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Overdraft facility

How to secure agreed credit when your account reaches zero - a type of social investment

What does it mean?

This is an extension of credit from a lender when a borrower’s account reaches zero. An overdraft occurs when money is withdrawn from a bank account and the available balance goes below zero. In this situation, the account is said to be “overdrawn”. If there is a prior agreement with the bank for an overdraft, and the amount overdrawn is within the authorised limit, the interest is normally charged at an agreed rate. If the negative balance exceeds the agreed terms, then additional fees may be charged and higher interest rates may apply.

Who might use it?

Overdrafts allow the organisation to continue withdrawing funds from an account even if there is no money left in it. Therefore, it is borrowing money at a pre-set interest rate and the overdraft limit itself will be set beforehand.

An overdraft is offered by most commercial banks, but is more difficult for charities and social enterprises to obtain. However, there are now more organisations willing to provide overdrafts to the sector.

Who provides it?

  • CAF Bank offers an overdraft facility to current CAF clients.
  • Commercial banks may approve an overdraft facility to a civil society organisation (e.g. HSBC, Natwest, Barclays etc.).
  • The Co-operative Bank offers an overdraft facility with an agreed limit.
  • Triodos Bank offers overdraft facilities to clients who have taken out a loan and have a current account with the bank. 
  • Unity Trust Bank provides overdraft facilities for up to £1 million secured and £50,000 unsecured.

Case study - Voluntary Action Barnsley

For many voluntary sector organisations, cost control and sustainability can often be achieved by the ownership of their own premises, which can then be used to generate income. Increasingly this means like-minded organisations coming together to share buildings, services and facilities.

This was the case for NCVO-members Voluntary Action Barnsley (VAB), who, as a long-standing Unity Trust customer, approached the bank for a loan to finance its new building, aptly-named as The Core in the centre of Barnsley.

The Bank agreed loan finance to meet VAB’s aims of sourcing additional development capital of £1.25m, which on completion which converted to a term loan of £0.75m. This involves a large scale overdraft to accommodate capital expenditure. As a result, VAB have a modern and vibrant building in the heart of Barnsley town centre, and forms part of the Remaking Barnsley Initiative.

VAB’s aim was to turn the centre into both DDA-compliant accommodation for its own staff, as well as providing a wide range of office accommodation and conference facilities, with state-of-the-art technology for other like-minded organisations in the town. The venue is adaptable to cater for a variety of events including conferences, meetings, counselling and training, all at the heart of the Yorkshire business community.

As well as the internal technology, The Core was built with sustainable features such as a biomass boiler, glazing with high thermal insulation, solar control and the sedum moss roof garden provides both insulation as well as a leisure space for staff, tenants and visitors. All of which have contributed to it earning a Excellent rating in terms of a being a green building.

In summary, by recognising that its future could be more secure by owning its own premises, VAB used a social investment from Unity to help deliver revenue, provide a central hub of expertise and support for the sector and provide an enterprise environment which encourages economic growth and sustainability for voluntary and community organisations within Barnsley. 

 

Page last edited Oct 22, 2015

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