Debt finance is money lent to an organisation in return for which the organisation undertakes to repay the lender both the interest (the cost of capital) and the original amount lent (the principal). It can be lent from a variety of sources, who vary in their appetite to lend to sport.
Loans can come from mainstream banks and building societies in the form of finance to enable your club to do something very specific and transformative. As the lenders need to get their loan back with interest, you need to be able to show how you’ll use the money in such a way as to generate new cash to service that debt.
For example, by acquiring your freehold, you’re not paying the rental fees you used to which frees up cash, or perhaps how with an expanded facility with a bar or catering you can generate more cash as a result. Both of these are ways in which you can use money in ‘one-off’ ways to generate cash on an ongoing basis – in the financial jargon, this is called capital development that enhances revenue generation.
That said, lenders are well aware of how sport and community organisations often struggles to make ends meet, and so if you can’t offer land or buildings by way of security in case you can’t service that debt, you may struggle to get them to be interested.
Secondly, interest rates are used to price how risky the lender views your business, and your club might score highly on a risk analysis, so even if you could access a loan and demonstrate a strong business plan and offer security, you might be paying a significant rate of interest for the privilege.
In addition, to mainstream finance providers, there are also specialist lenders focussed on organisations that deliver a tangible social impact as well as a financial return. Some finance providers have a greater risk appetite and will lend where mainstream providers might be less willing, or can lend on more generous terms (though be advised that some also lend at much higher rates too).
With other social finance providers, they are prepared to invest knowing the organisations ability to service debt is restricted because of the social benefit or impact it provides as a result of its mission and can live with that because they support the delivery of that social impact as a cornerstone of their existence as a finance provider.
An angel investor or (also known as a business angel or private investor) is an affluent individual who provides capital typically for a business start-up, usually in exchange for some form of share in the company. The television programmes like ‘Dragons Den’ and ‘The Apprentice’ are based on this form of investment.
As most sport organisations are not able to give shares or influence due to membership-based structures, angel investment is usually in the form of loans. These might be ‘soft’ and made without a fixed repayment schedule to provide cash flow support (often in the form of overdraft guarantee) or ‘hard’ with a fixed repayment schedule with consequences in the event of default.
Some sports and community organisations can use debt from members or users more akin to crowdfunding, where a larger group of people can provide a large sum collectively.
Because security is hard to achieve, the ability of clubs to access this is usually dependent on having a community of locally-based lenders who understand the club and appreciate how strong the finance will enable an increase in revenues.
Some things to think about:
- Before taking on any loan you will need to produce a robust business plan supported by a realistic budget and cash flow forecasts. There is a lot web based material on this but we would suggest you start with something provided free and written for sports and community organisations – Club Matters.
- Some lenders may require security for their loan or make conditions in their loan that can constrain your freedom to, for example, borrow money from another lender without their permission. That can also impact on grants you’ve received in the past when you weren’t indebted and were based on a security of tenure for the club. It can impact on your ability to be grant-funded in the futur, as grant funders are nervous that the purposes they exist to support won’t come to pass because the grant will go to service your debts, not develop your impact or reach or performance.
- Debt needs to be repaid, and if it is not, lenders have a range of legal options at their disposal to recover their money if you don’t meet your commitments to them (known as default). That can mean seizing the assets of the organisation if they have secured their lending against your property, or else using the courts to have you declared insolvent, in which case an administrator is appointed to sell your assets and use the proceeds to pay off your debts.
- Many sports clubs do not have own the freehold of their site/property to secure, or might have the land on which they play their sport unable to be redeveloped due to restrictive covenants of planning regulations, making them much riskier prospects for lenders. In those cases, the strength of the business’ financial projections becomes even more important.
- If you are considering peer-to-peer lending schemes, you should be careful to take advice to ensure you are not in breach of regulations laid down by the Financial Conduct Authority about offering financial products to the public (unless you are doing it via a society – see Community Shares section)
- You will also need to ensure that your organisation is in good shape with audited accounts, demonstrating a trading surplus and financial controls in place providing sound governance under excellent leadership. Getting ready to take on repayable finance is known as being ‘investment ready’. This web link takes you to a site which will assess your level of readiness.
- There are grants available to enterprises looking to become ‘investment ready’ which some clubs and community organisations could be eligible for. These can pay for the legal, accountancy, property, personnel and governance work needed to demonstrate to investors that your club has a sound plan, the right people and the right skills to be worth the risk of investment (but generally can’t be used by the club itself for general day-to-day expenditure).