Loans, bonds and shares

As voluntary and community organisations have become more entrepreneurial, there has been a corresponding growth in lending and investment. A specialist financing industry has developed to offer groups loans on terms that reflect the particular challenges facing not-for-private profit organisations. Loans should not be seen as an alternative to grants, but as a quite different form of financial support.

Loans versus grants

A loan is a way of financing an activity while other funding is secured.  This other funding is almost always income from trading.

Also, most loans must be repaid with interest and require careful planning to ensure the repayment terms are met. Your group doesn’t end up with an unwanted legal and financial headache.

Here are some typical examples of when borrowing is used:

  • buying assets such as land, buildings, vehicles and equipment
  • refurbishing or modifying buildings
  • managing cashflow while waiting for grant or contract payments - but only if the grant or contract has been secured
  • financing new trading activities

Specialist lenders

Examples of lending and investment schemes include:

Key considerations with loans

  • check your group’s constitution – has it got the powers to borrow?
  • check your group’s legal status
  • if a loan is only needed for managing cashflow, an overdraft facility may already be available to you at your bank
  • lenders will often want security, such as land, buildings or equipment – these assets could be lost if the loan is not repaid
  • it can be difficult to obtain a loan if your organisation does not own any assets that can be offered as security
  • loans usually have to be repaid with interest
  • lenders usually look at the group’s financial history and may want a business plan before agreeing a loan
  • charities need to check the latest Charity Commission guidance on borrowing before making a decision

Bonds and shares 

Some organisations look to their local communities for financing and issue community bonds or shares.  Bond and share issues are heavily regulated and you must seek professional legal advice at a very early stage.

Community bond issues (also called community loan stock issues) are offers to people to lend money to a community organisation. The money is paid back at an agreed time. Companies limited by guarantee and community issue companies are permited to issue bonds, but get specialist seek legal advice before you proceed.

Allia is a community benefit society that issues bonds and supporting groups around financing issues.

Community share issues are a way of inviting people to invest in a community owned business. There is no offer to pay people back, but dividends are paid out of future profits.  Shares issues are bound by complex rules and legal advice is essential. Most community share issues are made by industrial and provident societies (ISP) – companies limited by guarantee and community interest companies ability to issue shares is extremely restricted.  It is not unusual for a company limited by guarantee to form an ISP for the purposes of issuing shares. 

A practical guide to community share issues is available to download from the Community Shares website.

Useful organisations to contact

Locality (a merger of the Development Trusts Association & BASSAC)

The Plunkett Foundation (support to rural communities)


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