Most charities have an investment policy. Far fewer have a formal borrowing policy. Yet the decision to borrow, and on what terms, can carry significance equal to any investment decision. Debt can shape service delivery, restrict future choices and expose reserves, property and reputation to material risk. A borrowing policy can give trustees a clear framework for deciding when debt is appropriate, what level of risk is acceptable, and how borrowing will be monitored once in place.
A good borrowing policy should begin with a simple question: why is the charity borrowing? Debt should not be a substitute for an unsustainable operating model. The policy should define what borrowing can and cannot be used for, who has authority to approve it, what limits apply, and what information is required before any commitment is made.
Affordability should be central to a charity’s borrowing policy, with limits set for total borrowing, annual debt servicing costs and minimum headroom under stressed assumptions. This means linking the borrowing policy directly to the charity’s reserves policy, cashflow forecasts and liquidity targets. The Charity Commission expects trustees to decide, publish, implement and monitor their reserves policy, and to do so in a way that acts in the charity’s and beneficiaries’ interests, safeguard assets, exercises reasonable care and skill, and holds the charity accountable. Borrowing should be assessed against the same discipline: how much unrestricted cash is needed before debt becomes a threat to the charity?
The policy should also address fixed versus variable rates; Fixed-rate borrowing provides budget certainty and may suit charities with limited flexibility to absorb rising interest costs. Variable-rate debt can be cheaper at the outset and easier to repay or refinance, but it transfers rate risk to the charity.
Loan terms should be reviewed carefully before any agreement is made, including consideration of financial covenants, information undertakings, restrictions on further borrowing, controls over asset disposals or requirements to maintain insurance, valuations and reporting. A borrowing policy should specify who monitors covenants, how often compliance is reported to trustees, and what escalation is required if a breach is possible.
Where borrowing is secured on assets, the governance bar is higher. Charity Commission guidance for England and Wales says trustees must have the power to borrow or mortgage, either through a statutory power or their governing document. They should obtain and consider proper written advice, assess whether the loan is needed, whether the terms are reasonable and whether the charity can repay under the proposed terms. Mortgage records and specific document statements may also be required.
Finally, the policy should support good decision-making. The Commission’s guidance emphasises considering options, costs, risks and benefits, short- and long-term impacts, and keeping records detailed enough to show the reasons for significant decisions.
Borrowing can be a useful tool. But without a policy, decisions risk being made transaction by transaction, under time pressure and without a consistent view of risk. A borrowing policy helps trustees demonstrate that debt is being used deliberately, affordably and in furtherance of the charity’s purposes.
Arlingclose can support charities in reviewing and developing prudent, clear borrowing policies, and enhancing debt planning and decision-making. For more information, please get in touch at info@arlingclose.com.
03/06/2026
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