‐profit volunteer association comprising over 50 local community members that provides affordable retirement housing in a rural area of Tasmania. The association enables elderly residents to continue living and participating in their local community, improving their quality of life.

Myrtle Park provided five units for rent, a small community garden and operates three small businesses in flowers, firewood and scrap metal. The association wanted to double rental unit capacity and required debt financing to fund this.

The association had a sound track record, having remained financially viable and strongly supported by the local community for a large part of its 35 year history. This provided strong support for Myrtle Park’s application for a loan which was approved by Social Enterprise Finance Australia. The loan amount was matched by funds provided by the Housing Innovations Unit of Housing Tasmania to enable the additional units to be built.

17 Drawn from a Foresters Community Finance case study, A Better Life Through Affordable Communications, available at http://foresters.org.au/case‐studies/a‐better‐life‐through‐affordable‐communications‐cas‐93

18 Drawn from a Social Enterprise Finance Australia case study, Snapshot: Food Connect Brisbane, available at http://sefa.com.au/snapshot‐food‐connect‐brisbane/

19 Drawn from a Social Enterprise Finance Australia case study, Snapshot: Team Wild, available at http://sefa.com.au/snapshot‐team‐wild/

20 Drawn from a Social Enterprise Finance Australia case study, Snapshot: Myrtle Park Retirement Homes, available at http://sefa.com.au/snapshot‐myrtle‐park‐retirement‐homes/


http://foresters.org.au/case-studies/a-better-life-through-affordable-communications-cas-93

http://sefa.com.au/snapshot-food-connect-brisbane/

http://sefa.com.au/snapshot-team-wild/

http://sefa.com.au/snapshot-team-wild/

http://sefa.com.au/snapshot-myrtle-park-retirement-homes/


Case study 12 – NFP seeks financing to become self‐sustainable21

Women’s Property Initiatives (WPI) is a not‐for‐profit that builds and maintains affordable housing for disadvantaged women and children, charging rent at below‐market rates. The organisation works closely with relevant community and local government agencies to ensure their tenants receive adequate support in their new housing.

WPI currently owns and maintains 65 residential homes that are tenanted to 173 women and children. These have a total net worth of $20 million.

WPI is investigating how to best increase the supply of affordable and long‐term rental housing to disadvantaged women and their children. As part of this, it is exploring a social financing model that includes a loan package which could enable them to provide 170 residential homes worth $60 million. This number of homes would allow WPI to become self‐sustainable.

21 Drawn from a Social Enterprise Finance Australia case study, Snapshot: Women’s Property Initiative, available at http://sefa.com.au/snapshot‐wpi/


http://sefa.com.au/snapshot-wpi/


4 Options to improve access to loan financing are available

Loan financing can play an important role in supporting NFPs to deliver social value. However, there are a range of barriers that impact on the use of loans by NGOs. As illustrated in Figure 3 below, these barriers can be viewed as:

barriers to the demand for loan finance, which limit NGO awareness of the potential for using lending, and their willingness and capability to engage with the loan options that are available

barriers to the supply of loan finance, which limit the ability of financial service providers to enter into loan financing arrangements with NGOs.

Figure 3: Overview of barriers to the demand and supply of loan finance

Demand for loan finance Supply of loan finance

Supply barriers


Reputational risk

Transactional and

Demand barriers

Financial strength (Cash flows, Assets)


finance

Governance, leadership and opportunity costs

Sector knowledge and products

decision making


Financing needs Products

Market return:• Cash flow lending• Asset lending• Leasing• Socially responsible investments

Blended financial and social return:• Sub‐market loans• Equity‐like • Revenue based• Peer to peer• Loan guarantees

ProvidersTraditional:• Banks, credit unions, building societies

• Cash flow lenders• Private, institutional lenders

• Lease providers

Social / specialist providers:• Specialist financial intermediaries

• Social impact investors

ADHC funded NGOsDifferentiated by:

Financials Structures

Scale Products and services

Client Geography

SkillsFinancing of investible

propositions

Capital for organisationalcapability

development

Working capital

Capital for asset investment

This section discusses these barriers, and presents a range of options that can reduce their impact on the use of loan financing by the sector.

4.1 Actions to increase the demand for loan financing are required

Table 4 below provides an overview of identified barriers to the demand for loan finance. As illustrated, there are a range of barriers that exist across the sector, though the relevance of each barrier varies depending on an NGO’s specific characteristics and circumstances.

The material on the following pages discusses each of these barriers in more detail.



Table 4: Summary of demand side barriers

Barrier Elements of barrierIndicative impact

Financial strength(Cash flows, Assets)

D1: Availability of future cash flows to repay loans, particularly during transition to the NDIS

D2: Lack of reserves that can be used as deposits

D3: Lack of assets that can be used as loan collateral


finance

D4: Risk appetite of boards and management

D5: Negative cultural perceptions of loan financing

D6: Costs of loan finance

Governance, leadership and decision making

D7: Effectiveness of decision making mechanisms

D8: Board skill mix

D9: Financial literacy

D10: Availability of financial information

D11: Knowledge of financing products and providers

D12: Interest in loan financing

D13: Ability to communicate financial and social benefits


D14: Extent to which strategy and business plans have been developed

D15: Robustness of future financial models

L

M

H

M

H

M

M

M

H

H

M

M

M

M

M

4.1.1 Financial strength is a key determinant of whether an NGO can enter into loan financing

Underpinning any loan agreement is the need to be satisfied that the loan can be repaid, and there needs to be a reasonable expectation that future cash flows will be available to make repayments. For this to occur, future cash flows need to be:

Sufficient, in that future cash flows must be adequate to cover both normal operating expenditure and to make repayments of loan capital and interest

Timely, in that adequate funds need to be available when loan repayments fall due

Recurrent, in that there needs to be a reasonable expectation that funding will reoccur in the future

Unrestricted, in that there are no restrictions on how funds can be used (relevant to grant funding)

The extent to which NGOs have and can evidence available future cash flows varies. In particular, smaller NGOs that are reliant on a single revenue stream and have less sophistication in terms of their financial management capability, are generally less able to understand and evidence future cash flows.

A range of other challenges related to financial strength are discussed below.

The transition to the NDIS is further impacting how well NGOs can forecast future cash flows

The large scale increase in funding to the disability sector through the introduction of the NDIS should result in an increase in the overall funding available to NGOs, and provide the basis for an expansion in capacity and service delivery.

However, the transition to the NDIS is a challenge for sector participants, in terms of understanding what their future cash flows will be. In particular, NGOs are as yet unable to forecast the impact of changes on client volumes and purchasing patterns, timing of receipts, invoicing and collection costs, the potential for bad debts, and the future competitive environment. As a result, NGOs consulted during the



project were less sure of their ability to apply for loan financing, and were also less willing to consider loans at this point.

In considering the transition, it should be noted that there is anecdotal evidence that clients are generally continuing to use service providers with which they have existing relationships, rather than move to new providers. Additionally, there are indications from the NDIS launch sites that new people needing support are coming forward, which is increasing the demand for services. Initial evidence also suggests that the level of financial support per individual is generally at the same level or higher than previous funding arrangements.

We also note that in many cases NGOs should be in a better position to understand client needs than for‐profit providers seeking to enter the market. The transition to the NDIS is also a temporary situation, and these challenges should reduce once the NDIS has fully rolled out within a particular region.

As the use of loans by NGOs has been relatively low in the past, the transition to the NDIS may provide both an impetus and greater opportunity for NGOs to consider loan financing as part of their future funding mix.

Reliance on grant funding has previously limited loan financing options

Funding of the social sector by state and commonwealth governments has traditionally been in the form of government grants and occasional capital grants. Reliance on grant funding that must be either expended on services or returned to government has previously precluded many NGOs from loan finance. Grants are generally not suitable for loan financing, and for some NGOs have contributed to short term approaches to planning and a cultural aversion to loan financing.

Lack of reserves limits an organisation’s ability to make a deposit

Loans for major assets, such as the purchase or construction of a building, require that the NGO save up a deposit. Deposits required by NGOs are generally larger than those for comparably sized commercial entities. As the risks faced by commercial lenders are perceived to be greater (particularly reputational risk), the loan to value ratio they are willing to enter into is lower.

Lack of assets that can be used as loan collateral is a challenge for smaller NGOs

Having property assets is an advantage to entering into loan finance, as the properties can be used as collateral for loan applications. While some NGOs hold substantial assets, many do not. In particular, NGOs with relatively low revenues tend to have low asset bases. This compounds the level of financial exclusion faced by these smaller organisations. In addition, not all property assets can be used as loan collateral. This can occur where property is bequeathed in such a way that it cannot be put at risk or disposed of, or where ownership arrangements are unclear.

4.1.2 NGOs can be unwilling to engage in loan finance

In addition to the common factors that can limit the financial strength of NGOs there are also a number of common reasons why NGOs can be unwilling to engage in loan finance.

Board and management teams are risk averse in financing decisions

Risk aversion has been recognised as a factor in not‐for‐profit decision making. The Funding Institute Australia has linked a resistance to non‐grant capital with fluctuating and inconsistent income streams that limit the willingness for risk. As outlined above, the transition to the NDIS has been reported as increasing risk avoidance, with boards less willing to enter into loans until there is clarity about the NGOs future financial stability. The risks and personal impact on board members of NGO loan financing is also



a factor impacting on willingness to consider loan financing as commercial lenders generally require director guarantees, to provide them with security in the event of an NGO being unable to repay a loan. We note that social finance providers have introduced products that do not require director guarantees, however this is not well known.

Some cultural perceptions of loan financing reduce the willingness to engage

The culture of NGOs, with a primary focus on the welfare of clients, can reduce the willingness to use loan finance. The focus on the client can manifest in NGOs deploying all available resources into immediate service delivery, with limited investment in areas that promote the organisation’s own sustainability and savings for investment. Some NGO staff, management and boards also hold the ideological view that interest should not be paid to an external party, even if a loan would enable longer term improvements to the organisation and its clients.

Cost of loan finance discourage uptake

The cost of interest was raised by some NGOs as a disincentive to using loan finance. This concern resulted from multiple view points, including that interest would reduce the resources available for services, and that there is a potential for future interest rates increases.

NGOs also identified other costs in terms of finding and applying for suitable loans, as well as the need in some instances for external financial advisors.

4.1.3 Governance, leadership and decision making impacts on the ability to enter into loan finance

A range of factors relating to the governance, leadership and decision making processes within NGOs were identified as limiting NGOs’ ability to enter into loan finance, including the following:

Effective board decision making: Entering into loan financing is a major decision for NGO boards, and the lack of effective mechanisms to support these decisions can be a barrier to effective decision making. Board subcommittees, such as a Finance and Risk Management Subcommittee, have been cited in consultations as an effective approach to enabling the board to make decisions.

Board skill mix: NGOs need a mix of skills to make informed financing decisions, such as accounting, financial, strategic, planning, commercial acumen, risk management and marketing skills. While many larger NGOs and some small and midsized organisations do possess a mix of skills on their boards, consultations have indicated that there is still substantial room for improvement.

Financial literacy: Financial literacy was identified as a barrier. This included concerns by peak bodies regarding NGOs ability to understand their financial health and financing requirements; social finance providers who identify upskilling NGOs as a delay in loan financing decisions; commercial finance providers who see that NGOs can struggle to appropriately evidence their ability to repay a loan; and, by NGOs who identified improving financial capabilities as a precursor for exploring loans.

Knowledge of products and providers: NGOs are generally aware of generic asset lending products, such as mortgages and business loans, credit cards and overdraft facilities. They are generally less aware of other more specialised products, such as patient debt loans and lower return products. Similarly, NGOs are aware of lending options through local banks, credit unions and building societies, but have lower levels of knowledge about social finance providers.

Quality financial information: The availability of reliable internal financial information can be a barrier for some NGOs. The lack of financial information can result from inadequate systems, but can also result from a lack of understanding about how to make use of existing systems.



Communicating financial and social benefits: The ability to effectively communicate financial information to lenders can be a barrier. This can derive from differences in terminology, as well as financial literacy levels and the NGO’s ability to present financial information. The ability to report on social benefits can also be a barrier, particularly when seeking a loan from a social finance provider.

4.1.4 Capability in strategic and operational planning is varied

The quality of strategy and business plans impacts on loan financing decisions

The ability of NGOs to develop clear strategies about their future direction, and robust business plans, is varied. As part of the loan application process, financial service providers need to have a clear understanding of where the organisation is headed (e.g. targeted client groups, pricing approaches), specific plans for how this direction will be achieved, and a track record of previous successful planning.

Social finance providers noted that they invest a great deal of time through the loan application process in making sure that organisations are “loan ready”. Commercial lenders are generally unable to provide the same level of support, and the onus on evidencing the viability of future directions rests with NGOs.

Not all NGOs can develop robust financial models that enable them to plan for the future

Linked to strategic and business planning is the ability of an NGO to undertake the financial modelling to evidence that future cash flows will be available to repay loans. While some NGOs undertake extensive modelling of future cash flows and liquidity, many organisations do not possess the level of sophistication in financial expertise, systems and tools to enable this to occur.

4.2 Attributes of the sector discourage suppliers of loan products

Table 5 below summarises a range of barriers that have been identified as impacting on the supply of loan financing. These are discussed in more detail on the following pages.

Table 5: Summary of supply side barriers

Barrier Elements of barrierIndicative impact


S1: Evidence of future cash flows to enable repayments, particularly in the transition to the NDIS

S2: Assets to provide loan collateral

S3: Evidence of board and management capability and effectiveness

Reputational risk S4: Impact on the lenders reputation as a result of a loan default

Transactional and opportunity

costs

S5: High transactional costs relative to the size of a loan

S6: Opportunity costs where funds could be better invested elsewhere

S7: Cost of capital

Sector knowledge and

products

S8: Lack of differentiation in commercial loan products and credit policies

S9: Staff knowledge of sector and NGO business models

S10: Lack of market data to enable market segmentation and inform investment quality

L

M

H

M

H

L

L

L

L

M



4.2.1 Evidence of financial strength is critical for lending decisions A major supply side barrier is evidence of an NGO’s financial strength. In particular:

Evidence of future cash flows: Lenders are unable to enter into loan financing without clear evidence about how NGOs will repay a loan. While social finance providers are able to work with NGOs to help them develop this evidence as part of an exploration of funding needs and options, commercial lenders are unable to provide this level of support due to the transaction costs involved.

Lending in the transition to the NDIS: As NGOs are less able to predict their future cash flows in the transition to the NDIS, they are less able to provide evidence to financial service providers that they will be able to make loan repayments, which limits the ability of lenders to make loans.

Assets to provide loan collateral: A lack of assets to act as loan collateral can limit the supply of loans. Collateral can take the form of property or buildings against which a mortgage or secured business loan is made. It can also take the form of term deposits against which short term cash flow lending can be secured. While loan finance can still be provided without collateral, this increases the risks faced by financial service providers, which either increases the interest rate at which a loan can be made, or reduces their willingness to enter into a loan.

Evidence of board and management capability and effectiveness: Lenders need to form a view of the capability of an NGO’s board and management as part of their due diligence process. Lenders need to be confident in the decision making and leadership effectiveness, drawing on evidence of an organisation’s previous planning and delivery against strategic plans and budgets, as well as information on the board and management team’s experience and skills to form an opinion about the likelihood the organisation can meet its obligations under a loan agreement.

4.2.2 Reputational risk is a major concern for lenders The risk to the lenders’ reputation from having to take action should an NGO be unable to make loan repayments is another major barrier for commercial lenders, as the negative publicity from taking action against an NGO can be more damaging to a financial institution than the financial benefit of entering into a loan. Reputational risk is secondary only in importance to available cash flows, and is often the key determinant for declining a loan that would otherwise be successful.

Reputational risk is less of a factor for social finance providers, which may reflect differences in default rates for lending. The level of loan defaults reported by the social finance sector was “virtually nil” while the default rate reported by commercial lenders is in line with general commercial lending levels.

4.2.3 Transactional and opportunity costs are a barrier to lending

NGO lending represents high transactional costs relative to the size of a loan

Transactional costs to lend to NGOs can be higher than lending to for‐profit organisations. Social finance providers undertake substantial upfront support for NGOs to assist them to become “loan ready”, which can require additional time and resources for each transaction compared to a commercial provider. Commercial lenders are less able to provide the additional level of support that some NGOs may require, though some commercial lenders have “gone the extra mile” to assist NGOs to make appropriate decisions, with the extra time taken generally disproportionate to the size of the loan.



There are opportunity costs for lenders to invest in the NGO sector

In addition to transactional costs, there are also opportunity costs for commercial financial service providers to lend to NGOs. For example, general business lending is seen as having lower levels of risk and better rates of return. A related factor is that supporting NGOs through philanthropy can provide tax deductions, while taxes are payable on interest generated from a loan.

4.2.4 Sector knowledge and products

There is a lack of differentiation in commercial loan products and credit policies

NGO lending by commercial lenders is generally undertaken using the same credit policies as for standard business lending, and consultations with commercial lenders identified that they do not generally provide different types of products for NGO lending. Lack of differentiation is less of a factor in the social finance sector, where product offerings are more tailored to the needs of each NGO.

Understanding of the sector by lending staff is variable

Some commercial lenders have established specialist business units that focus on the banking needs of NFPs. However, lending to smaller and medium sized NFPs is generally delivered through local lending staff, who typically have a lower level of understanding of NFPs, and very limited understanding of disability service provider business models.

Understanding of the sector was less of a factor for social finance organisations, given their more specialised nature.

There is a lack of market data to enable market segmentation and inform investment quality

There is a general lack of quality data available regarding the NGO sector as a whole, and the disability services sector in particular. This lack of data reduces the ability of financial service providers to understand the investment opportunities available in the sector, as they are unable to undertake market segmentation and develop a clearer understanding of potential risks and opportunities. The transition to the NDIS illustrates this challenge with a lack of information available that would enable financial service providers to assess the potential for investing in specific disability service providers.

4.3 The relevance of barriers varies by the type of financing required

The capital needs for NGOs can be viewed as:

Capital for asset investment, such as for the purchase or construction of buildings

Capital for investment in organisational capability (such as improvements in systems or processes)

Working capital, which enables smoothing of day to day cash flows.

The availability of lending to support these categories differs, with lending for asset investment easier to obtain than for organisational capability development, and working capital financing much more challenging for NGOs to access.

Lending for asset investment is generally available (provided that prerequisites for lending such as evidence of future cash flows can be met) as the asset provides collateral for the loan, reducing the risk.



Business development finance is also possible (e.g. system purchases and upgrades) from both commercial and social finance service providers, though more difficult to obtain due to the higher risk.

Working capital is less available than other forms of finance, particularly for NGOs without assets to provide as collateral. While commercial lenders do provide working capital products, some NGOs related that they had been unable to obtain working capital products such as credit cards and overdrafts, and where these were available the conditions made them unattractive. Consultations with social banking providers identified that they can provide some working capital products, such as overdrafts and credit cards, however the level of knowledge of these providers is uneven across the sector.

4.4 The barriers to demand and supply can be reduced to expand the use of loan financing

There are a range of options that can be considered to lessen the impact of loan financing barriers. Barriers related to the transition to the NDIS can be lessened through making emerging data public, as well as various temporary measures to enable the transition. Barriers to the demand for loan finance can be addressed through education and information sharing. These measures will also be important to addressing barriers to the supply of loan finance, through better enabling lenders to make loans.

4.4.1 Measures to enable access to loan finance during the transition to the NDIS

As outlined above, the transition to the NDIS is creating barriers to both demand and supply of loans to NGOs. Freeing up loan finance in this environment will involve reducing risk factors which should encourage both the demand for and supply of loan finance. Three options have been identified to address this, as outlined below.

Collecting and disseminating information about the NDIS market

Collecting and disseminating information throughout the NDIS rollout period can provide clarity to NGOs and financial service providers about the market, enabling them to make more informed financing decisions. Information that would be of value includes:

Data regarding changes in client behaviour and service use

Data regarding changes to pricing

Details about the competitive environment

This information may also provide additional benefits in terms of accelerating the market for disability services to develop, as market gaps will be identified and addressed by service providers, and sustainable, competitive pricing points would be reached.

Establishing a capacity building and working capital SEDIF style fund

The availability of working capital to invest in new systems and staff capability development will be important to enable the transition. Using loan finance to invest in these areas is problematic, as social finance providers are less able to provide working capital, and investments in systems and staff capability do not produce an asset that can be used as collateral.

A potential solution may be to establish a SEDIF style fund that is specifically aimed at providing capacity building and working capital loan products. Funding could be sourced through a mixture of government



funding, philanthropy, private lenders, commercial lenders and superannuation funds, using tiered arrangements to build a sufficient base of capital. One of the existing SEDIF fund managers could operate the facility, covering costs through either a separate allocation of operating funding, or through a margin charged on loans made.

Introduce a temporary guarantee scheme

Under this approach, a fund would be established that would provide a guarantee on specific types of loans made by financial service providers to NGOs impacted by the introduction of the NDIS. NGOs would be able to apply for loans from financial service providers, with the funds guaranteed up to a certain portion of the loan amount (e.g. 80%) should the NGO be unable to make repayments.

The approach would need to be carefully designed to ensure its effectiveness. In particular, accessibility would need to be constrained to relevant NGOs, lenders would need to have obligations before they could make claims on the fund, the level of guarantee available would need to be restricted, and moral hazard risks would need to be addressed. Additionally, the fund should operate separately from government to avoid the potential for contingent liabilities to arise.

4.4.2 Measures to address demand side barriers There are opportunities to influence demand for loan finance through informing and educating NGO boards and management teams, and providing tools enabling them to understand and explore financing options. In summary, these opportunities are as follows.

Refine and promote existing strategic and business planning resources

Developing clear strategic and business plans is a prerequisite for NGOs to explore their loan financing options. A range of materials already exists regarding planning. Further promotion of these resources would be of assistance, as would refining existing resources, and developing simple instructional materials (such as webinars) that guide NGO boards and management through the process of strategic and business planning.

Improve financial literacy and information

Approaches to improve financial literacy and internal financial information include:

distributing easy to understand information on preparing an NGO to become loan ready

the development and distribution of a simple cash flow modelling tool

a program to provide one on one coaching or forums to enable NGO staff to understand and use the full functionality of existing finance systems (e.g. MYOB, QuickBooks etc.)

working with peak bodies to establish a peer network of NGOs

incorporating information about interest costs in documents and workshops to inform NGOs of the relative size of interest costs against the benefits that loan financing can bring.

Inform risk management and cultural views of loan financing

Enabling NGO boards and management to judge and manage risk will be important to any efforts to increase the use of loan financing. A key initiative would be to inform NGOs about the potential risks of using loan finance, but also the risks of not considering using loan finance (e.g. the inability to grow service options as rapidly as other NGO and private sector disability providers under the NDIS).



Enhance board effectiveness

Enhancing the effectiveness of boards and enabling them to make more informed decisions will be an important element in addressing demand side barriers. This should include reviews of existing NGO Board training programs, and the incorporation of loan decision making mechanisms (e.g. use of subcommittees) into revised versions. Additionally, incorporating information and discussions about board mix and its relevance to informing financial decision making and strategic planning into existing board training programs would be of benefit.

Improve corporate efficiency

There are likely to be substantial efficiency opportunities in how NGO corporate functions are delivered. Nous has previously undertaken benchmarking projects on behalf of NFPs in Victoria which have identified substantial savings opportunities, with an average saving per organisation of 2% of their total annual expenditure. Undertaking a similar corporate benchmarking project for NGOs could identify substantial cost reduction opportunities, which could provide future cash flows for building reserves and applying for loan financing.

4.4.3 Additional resources can be developed to address demand side barriers A range of resources that are relevant to loan financing already exist. These include information on financial management practices, materials to explore loan options, information about board development and good governance, resources to inform business planning and risk management.

There are some gaps in the resources that are currently available, and developing resources that address these gaps could further reduce the impact of demand side barriers to accessing loan finance. A series of recommended resources for development during and post the project have been included in Section 6 of this document.

4.4.4 Measures to enable supply side barriers Many of the barriers to the supply of loan finance will reduce as a result of initiatives outlined above. In particular:

A better understanding of the loan products and providers available will increase the ability of NGOs to effectively engage with the financial services sector.

NGO’s ability to evidence future cash flows, capability to make loan repayments, and the capacity to plan and make informed decisions about loan financing would increase the propensity of financial service providers to enter into loans.

Gathering and distributing information during the transition to the NDIS and introducing a guarantee scheme will enable financial service providers to better judge and manage lending risks, increasing their willingness to invest in the sector.

Establishing a CEDIF style working capital fund and promoting the availability of loan products and providers would likely stimulate demand, which would then increase supply as the investment potential of the sector becomes better understood by financial service providers.

Some additional options that could further address supply side barriers are as follows.

Providing information about the sector: Increasing the availability of information about the disability sector would enable financial service providers to better understand the market and better judge the risk profile of investment opportunities. In turn, this can provide the basis for a better



understanding of risk adjusted returns, increasing the volume of lending from commercial providers to high quality investment opportunities in the NGO sector.

Access to credit cards: Credit cards can be a practical product to support NGO working capital needs, but can be difficult for some NGOs to obtain due to application requirements. Some social banking providers (such as Community Sector Bank and mecubank) do offer credit cards to the NFPs, and some NGOs have successfully applied for and use credit cards issued by major banks. Financial service providers could look to promote the use of credit cards by their NGO customers, and commercial lenders could also review their lending criteria for NGO credit card applications.

Reducing reputational risk through the sale of outstanding debts: One way to manage the reputational risk for commercial lenders is to enable the sale of loans that are in arrears, rather than risking having to foreclose. As the social finance sector continues to mature, in some instances it may be possible for social finance providers to purchase, at a discount, loans that have been entered into between commercial lenders and NGOs.

4.5 Further innovation in loan financing is possible The project has identified several innovative approaches to how loan finance can be accessed and utilised by NGOs. These examples are outlined below, and should be further investigated.

An NGO specific investment fund for reinvestment into the sector

Large and medium sized organisations can from time to time have significant cash available, and use deposit accounts to generate a small amount of interest revenue. However, they do not have the scale to enable them to operate a treasury function that would give them access to higher rates of return. Developing an investment fund specifically geared to the need of NGOs may enable these organisations to pool their funds and increase their rates of return.

Leveraging client savings is possible to secure loan finance

One provider of disability accommodation services has developed an innovative way to utilise their clients’ funds to access loan finance, in the process providing a better quality service and financial benefits to their clients. This provider identified that some of its clients wanted to purchase their own properties, and had deposits to do so. Working with their clients they have developed an approach to use the clients savings as a deposit for a mortgage, with the NGO holding the asset.

Under this arrangement, the client is formally noted as having an interest in the property. If the building were sold in the future, the client would receive both their original deposit back, plus a portion of the increase in the property’s value. This gives them both a home in which they can have a sense of ownership, as well as enabling them to build up an asset over time.

A Canadian pilot in stock exchange based lending may have benefit in Australia

A pilot program is currently underway in Canada to test the use of a stock exchange platform to raise capital for impact investing. The SVX is a restricted market dealer registered on the Canadian Stock Exchange. The venture is led by the MaRS Centre for Impact Investing, in collaboration with a wide range of public and private partners including the Government of Ontario, KPMG and Rockefeller Foundation.22

22http://www.svx.ca/ Accessed 29 Nov 2013


http://www.svx.ca/


The platform is aimed at bringing together social ventures, investors and funders for impact investing initiatives. Depending on the outcomes of this pilot, a similar approach could be trialled in Australia both for impact investing and for broader funding of the NGO sector.

Commercial lenders could develop combined social and financial return product categories

One option that could be further explored by commercial lenders is to develop investment vehicles that specifically aim to deliver both social and financial benefits. This could provide more options for investors (both individuals and institutions) that are seeking a mix of financial and social investments.

As the returns available for these products would be assessed on both the financial returns and social benefits, the financial returns could be lower than for other investment products available, enabling commercial lenders to lend to NGOs at lower interest rates than would otherwise be available.

Enabling these products to be developed would require:

improvements in the consistency of reporting on social outcomes, to give lenders clarity about and enable them to report to their investors on the social value being achieved

development of new credit policies for lending from mixed social and financial return capital pools.

5 Expanding the use of loans is possible for some, but not all, NGOs

Loan financing can and is being used by a range of NGOs, and the options outlined above for addressing the barriers to loan finance should enable greater access to loan finance. Nonetheless, there are likely to be some NGOs that will still have difficulty in accessing loan finance, and loan financing will not be suitable for all financing needs.

However, there are also clear signs of what steps NGOs can undertake to become ready for loans. Following the examples of other organisations can enable NGOs to plan and use loan financing as part of their investment strategies, and as part of their approach to transitioning to the NDIS.

5.1 Some NGOs are excluded from accessing loan finance The level to which NGOs are currently able to access loan financing varies. Some organisations, particularly larger providers, are able to access loan finance due to their financial strength and ability to present clear, investible propositions to lenders. Other organisations face difficulties in accessing loan finance, due to their circumstances and the relative strength of barriers outlined above.

Figure 4 below illustrates this challenge by comparing the risk of lending (horizontal axis) with interest rates (vertical axis). As illustrated, low risk investments, such as Australian Government Bonds and high grade corporate bonds, attract low interest rates. As risk increases, so too does the interest rate at which lenders are able to provide loans, as well as their ability to enter into loan financing at all. NGO lending generally falls within the moderate to higher risk lending categories to the right of the graph. As the level of security decreases (e.g. availability of property as collateral, willingness of directors or others to guarantee the loan) and cash flows become less certain, the interest rate increases markedly, and lenders are less able to enter into loan financing as they cannot be certain that the loan will be repaid.



Figure 4: Interest rate and risk profile of lending23

Implied risk level (increasing →)

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

0 1 2 3 4 5 6 7 8

Interest rate

Risk and interest rate profile of NGO lending

Lending becomes more costly / less possible as risk

AustralianGovernment

Bond

Corporate A‐ratedBond

CorporateBBB‐rated

Bond

Large business weighted‐

average rate on credit

outstanding

Generalsmall

businesslending

Businesscredit card

Unsecured,uncertaincash flows

Loan finance not possible due to lack of cash flows and

security

Unsecured,cash flows availale

Loan finance less likely due to lack of

security

Addressing the barriers to loan finance should enable more NGOs to access loans. However some NGOs will still be excluded, particularly where they are unable to evidence sufficient future cash flows and lack collateral.

Aside from the potential for exclusion, it should also be noted that not all NGOs are well suited for entering into loans. Where there is no prospect for an organisation being able to repay a loan, entering into a loan would not be appropriate as this would put the organisation’s future viability and its client services at risk.

5.2 NGOs follow a similar journey in accessing loan financing The project has identified a broad pathway that NGOs appear to follow as they explore and enter into loan financing. While not all NGOs will follow the same path in accessing loan finance, the themes outlined in Figure 5 below may be useful in understanding to what degree an NGO is “loan ready”, and to identify steps that will enable the organisation to overcome barriers it faces in accessing loan finance. This can assist NGOs both in considering their longer term investment approaches, and in planning for how they will successfully transition to new funding arrangements under the NDIS.

23 Interest rate data sourced from http://www.bloomberg.com/markets/rates‐bonds/government‐bonds/australia/; RBA F3 Aggregate Measures of Australian Corporate Bond Spreads and Yields: Non‐financial Corporate (NFC) Bonds; RBA F5 Indicator lending rates; CBA https://www.commbank.com.au/business/rates‐fees.html; project consultations



Figure 5: Overview of loan maturity journey

Time

Maturity

Build consensus and plan for the future

Build reserves and explore options

Trial and expand use of loans

• Identify the NGOs purpose, clients and aspirations

• Develop strategic and business plans, including investment priorities

• Identify and address skills and information gaps

• Demonstrate available cash flows through financial planning and ongoing savings

• Build a deposit to enable future investments

• Develop a relationship with lenders and understand the financing options available

• Look for investment options that align with the organisation’s strategic objectives

• Enter into initial, small loan (business or asset based) to gain confidence and build a track record in repaying loans

• Explore further investment opportunities while repaying loan

• Once the initial loan has been repaid, review investment priorities and identify next investment opportunities

• Maintain contact with financial service provider, and keep them informed of the organisation’s potential future lending needs

Build consensus and plan for the future

The starting point for exploring loan financing is for the board and management to agree on what the organisation’s overarching purpose and objectives are. This includes a shared understanding of the clients the organisation will serve and the services that will be provided, and the external factors that will enable and limit how the organisation can operate. This forms the basis for business planning, including agreeing where and how to invest to deliver the organisation’s purpose, the funding choices to be used (including any loan financing), and how any operational gaps can be addressed.

Build reserves and explore options

Developing a cash reserve is an important next step, both to demonstrate to lenders an ability to service loan repayments, and to build a deposit that can be used as part of a future investment. During this phase, NGOs should also explore their investment options. For example, if the organisation plans to purchase a building, understanding where the building would be located, what factors would be important in selecting a building, and what the price would likely be will assist with planning and preparing for a future purchase. Exploring financing options with financial service providers should also be done at this point, to understand the financing options available and the process to apply.

Trial and expand the use of loans

At this point the NGO has identified a suitable investment option, and uses its cash reserves and loan financing to make the purchase. It is notable that NGOs interviewed during the project that had previously entered into loans opted to take out small loans at first. This gave them a level of confidence in their abilities to use loan financing, and also gave them a track record of making repayments. Once the loan repayments are underway the NGO can start to explore further investment options. Keeping in contact with the financial service provider enables them to more readily support the NGO in the future.



6 Recommendations The project’s findings indicate that there are three broad themes that can be addressed to better enable access to loan finance. These are:

The need to reduce the barriers to the demand for loans, primarily through educating sector participants about the benefits of loan financing and how NGOs can access loans

The need to reduce the barriers to the supply of loan finance, to enable traditional and social finance providers to increase the amount of loan finance that flows to the sector

The need for temporary arrangements during the transition to the NDIS, to enable both NGOs and financial service providers reduce the risks associated with lending during this period.

The recommendations outlined below have been identified to address each of these themes.

Recommendation 1: Develop resources and tools to assist the NGO sector to understand and better access loan products Recommendation 1.1: Develop a series of resources for distribution to the sector that support NGOs in exploring their financing options.

The resources proposed for development during the remainder of the project and post the project’s completion are outlined below:

Resources for potential development during this project

A simple paper that outlines: the loan financing options that are available, in terms of both products and providers the types of information that are generally needed for a loan application an overview of the loan application process a checklist to judge the organisations readiness for seeking loan finance.

A video scribed animation providing a rapid introduction to loan financing, the loan products and providers available, and how loan financing can be used to support NGO service delivery.

Resources for potential development post this project

A glossary of common terms used in loan financing, with examples of comparable terms and concepts in common use by the NGO sector.

The design of a repeatable workshop aimed at members of NGO management teams and boards that presents: the potential benefits for using loan finance the loan financing options that are available, in terms of both products and providers the types of information that are generally needed for a loan application an overview of the loan application process.



The design of a training workshop aimed at representatives of peak bodies to improve their understanding of loan financing, so as to better enable them to share knowledge with their members.

The design and development of a series of short webinars aimed at NGO board members that provide a quick introduction to loan financing, including:

the potential benefits for using loan finance the loan financing options that are available, in terms of both products and providers the types of information that are generally needed for a loan application an overview of the loan application process.

Supplementary materials for inclusion in ADHC good practice materials regarding loan financing for NGOs.

The development of a simple cash flow modelling tool, based on the standard chart of accounts, to assist NGOs in understanding their future cash flows.

Recommendation 1.2: Review and refine resources that have previously been developed to enable sector capability development to incorporate information regarding the use of loans as part of an NGO’s financing mix.

Recommendation 1.3: Engage with NGO peak bodies to:

establish a program to provide coaching and support to NGO staff to better understand and use the full functionality of existing finance systems

establish a peer network of NGOs to provide advice and share good practice in financial management across the sector

promote the potential for increasing the efficiency of corporate services as a means to reduce expenditure and enable improvements in cash flows

Recommendation 2: Engage with the financial services sector to promote the understanding of and opportunities for NGO sector lending Recommendation 2.1: Develop and publish information on the NGO sector to enable financial service providers to become better informed about the sector and better judge the risk profiles of investment opportunities.

Recommendation 2.2: Engage with the financial services sector to:

promote greater understanding of the NGO sector and its investment potential

encourage an expansion in access to loan products in general, and credit cards in particular as a pragmatic approach to supporting working capital needs

consider the potential for the discounted resale of outstanding NGO loans from commercial financial service providers to social finance providers, in order to reduce reputational risk and enable restructuring of outstanding debts




Recommendation 3: Further enable NGOs to successfully transition to new funding arrangements through additional initiatives Recommendation 3.1: Collect and disseminate information about the NDIS market as it develops to better inform sector participants and providers of finance. This should include:

data on changes to client behaviour, emerging pricing, and the emerging competitive environment

forecasts of what the future market environment will look like in terms of providers, clients and services, based on emerging trends.

Recommendation 3.2: Undertake the detailed design for and establish a capacity building and working capital SEDIF style fund to improve access to loan finance during the transition to the NDIS.

Recommendation 3.3: In collaboration with the social finance sector, further investigate and undertake the detailed design for a temporary and tightly limited guarantee scheme to support NGOs transitioning to the NDIS and encourage loan financing during this period.

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