The potential role of loans in the ADHC funded NGO Sector: Summary report
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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 This activity is funded by the National Disability Insurance Agency Sector Development Funds. Bold ideas | Engaging people | Influential, enduring solutions
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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
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
This activity is funded by the National Disability Insurance Agency Sector Development Funds.
nousgroup.com.auDepartment 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
Glossary of key terms
Assets Economic resources owned or controlled by an organisation, such as cash and property.
Financial statement with an organisation’s assets, liabilities and equity at a point in time (also
Balance sheet
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.
Terms in a financing contract that specifies the extent to which certain activities may or may not be
Covenant
carried out, such as limits on any further borrowing.
A loan is said to be in default when a borrower has been unable to make loan repayments when
Default
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.
An agreement under which a third party takes responsibility for a debt should the borrower be
Guarantee
unable to make loan repayments.
Investment made with the intention of generating measurable, beneficial social, cultural and
Impact investment
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.
A measure of readily available assets, such as cash and assets that can be readily converted to
Liquidity
cash.
An agreement to provide access to finance, on condition that the loan amount and interest are
Loan
repaid under specific terms and agreed timeframes.
Market rate The cost of borrowing on the open market.
For this report, the term not‐for‐profit organisation (NFP) is used when discussing the broader
NFP
Australian non‐government sector.
For this report, NGO refers to an ADHC‐funded non‐government organisation, which is a subset of
NGO
NFPs.
Opportunity cost The cost of the best alternative forgone in order to pursue a certain action.
Debt products that provide long term returns, often with below market or zero return in the short
Patient finance
term.
Philanthropy Charitable donation undertaken with a desire to improve human welfare.
Financial statement with an organisation’s revenue, expenses and net result over a period of time
Profit and loss
(also known as the Statement of Financial Performance).
The risk to the lenders reputation from having to take action should an NGO be unable to make
Reputational risk
loan repayments, such as from negative publicity.
Social finance/ An approach to lending money or investment with the intention of delivering a social benefit and
investment 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.
This activity is funded by the National Disability Insurance Agency Sector Development Funds.
nousgroup.com.auDepartment 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
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 (NGO 1 ) 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.
This activity is funded by the National Disability Insurance Agency Sector Development Funds.
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The potential role of loans in the ADHC funded NGO Sector: Summary report | 28 April 2014
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
ADHC funded NGOs Providers
Differentiated by: Traditional:
Demand barriers Supply barriers • Banks, credit Social / specialist
Scale Products and services unions, building providers:
Financial strength Evidence of financial societies • Specialist
(Cash flows, Assets) strength • Cash flow lenders financial
Client Geography • Private, intermediaries
Financing of institutional • Social impact
Willingness to lenders investors
Financials Skills Structures engage in loan investible Reputational risk • Lease providers
finance propositions
Financing needs Governance, Products
Transactional and
leadership and Blended financial
Capital for opportunity costs Market return:
decision making and social return:
Capital for asset organisational • Cash flow lending
investment capability • Asset lending • Sub‐market loans
development Strategic and Sector knowledge • Leasing • Equity‐like
operational planning and products • Socially • Revenue based
responsible • Peer to peer
Working capital investments • Loan guarantees
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
This activity is funded by the National Disability Insurance Agency Sector Development Funds.
nousgroup.com.au | ii |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
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
This activity is funded by the National Disability Insurance Agency Sector Development Funds.
nousgroup.com.au | iii |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
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.
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The potential role of loans in the ADHC funded NGO Sector: Summary report | 28 April 2014
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 projects 3 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)
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The potential role of loans in the ADHC funded NGO Sector: Summary report | 28 April 2014
~ 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 2013 6 .
~ 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 organisations 7 .
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
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The potential role of loans in the ADHC funded NGO Sector: Summary report | 28 April 2014
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 2018‐19 8 . 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
This activity is funded by the National Disability Insurance Agency Sector Development Funds.
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The potential role of loans in the ADHC funded NGO Sector: Summary report | 28 April 2014
time. Analysis by ARDT of a concurrent project identified similar results, with 58% of NGOs surveyed not
having considered loans previously 11 .
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
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The potential role of loans in the ADHC funded NGO Sector: Summary report | 28 April 2014
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 ‐ Social / specialist providers ‐
Australia International
Commercial finance
~ Cash flow lending and short ~ Authorised deposit‐taking
term loan products (secured institutions (banks, credit
and unsecured loans, credit unions, building societies
cards, lines of credit, etc.)
overdrafts) ~ Private, corporate and
~ Asset lending (against institutional investors
inventory, property, plant and ~ Cash flow lenders
equipment, construction etc.) ~ Lease providers
~ Financial leases ~ Brokers
~ Invoice discounting and
factoring
~ Revenue based financing
Impact investment and patient finance
~ Specialist financial
~ Specialist financial
intermediaries, e.g. New
intermediaries e.g. Social
Hampshire Community Loan
Enterprise Finance Australia
Similar products as those in Fund – USA
(SEFA), Foresters, Social
commercial finance, as well as: ~ Impact banks, e.g. Triodos
~ Private, corporate and Ventures Australia (SVA),
~ Sub‐market return loans (zero Bank ‐ Netherlands, Charity
institutional investors ~ Community Development
interest, structured lower Bank ‐ UK
~ Banks (through foundations) Financial Institutions (CDFIs)
return) ~ Impact investors, e.g. NESTA,
~ Superannuation funds ~ Social investment funds
~ Equity‐like investments and Bridges ‐ UK
(particularly ‘ethical’ super ~ Impact banks, e.g.
patient debt ~ Impact‐first stock exchange
funds) Community Sector Banking
~ Supplier finance platforms, e.g. SVX – Canada
(CSB)
~ Peer‐to‐peer loans ~ Peer‐to‐peer lending
~ Impact investors, e.g. Small
platforms, e.g.
Giants, Impact Investment
societyone.com.au, zopa.com,
Group
kiva.org
Each of these is discussed in more detail in the following pages.
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The potential role of loans in the ADHC funded NGO Sector: Summary report | 28 April 2014
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 Cash flow lending helps organisations to smooth their cash flows and can also provide temporary
lending 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 Business investment loans enable organisations to borrow a fixed amount for investment in different
investment term aspects of their organisation’s operations, such as investing in new IT systems, purchasing minor
loan 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 Invoice discounting can be used to improve an organisation’s cash flow by reducing the lag between
discounting 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.
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The potential role of loans in the ADHC funded NGO Sector: Summary report | 28 April 2014
Product type Commentary
Revenue based Finance is provided in return for a percentage of ongoing gross revenues until the initial principal
financing 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.
This activity is funded by the National Disability Insurance Agency Sector Development Funds.
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The potential role of loans in the ADHC funded NGO Sector: Summary report | 28 April 2014
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
Product type Commentary
Sub‐market return Sub‐market return loans are products provided at below‐market interest rates. These may take
loans 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 These are products that are structured like equity investments, but do not necessarily reflect an
investments 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) P2P lending involves private donors providing loans directly to individuals and ventures rather
loans 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.
This activity is funded by the National Disability Insurance Agency Sector Development Funds.
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The potential role of loans in the ADHC funded NGO Sector: Summary report | 28 April 2014
~ 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.
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The potential role of loans in the ADHC funded NGO Sector: Summary report | 28 April 2014
~ 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 annually 13 .
~ 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 organisations 14 , 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
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