COVID-19 has had a huge impact on the charities sector. Charitable donations have fallen drastically and, with cash flow restricted, it is becoming increasingly important that charities look at other revenue streams.
The Charity Commission has confirmed in its recent guidance that charity trustees can utilise reserves for unexpected circumstances such as those currently being experienced, but these reserves will only last for so long. And their use may not be the right option when charities need to make sure they can support beneficiaries for the long term. The use of reserves is a subjective decision for the trustees and it might also be necessary for them to report any spending of reserves to the Charity Commission as a serious incident to update their charity's risk register.
It has always been the role and responsibility of charity trustees to manage their charity's finances responsibly, act with reasonable skill and care and to take advice where needed. This includes establishing what external funding opportunities are available when spending reserves or liquidating assets.
With numerous accredited lenders now providing government-backed lending, and many of these not being institutional lenders, charities now have more choice and opportunities for funding and finance than perhaps ever before. However, charity trustees should get legal advice to make sure the terms of any document are market standard and include the appropriate terminology and clauses for charities. The opportunity to borrow through a term loan or overdraft can increase flexibility for cash flow and help with the growth of a charity's business, but in most cases security over some or all of a charity's assets would likely be a condition of any such loan.
If charity trustees are considering alternative options for funding and finance, it is vital that they are mindful of the requirements of the Charities Act 2011, and in particular the requirement to seek legal advice before entering into any security over real estate. These requirements exist to ensure that trustees act prudently when dealing with a charity's assets and limit the risk to a charity's property. Trustees should also be mindful that there may be restrictions on assets that would prevent them being offered as security.
The underlying message is that charity trustees must act with good governance, provide clear leadership and consider long term strategy. Cash flow management and accurate and considered forecasts are a given as is strict consideration of the ultimate purpose of a charity's purpose and the needs of its beneficiaries. These responsibilities apply COVID-19 or not. If in any doubt, trustees should refer to Charity Commission guidance and seek legal advice.
Originally published by Gilson Gray, September 2020
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.