Fixed Interest: Why Our Lending Is More Competitive Than Ever
On 4th August the Bank of England increased its base rate to 1.75% to counteract spiralling inflation, the logic being that the higher cost of borrowing will decrease the demand for investment and reduce spending in the economy. This was the sixth consecutive increase in the bank rate in less than 12 months, with further increases anticipated by most analysts.
For arts, culture and social sector organisations more generally, this creates a challenge: how to invest affordably in new projects, especially those with a broad range of potential returns, grow existing work or simply manage cashflow amidst the cost of living crisis, whilst having a certainty over the cost of borrowing.
It’s all in the blend
This is an area where the blended model of social impact investment, which combines public, private and philanthropic capital in a single fund, can offer a distinct economic advantage. Essentially, it is a not-for-profit model, and our Arts & Culture Impact Fund is a prime example: our funders – Arts & Council England, Heritage Fund, Bank of America, Big Society Capital, Esmée Fairbairn Foundation, Freelands Foundation and Nesta – have supported the fund through a combination of repayable grants and fixed-rate loans, unconnected to the Bank of England base rate. By fixed-rate, we mean that the interest rate we pay our investors does not change for the duration of the fund’s life (until 2030). And this means that the interest rate we charge on our lending to arts, culture and heritage organisations can also be fixed so that borrowers have certainty about their financing costs for the duration of the loan.*
In a rising interest rate environment, this means that the Arts & Culture Impact Fund can offer loans more cheaply than many other lenders. Our rates range from 3%-8.5%, with the average at the time of writing (August 2022) being 5.5%. These are fixed over the life of the loan, with the exact rate offered depending on the borrower’s circumstances, whether any security is available and our perception of risk (the greater the risk, the higher the rate).
How do these rates compare across the market? On loans of up to £1m, most commercial lenders will charge the Bank of England base rate (currently 1.75%) + a margin that is likely to range from 3.5%-10%+, primarily dependent on the availability of security. The most competitive rates are offered on larger loans, to bigger, more established businesses and, in the case of secured loans (mortgages), where the value of the loan relative to the value of the property is less than 60%. Whilst these loans can also be at a fixed rate, these ‘fixes’ are available for relatively short periods of time (typically 2-3 years), with the underlying rate being tied to the changeable base rate. If the rate isn’t fixed, a variable rate applies, in which case the cost of borrowing is directly linked to the base rates – as that changes so will the amount of interest the borrower has to pay.
It’s also worth noting that most commercial loans will have early repayment charges to compensate the lender for interest foregone if the borrower wants to pay off the loan early. The Arts & Culture Impact Fund’s stakeholders explicitly chose not to do this given the remit of building a market that supports prudent economic behaviour in the organisations it funds. Our priority is to support great arts, culture and heritage organisations to achieve their missions, benefit local communities and become more financially resilient over the long-term.
It’s not all about the money
Finally, whilst our funding is indeed likely to be cheaper than most repayable finance options in the current economic climate, this is not the only benefit. There is much more to this funding relationship than the interest rate. As a specialist arts & culture lender motivated by social impact and a passion for the arts, we’re familiar with the business models, funding cycles and the great work happening across the sector, and are specifically mandated to support artistic and social value creation as well as preserving capital. We leverage this expertise to support organisations (e.g. through networking), advocate on their behalf and act as a strategic sounding board. We can also bring a flexible approach to all of our lending so that repayment terms are bespoke and suited to the needs of the borrower. For example, we can offer interest-only periods (i.e. capital repayment holidays) if there is a time lag between the deployment of funds and the generation of financial returns.
Our team is small, friendly and keen to hear from you, even if it’s just an exploratory conversation. You can make an enquiry here and we’ll get back to you.