In light of the recent financial crisis and associated reductions in local authority budgets, numerous charities in Scotland are facing major changes to their income streams and are looking for alternative methods of raising funds. The banks are also looking at new customers that may have been overlooked in the property boom years. Given that grants are getting harder to come by and many charities are asset rich but potentially cash poor, we are seeing increased interest from banks to lend to charities and third sector organisations.
A standard security provides the best form of protection that a lender or grant-maker can seek to secure obligations in the event of potential default by a charity. For this reason, many loans (and high value grants) will be provided on the basis that a standard security over the assets of the charity is given. However, there are certain additional factors to be considered:
- Firstly, the charity must possess the ability to both borrow and also to grant a standard security and these powers should be checked in the charity's constitution, including a check that the loan is in furtherance of the charity's objects. If the charity is a trust or an unincorporated association, it will also be important to check the identity of the registered owners of the property over which the security is to be granted, in terms of that organisation's constitutional documents.
- Furthermore, as is the case with all standard securities, the security will be taken over the charity's heritable property or any registered leasehold interest. A solicitor will often be asked to provide a certificate of title for the bank to rely on which will, firstly, establish whether the charity can grant a valid security over the property and secondly, identify any title issues that might prevent the project, that the funds are intended to be used for, being delivered.
- Where a loan is being sought to fund significant trading activity that is either outwith the objects of the charity or carrying a level of risk deemed unacceptable to the Trustees, the charity will most likely have set up a subsidiary to carry out such trading and, in such circumstances, it may be that the subsidiary is to receive the loan. In this situation, so as not to expose the charity's assets to risk, the charity will generally not be able to guarantee funds loaned to the subsidiary or provide a standard security over the charity's assets.
Banks should also be aware that a new vehicle for Charities in Scotland, the Scottish Charitable Incorporation Organisation (or "SCIO"), is scheduled to be made available this year (current indications are still that the SCIO will become available from April). This may lead to a number of charities in the form of unincorporated associations, and potentially trusts, seeking to change legal form, with potential flow-through considerations relevant to existing loans, standard securities and account types.