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.
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. Careful planning is needed to ensure that repayment terms are met and your group doesn’t end up with an unwanted legal and financial headache.
Here are some typical examples of when borrowing is used:
Examples of lending and investment schemes include:
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 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.
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. Share 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.
The Plunkett Foundation (support to rural communities)