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
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 In te re st ra te
Risk and interest rate profile of NGO lending
Lending becomes more
costly / less possible as risk
Australian Government Bond Corporate A‐rated Bond Corporate BBB‐rated Bond Large business weighted‐ average rate on credit outstanding General small business lending Business credit card Unsecured, uncertain cash 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
Figure 5: Overview of loan maturity journey
Time
Ma
tu
rity
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