Colleges, Reclassification

New borrowing rules posing cashflow problems for colleges

Rules imposed last year amount to a 'perfect storm', FE leaders warn

Rules imposed last year amount to a 'perfect storm', FE leaders warn

Colleges are grappling with cashflow challenges due to new, “restrictive” borrowing rules that leave them with considerable upfront capital costs.

FE leaders this week warned that colleges are having to wait around two months for the Department for Education to refund what they spent on funded building and facility improvements.

Colleges were reclassified as public sector organisations last November, which means they are no longer able to get bank loans to pay for capital projects without permission from the DfE.

The department launched a time-limited “college capital loan” system to use between 2023 and 2025 in response to college complaints that this overnight decision put their projects on hold.

But the loans are paid “on invoice”, so colleges need to pay for capital builds out of their own pocket in the first instance, and only receive the funding from the government once they have shown officials their invoices.

Speaking at a breakout session at this week’s Association of Colleges (AoC) annual conference, Zoe Lewis, chief executive at Middlesborough College, warned this was creating a “perfect storm” for colleges seeking urgent repairs or capital improvements.

“If this is for a big college build, what college could cope with that cashflow?” she said.

“In the old world, we would have drawn down from Santander based on a profile that we felt was sensible.

“[The government] needs to get it back on profile, it needs to trust us. It’s very frustrating.”

Andrew Tyley, a deputy FE commissioner, said the issue would especially affect the “relatively small number” of colleges which need “massive [capital] investment”.

“For those colleges that need £30 [million], £40 [million] or £50 million [of capital funding], there’s no way they’re going to be able to fund that themselves,” he said.

He also warned there was a “north-south divide” over funding. “The further north you go, the less scope there is to generate money from capital receipts to fund those developments.”

Middlesborough College was pushing forward with a £50 million project to develop an engineering centre around the time of reclassification. The DfE gave the college a £6 million grant for the scheme, but the rest had to come from borrowing.

Lewis said her college had “underestimated the impact of [reclassification] in terms of its immediacy”, and had not signed off bank loans for the project before reclassification.

“If we had known [reclassification would take hold so quickly], we would have signed off on funds from the bank,” she said. After reclassification colleges could still use funds they had borrowed from banks, and were just prevented from accessing more bank loans without permission.

But the college is now waiting for funds from the DfE, which has delayed the project.

Lewis said she contacted Shelagh Legrave, the FE Commissioner, immediately to warn her about the impact this could have on colleges. “I wrote to [her] the day after [reclassification] landed, and said: ‘You need to watch this’.”

But Lewis did say that colleges pay “a cheaper rate” borrowing from the government than from banks, which she admitted was a “big benefit of this new world that we’re in”.

She added: “It’s complex and bureaucratic and it’s a bit painful but, as I said, there are some benefits as well and I think [the DfE] will learn on the job.”

Julian Gravatt, deputy chief executive at the AoC, warned there were “cashflow risks for colleges” under the new system because the “decision to double-check every extra invoice means that some colleges will have to wait two months after paying their construction company to get the loan in from government”.

He called on the DfE to work with colleges on “sustainable long-term capital investment arrangements to ensure we have the buildings and teaching space to run the courses to equip students with the skills they need”. 

Gravatt added: “Bank lending would be available for viable projects if it was allowed, and there are lots of viable projects colleges want to invest in which will save money, help achieve net zero estates and which will help people get the skills they need to drive inclusive economic growth. Restricting those projects is not good value for money, it is wasted potential.” 

A DfE spokesperson said the department recognised “that restrictions on commercial borrowing following reclassification have led to some colleges encountering challenges in the financing of their capital projects”.

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  1. Peter marples

    My heart bleeds. It really does. They have to wait to be reimbursed for 100% of the spend on their pet projects and if they default on the repayments the dfe bail them out.

    Do these overpaid CEO’s actually live in the real world

    No risk, massive salary, massive pension and they bleat they need to talk to their contractors. Ever heard of a proforma invoice. Probably not !

  2. The vast majority of us working in the sector just want public money to be spent as effectively and fairly as possible.

    So when you get poor policy that wastes money, it’s galling, but poor policy can have different consequences.

    In this case, a change that could have been thought through and the consequences managed better. (i.e. a failure of the system to self regulate for the public good)

    In other cases, you can get individuals benefitting from public money, gaming the system to leverage fancy sports cars and mansions, dumping thousands of learners and apprentices, then calling in the lawyers (i.e. a failure of individuals to self regulate for the public good)

    Two sides of the same coin. Those of us on the edge of the coin rarely see an upside, but we’re not unaware.

    • Peter marples

      It’s a pity anon hides behind such because If they didn’t they would find themselves in court themselves. You need to get your facts straight where the mansions and cars came from, certainty wasn’t the public purse and was a consequence of bloody hard work and risk taking elsewhere. We will find out through the appropriate channels who was right in due course but the lawyers aren’t being funded by tax payers money – well from my side they aren’t