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Simply FINANCE Simply FINANCE A comprehensive guide to the different options for financing a community enterprise 1st E dition J une 2011 Published by: Co­operatives UK Holyoake House Hanover S treet Manchester M60 0 AS Tel: 0 161 2 46 2900 Fax: 0 161 8 31 7684 email: [email protected] web: www.uk.coop © C opyright: Co­operatives U K 2011 Co­operatives U K i s t he national trade bo dy that campaigns for co­operation and w o r k s to promote, develop and unite co­operative e nterprises. Co­operatives UK aims to brin g together all those with a passion and interest in co­operative action. Design, artwork and illustration by www.wave.coop Printed on recycled paper You can get details of other publications from our website. This guide has been produced as part of the Making Local Food Work Project. ISBN: 978­0­9549677­8­9 2 Foreword Money may make the world go round, So often, people say ‘I am keen to be but if you are trying to make the world involved in community enterprise, but a better place it can seem to be notable I don’t know anything about finance / by its absence. So many would­be social money / economics’. This is a real entrepreneurs founder on this first step obstacle – it’s the one thing that every of securing the funds they need to launch person involved in the running of a a project. community enterprise does need to know a bit about. Let’s take the knowledge in this This guide will go some way towards guide and spread it around as widely as easing that difficulty. There has been possible, to rebuild the confidence of the an enormous amount of innovation and people rebuilding our society. development in the field of finance for social and community enterprises in the Peter Gotham last decade, and it is about time the Gotham Erskine LLP findings were brought together in an London informative and practical way. Peter Gotham formed Gotham & Co. in 1981 to This guide does not offer theories or develop the services he had been providing to small idealistic dreams, but simply describes organisations on a voluntary basis for over 10 years. the tools that are available and offers beginners’ guides on how to use them. As well as lecturing and writing on finance for non­ That means there is no longer any excuse professionals, Peter is currently the Chair of the for sitting on the sidelines, or leaving the Charities and Voluntary Sector Group on the Institute of Chartered Accountants in England and Wales. field to profit driven business. You have here everything you need to get stuck in Peter is also a Visiting Fellow at the Cass Centre for to revitalising your community. Charity Effectiveness at City University, London. 3 Contents 1 Introduction 7 2 Becoming ‘investment ready’ 10 2.1 Returns 10 2.2 Risk 11 2.3 Purpose and focus 11 2.4 The business case 12 2.5 Scale 13 2.6 Sufficient capitalisation 13 2.7 Diverse connections 15 3 Grant funding 16 3.1 The grant contract 16 3.2 Types of grant funding 17 3.3 Before you apply 17 3.4 State aid 18 3.5 Sponsorship 19 3.6 Looking for grants 19 4 Supply chain finance 21 4.1 Reinvested surplus 21 4.2 Downpayments and advance purchases 22 4.3 Asking for credit 22 4.4 Membership fees 24 4.5 Sweat equity 24 4.5.1 Historic debts 25 4.5.2 Shares for work 25 4.5.3 Unpaid labour and taxation 26 4.6 LETS, timebanks and alternative currencies 26 4.7 The bottom line 27 5 Loan finance 29 5.1 The benefits of debt 29 5.2 Gearing – the measure of indebtedness 30 5.3 Different forms of lending 31 5.4 Security and collateral 33 5.4.1 Personal guarantees 33 5.5 Lenders with a social purpose 34 4 5.6 What needs to be in place before applying for a loan 34 5.7 How will it change your organisation? 36 5.8 Qualification loans 37 5.9 Loans from supporters 37 5.10 Loan stock and bonds 38 5.11 Debentures 40 5.12 Personal liabilities as a result of borrowing 40 6 Equity finance and share issues 43 6.1 Distinctions between loans and equity finance 43 6.2 Different types of shares 44 6.2.1 Withdrawable shares 44 6.2.2 Transferable shares 44 6.2.3 Preference shares 45 6.2.4 Membership shares 46 6.3 Consequences of equity 46 6.4 Shares and co­operation 47 6.5 Legal structures used for share issues 48 6.5.1 Co­operative and Community Benefit Societies 48 6.5.2 Companies limited by shares, including CICs and plcs 50 6.5.3 Limited Liability Partnerships 51 6.6 Carrying out a share issue 52 6.6.1 Corporate shareholders 52 6.6.2 Legal restrictions on marketing securities 55 6.6.3 The laws that affect share issues 55 6.6.4 Unregulated investors 56 6.6.5 Special purpose share funds 57 6.7 Payment of dividends and interest 57 6.8 Joint ventures 58 6.8.1 Forming partnerships between organisations 58 6.8.2 Special Purpose Vehicles 59 6.9 Property leases as a form of equity 60 7 Documenting finance raised 62 7.1 The balance sheet 63 7.2 Record keeping requirements 66 7.3 Communication 67 5 8 Tax efficient finance 68 8.1 Business taxation 68 8.1.1 Corporation tax 68 8.1.2 VAT 69 8.1.3 Capital gains tax 71 8.1.4 Mutual trading status 71 8.2 Individual taxation and deduction of tax at source 72 8.2.1 Enterprise Investment Scheme 73 8.2.2 Stamp duty on shares 73 9 Next steps 74 Appendix 1 Summary table of legal structures 75 Appendix 2 Sources of finance 76 Appendix 3 Sources of further guidance and advice 77 National Support Bodies 77 Co­operative and Social Enterprise Development Bodies 77 Co­operative Finance Consultants and Specialist Accountants 79 Specialist Independent Financial Advisors and Funds 79 Books and Online Resources 80 Appendix 4 Forms and agreements 81 Model loan agreement 81 Model loan stock application 84 Model loan stock certificate 85 Corporate application for withdrawable shares 86 Application for withdrawable shares 87 Sophisticated Investor Self­Certification Form 89 Appendix 5 Glossary 90 6 Introduction to the Guide Co­operatives UK is the national trade body that campaigns for co­operation and works to promote, develop and unite co­operative enterprises. Co­operatives UK has a unique role as 1 a trade association for co­operatives and aims to bring together all those with a passion and interest in co­operative action. Its core role is to: About finance provide a strategic voice for What do we mean by finance? It is co­operation; liquid capital resources – lump sums of money that can quickly and easily be work to safeguard and increase deployed for whatever purposes are awareness and understanding of required. A clear vision of the future co­operative values and principles; success of an organisation motivates support the development and growth supporters to provide resources. The of co­operatives; and resources are then applied to make that vision of the future possible. be the centre of excellence for the provision of services to co­operatives. Finance can be neglected because it seems dry, or complicated, or morally This guide is written for development compromised. But it need be none of those professionals in England involved in things. Think of it instead as the fertiliser supporting new and existing organisations that, when sprinkled on to a lacklustre in the social and community enterprise enterprise, allows it to spring into life sector, and also for self­supporting and productivity. Finance stems from the individuals working in those organisations. natural human impulse to collaborate Anyone who is seeking to bring finance and pool resources. Irresponsible and together with a new enterprise, or an unaccountable enterprises have annexed existing enterprise that is growing or this impulse for their purposes; we can diversifying, will find this guide relevant. and should reclaim it. This guide is funded by the Big Lottery No organisation is too small, or too Fund which covers England only. As simple, or too homespun, not to require such this guide may not be relevant finance. Sometimes the vital boost that to the financial regulations in Scotland an organisation receives at the outset and Wales. goes by other names, or does not take a monetary form. It is still a necessary Throughout this guide, we will refer only resource, allocated in order to turn to the ‘organisation’, as it will apply to potential into reality. a range of different companies, societies and unincorporated bodies. More specific terms, such as company, co­operative or society, will be used where the information applies only to such bodies. 7 Finance for co­operatives and community Use the contents to identify the key issues enterprises is in many ways similar that you need advice on, and look out for to that for conventional enterprises: the cross references that will direct you to language, the concepts and the maths other, linked, chapters of the guide. There are essentially the same. The difference are flowcharts to help you navigate, but if is that it is upside down. In conventional you are in doubt begin with chapter 2, enterprises, investment and ownership which will describe what is needed to be dictate the activities of the business; in the ready for finance.
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