Page 7 - Independent Schools Magazine
P. 7

 A new take on borrowing
Crowdfunding to  nance facilities & bursaries
Henry Briggs, senior partner at the Birmingham of ce of chartered accountants Haines Watts, is a former school governor who acts for both independent and state schools. He comments on a novel way of raising funds in place of bank borrowing.
 Crowdfunding is a method of  nancing businesses or appeals which has taken off in recent years and involves the raising of money (usually in small amounts) from a large number of people, using the internet. There is evidence now that some schools are using it as
a method of raising funds for new facilities and bursaries.
Whilst it is reported that the largest amount ever raised through crowd funding is around £191m, the reality is that usually the sums raised are much more modest – and can be
a means of raising pure donations, equity stakes, or a replacement for more traditional bank borrowing.
Schools that are looking to this are starting with such funds being raised from their own stakeholders (parents and alumni) in the form of loan  nance. By borrowing direct from individuals, they can provide what appears to be a reasonable rate of return to the lender and reduce their own costs of borrowing.
Such loans can be used to improve facilities, thereby increasing the asset base of the school, without having to provide extra security; they may be termed ‘Education bonds’ for a much needed sports hall or theatre. The idea of lending, rather than giving, the money to the school may well appeal to a school’s supporters and is an easier ‘ask’ for the fundraisers.
The other advantage to the school is forming a stronger connection with individuals as investors and therefore a contact base for future projects. Such projects may be made more attractive by creating facilities which can be used by others in the area and thus either a source of  nancial return for the school, or a means of helping them with public bene t goals.
In some cases, it may also be part of the sell that investors are
encouraged to forego or waive interest to be put towards bursaries.
The advantages so far appear to all fall to the school, whilst lenders are given a ‘feel good’ factor without actually parting with money by way of gift. However, there are certainly some caveats that lenders need to consider before being separated from their money.
There is a general lack of regulation over crowdfunding at present, though steps are being taken to tighten this. This raises both the risks involved and the need for caution. Such loans will not be secured on assets to allow a lender to recover sums against them in the event of payment default; a requirement any bank would need, unless charging
a premium rate of interest on an unsecured loan which was well covered by working capital.
The terms of repayment are important, as is the way in which the borrower is providing to cover their repayments of the loans. Whilst loans retain their monetary (if not real) value, assets like swimming pools very quickly depreciate and incur high maintenance costs. A ‘bullet’ repayment of the whole
loan at some future date is more
in danger of not being met than
a regular schedule of repayments made from cash generation in the shorter term.
There are some disadvantages for the borrower too. Any hint that they may not make scheduled interest
or loan repayments will cause something of a ‘run’ on the loans
- and this would be from their own community of supporters. Having parted with their money, these supporters may be quick to demand  nancial and other information not previously provided.
Goodwill can easily turn into ill will if any problems arise, such as falling pupil numbers, adoption of policies
not welcomed by the bond holders, or even a strategic merger with another school.
Schools seeking funding in this
way need to do their homework. A business plan which includes clear methods of repayment, by means
of a sinking fund or transparent generation of cash to fund
regular repayments, will enhance con dence. If lenders agree to forego interest, this needs to be a clear choice of theirs at the outset, rather than being subject to a blurring of the lines at a later stage. If the waivers are used for speci cs such as bursaries, these are restricted
funds and subject to controls imposed by the charity commission.
The present low rates of interest on borrowing mean that the differential being offered or obtained when compared to bank rates, may not make crowdfunding of loans in these circumstances suf ciently appealing. This may change with time as interest rates rise and if banks continue to stretch the margins they make between lending and deposit interest rates.
Crowdfunding is still in its relative infancy and as rates rise, it may also be that defaults do also, causing a fall of con dence in such schemes.
01189 356707
                   Independent Schools Magazine 7

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