Simply FINANCE A comprehensive guide to the different options for financing a community enterprise 011 une 2 ition J 1st Ed by: lished K Pub ves U ­operati e Co Hous olyoake t H tree anover S H ster Manche AS M60 0 2900 46 0 16 1 2 7684 Tel: 31 op 0161 8 uk.co Fax: s@ nquirie ration K ail: e coop ­ope ves U em w.uk. 11 for co erati : ww K 20 igns Co­op n. web ves U ampa ises. actio rati that c terpr rative o­ope dy ive en ­ope ght: C ade bo perat t in co opyri nal tr co­o teres © C natio unite nd in s the and n a U K i vel o p passio atives te, de with a ­oper romo hose Co s to p r all t w o rk gethe and ng to to bri aims

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. social and community enterprise sector it is the stakeholders – the people most As this is a guide, use the content to help affected by the enterprise – that are in understand and formulate your ideas, then control, determining the direction of the seek the appropriate professional legal organisation and the terms on which and financial advice – as highlighted in investment is raised. This simple, but the appendices. subtle, reversal of power provides the context for all the finance options Throughout this document we refer to discussed here. Co­operative and Community Benefit Societies, rather than Industrial and Provident Societies. This is on the What this guide does assumption that legislation introduced in 2010 will facilitate a change in title. You are the right person to be reading To the best of Co­operatives UK’s this guide if you are involved with a knowledge this will be commenced project that wants to be more, or better, in the autumn of 2011. than it presently is. In order to make that leap something extra may need to be brought in from outside the organisation. Acknowledgements This guide: The author, Alex Lawrie, is a member provides a foundation for understanding of Somerset Co­operative Services CIC, the role played by finance in enterprises; and would like to thank the many people describes the main forms of finance and who offered ideas and criticisms of the how they are accessed; text as it evolved. provides some templates and standard Thanks go to the commissioning team conditions to enable you to reach honest at Co­operatives UK, in particular and fair agreements with providers Emma Laycock and Sarah Alldred, of finance; for their support and advice. identifies some of the main tax and accounting issues, in so far as tax and Detailed reviews of the text were also accounting are affected by the way in provided by Stuart Field, Lauren Baker, which you finance your enterprise. Jim Brown, Slade and Cooper, Sandra Aldworth, Peter Gotham, Jodi Hibbard, Paul Martin and Sarah Lawrie. Thanks also to Steve Angove, Kate Whittle, Wessex Reinvestment Trust and Radical Routes for their contributions.

8 Your route through Chapter Two

These flowcharts may help you find the most obvious solutions to your finance needs; however, they won’t direct you to all the sections that are of relevance to you, so don’t rely on them for all the answers.

No Is there full agreement

Is there a well presented on a clear business

business case? idea?

Yes Yes No

Will you have durable Go to assets or regular and 2:4: the business case predictable income? Go to 2: Becoming investment ready No

Yes

Are the social returns Go to excellent? Yes 5: Loan finance first Go to: 3: Grant funding first No

Is it possible to begin trading with modest Yes finance? Go to 4: Supply chain finance first No Go to: 6: Equity finance and share issues first

9 Becoming ‘investment ready’

All businesses (or “enterprises”) have to make a case for the finance that they require. Not every idea can be supported, and

2 the key to ensuring that funders and investors are drawn to one rather than another is communicating its strengths and relevance clearly and effectively. The precondition for that is that the participants in the organisation understand it clearly themselves. This is what makes an organisation ‘investment ready’ – a term most often employed in relation to equity investment, but of relevance to organisations that hope to borrow or receive a grant as well.

‘Investment readiness ’ to describe Business is often defined as a repeated are bound to be asked, “Will this really is a term used you answer investors how well ’ series of voluntary exchanges. Social lead to the benefits that we are seeking? about the returns questions gain. First used in enterprises and co­operatives are Is this the best place for our resources?” they will an Australian government businesses, but they are guided by a it was defined as report, shared purpose – a set of values, or aims, ‘meeting the fundamental to be attractive that go beyond simply making money. 2.1: Returns requirements . to external ’ investors These two features mean that they provide In any business, there is a balance some ‘return on investment’: between financial and social returns: there is an intention to make a profit if your returns are principally social, with (each year, the value of the organisation few if any financial returns, the emphasis is greater than the year before) which is likely to be mostly on grant funding, investors may be able to share in; small scale investment from the most there is a benefit to the people most closely involved stakeholders, and in­ affected by it (sometimes called ‘the kind support; Radical social return’). Routes, with its if there are significant financial returns, investment society Rootstock, is a good example of a with subtle or localised social returns, co -operative These two kinds of ‘return’ are the basis that clearly offers it may be more appropriate to look at a blended return to investors. of the story they have to tell about their People loans and share issues. who invest in it get intended future success. a financial return (interest, presently around 3%). But there is Maybe your enterprise will excel also a social return,as Radical That’s the essence of what finance is Routes uses the funds in both: but while a ‘blended return’ to start - housing co operatives, about: your good idea has outputs – it is social centres is the objective in theory, there will and businesses that all productive – and so people who want to campaign for peace, always be choices and priorities, and social share in those outputs in some way are justice and ecological it is as well to think through what they sustainability. willing to put some of their resources will really be in practice. in to make it happen. There are always alternative places for investment to go: you

10 returns often rely Social – on a ‘hypothesis ’ of change then it Having a focus on social benefits does Risk should be considered at an early a belief that if we do x, social benefit y. It will deliver not prevent an organisation from putting stage in the process simply because it to explain this hypothesis helps to a great deal of time and resources into will, to a large degree, shape the clearly, and provide evidence maintaining profitability. Socially driven experience of the participants. A risky support it. businesses form a broad spectrum, enterprise is stressful, exciting, high ranging from those that are outwardly pressure and with the potential for both highly commercial, to those that are more high returns and disappointment. A low charitable and do not expect to compete risk enterprise is confined to well trodden for business. paths, rulebound, safe and reassuring. They reward people of very different temperaments, and anyone getting drawn Social 2.2: Risk into a new business activity has a right to Return on Investment (SROI) is a detailed know the level of risk involved first. Your methodology The other spectrum on which your for quantifying social benefits the founding team should have an honest from an activity. organisation must position itself is that of However, many organisations discussion about the level of risk that they use more approximate low or high risks and returns. Risk is more qualitative or are prepared to manage. measures for than just uncertainty; it is the unavoidable, preparing ’‘social accounts . inherent uncertainty of a volatile or changing marketplace, and the extent to 2.3: Purpose and focus which those unavoidable uncertainties could impact on your organisation. There But maybe there is a more fundamental is no excuse for failing to investigate and question to be examined at this stage. gather information on critical issues before Whether it is a completely new the organisation starts trading, but if that organisation, or a new product or activity A risk still leaves you not knowing exactly what for an existing organisation, are you register is helpful: brainstorm a list of possible kind of market will exist for your product actually clear what the business idea is? risks, and then for each one in two years time, that is risk. assess its likelihood, severity, and mitigation (actions that A mission statement can be very helpful; can be taken to protect the When seeking finance, it helps if there it should sum up in just one sentence the organisation from it). are enough returns to offset that risk. area in which the business works, the A venture capitalist (social venture or distinctive methods or values it employs, financial venture) is unlikely to get enough the expected results of the activity, and return out of a low risk activity for it to the wider impact that is expected. be worthwhile. A cautious banker must Some organisations have a statement preserve their capital, and mainstream of aims that serves a similar purpose. social enterprises have Many donors want predictable outcomes; they However, bold statements of good altruistic goal – benefiting an others – while - co operatives accept that the consequence is modest, intentions can sometimes conceal to stress self - help, and seek or limited returns. confusion about the actual plan of benefit the community its action. In addition to this statement communities to which belong. Social founders co- operatives (a term more elsewhere in Europe familiar than here, but which describes a growing number of two enterprises) combine - the takes a community collectively

action for the good of all.

11 of long term principles, there should businesses bundled up together. be a description of the specific If you are planning to collect kitchen transaction that is intended to advance waste and place it in a digester to create the mission of the business here and compost and biogas, these are arguably now. It should cover: two products from one business. But if you are then wanting to sell the compost If you are introducing the product; quite new, you alongside a range of other gardening something may have a ‘unique selling an the benefit to the customer, products in a retail outlet; or collect and proposition’ : there is can unmet need that you compared to other similar products; recycle waste timber alongside the kitchen

meet exceptionally well. waste; then you are actually trying to start the distinctive features of the process two businesses at the same time, and that by which the product is prepared; is more than twice as hard. the raw materials, or inputs, from which the product is made; Brand new businesses are time consuming and vulnerable. Even if you think you are the ways in which these things part of a team that has the resources to contribute to the mission. develop more than one at the same time, you should treat each one separately It might be important to describe the and ensure that its needs can be idea in relation to the people that the independently met. organisation serves. The relationship between the organisation and its key stakeholders (which might include 2.4: The business case customers, suppliers, workers, or local residents) may make a crucial contribution This leads us to how you formally put to the productive process, or actually be these ideas down on paper, in the form a benefit of the product being supplied. of a business case or business plan – or, indeed, both. The difference between the You will find it easier if you can refer to a two is subtle, but in general the business similar, successful organisation elsewhere case deals with whether or not you should and explain how you are learning from carry out a business activity, while a ‘Impacts’ means the changes beyond the boundaries of their example – it is good to be a bit business plan explains how you should your organisation which innovative and original, certainly, but well best carry out a business activity. The you want to see as a result of your ’ activities; ‘Aims is trodden paths are usually well trodden for business case can be a brief provided by a similar term – it refers to a good reason. the key stakeholders in an organisation so the most ambitious of your goals and objectives, those that project managers and staff can write that you cannot set a A common problem at this stage is that it a full business plan. deadline for and may in fact never be fully completed. becomes clear that what was intended to be one business is actually two or more

12 Both have to address the question of Scale is often misleading, though. finance and returns. A business case will Everyone assumes that a larger project is ask: “what are the returns from this activity? more difficult than a smaller one – but that How do they compare to the returns from isn’t always the case. The ease of a project other possible activities, or no activity at is more to do with making good use of all? Are they sufficient to justify the available capacity, and not calling on resources required – the finance?”. capacity that is unavailable. A business plan, by contrast, will look at Working capital is finance in a slightly different way: “what So, consider a choice between two tools: the funds available to are the optimum resources to start this one that is cheap to buy and run, but slow spend less any bills due for payment; it is an business activity with, and how can they to operate; and one that is expensive but essential resource to be used most efficiently? Where can they very productive. Neither one is ‘better’ manage cash flow best be obtained from, and what terms than the other – it depends on the size challenges. can we expect to get? What returns are of the market that the business is meant expected, and when? How do we to serve. A handful of people would meet maximise them, minimise risks, and their needs best with the simple device; prepare the business for future activities?”. the more expensive tool would burden the group with obligations while never For the purposes of this guide, the working at its full capacity. There may business case is of most relevance. The not be appropriate tools for certain sizes business case may well be principally of market – the only way to be profitable internal; it is a decision making tool, used is to aim higher or lower. before committing to action to make sure that it meets the objectives of the business. However, it can also be used to introduce 2.6: Sufficient capitalisation sources of finance to the proposal. It is a commonplace observation that social enterprises, co­operatives and community enterprises have suffered 2.5: Scale in the past from being undercapitalised: The scale of this preparatory work should working with old, broken tools, in be in proportion to the project: for a cramped premises, with inadequate hundred square metre community garden, training and no working capital with you should cut to the chase briefly and which to establish the business. If there succinctly, ignoring the bits that are of less is one thing you should get from this relevance. For a hundred acre organic guide, it is how to avoid that plight. farm and research establishment, you should expect to have to justify in detail the enormous commitment you are expecting all concerned to make.

13 Business case contents Business plan contents

Mission statement.

A summary of the business idea.

Strategic purpose: what are the expected SMART objectives (specific, measurable, outcomes, and what are the needs that achievable, relevant and time bound; you can are being met? add ethical and resourced or rewarding to make them SMARTER!)

Choices: what other options for action were Background, history and context: where did this considered and why were they rejected? idea come from?

Focus: what are the assumptions being made, Supporters: who else thinks this is a good idea, and the constraints that are accepted? Were and what are they committed to putting into it? the size, scale and complexity within limits?

Dependencies: what are the requirements for Personnel: who are the people who will implement personnel, and what other agencies need to the plan, and why do you think they are the support the idea? right people?

Area of work: PESTLE analysis (political, economic, social, technological, legal and ecological) can help you assess what are the relevant features of the business environment.

Risk analysis: what could go wrong, how severe, how likely and how likely are these risks?

Market strategy: what market research and analysis has been carried out, and what marketing message and activity is required?

Workload: what existing capacity is there, Operations Plan: SWOT (strengths, weaknesses, and where is new capacity needed? opportunities, threats) can be used to identify your What is the timetable, and the main milestones least­resistance route, and define phases and on the way? critical paths.

Social returns: what are the returns expected Evaluation and social accounting: how will you from this activity? measure and report the social benefits you expect to get?

Resources: what is needed to get this Budget: how will you raise the finance for the activity underway? resources needed at startup?

Pinchpoints: when do you expect resource Cashflow analysis: usually a spreadsheet showing flows to be at their tightest? the first two years month by month.

Return on investment: an analysis of how much Profit and loss: typically year by year, and showing profit is generated by the activity and over not just cash flow but depreciation, invoices, capital what period of time. A spreadsheet can combine repayments and other ‘hidden’ value. Some this with initial investment to generate a figure investors may require balance sheets in addition. for ‘internal rate of return’ (see 6.7).

14 However, there is a strong argument 2.7: Diverse connections that overcapitalisation is a risk also. It is usually safe to assume that finance All capital comes with obligations – the for any organisation will be of many need to make a return. If too much of different sorts – and almost always could the turnover is being put into rewarding feature at least a small contribution from investors, the business will lack reserves for each of the four categories in the next future development. The consequences of chapter. Grants, loans, supply chain and borrowing too much and being unable to Profits equity can be very effectively combined, and cash surpluses keep up repayments if sales slip are are not the same thing. Cash and if you are seeking to finance your in the bank may be obvious enough (see chapter 5.2) but ‘spoken ’for ; profits may be business development using some but present something similar can happen with equity in ’ assets that can t be easily not all of these, you are missing out converted into cash. investment if investors put pressure on the A healthy on opportunities – perhaps small, but business has both organisation to deliver a short term return available cash worthwhile. and net profits. on their investment. The tail can begin to wag the dog. Last of all, it is important not to regard finance as simply a functional need for There is also the danger of the fool’s an organisation. It is potentially much paradise: it is a great relief when starting more than that: you can weave a a business to know that – as many would supportive community around your suggest – you have enough working organisation, and build co­operative capital to cover running costs for eighteen relationships not just inside but outside months while sales build up. But such a the organisation. cosy security blanket can cut you off from the reality of the market and the needs of Funders, lenders and investors are not your customers. You may not realise that just there to hand over a cheque but there is inadequate demand for your may be keen to be part of a conversation product, or that your processes are about your project: as it develops, they inefficient, until it is too late to change may provide you with contacts, advice, direction. Finance is vital, the lifeblood of custom and further funds. All that is any business, but it is not a substitute for required is to treat them with respect, market intelligence and shouldn’t be used honesty and courtesy. as such.

Permaculture is an approach to project design that among other things stresses multiple elements meeting each need, and multiple needs met by each element. This can be applied to the financing of an enterprise to create ’ a robust ‘web of finance.

15 Grant funding

It is understandable that most people seeking finance in the social and community enterprise sector will look first at the

3 availability of grant funding. Although the forms and features of grant funding have changed substantially in recent years, they remain crucial opportunities to turn good prospects of social return into the liquid funds needed to get a project underway. The plethora of organisations offering grants, and the complex application processes and criteria, can be daunting at first; but there are also many organisations that provide excellent training and advice on how to make sense of it all.

3.1: The grant contract change direction if monitoring reveals that outcomes are not being achieved, There are many different relationships Some and if nothing else use a final evaluation funders are for known being adopted between funders and paying grants to learn from the experience; in months arrears. The grant recipients these days, only some of which then has to be combined fit the neat description of ‘grant funding’. there are funders offering support that with some other form finance of Some agencies will describe ongoing can be ‘clawed back’ if certain targets (typically a loan) to cover the cashflow. support for a service as a ‘service level are not met. This may be described as agreement’ or some other form of regular, grant funding, but it is in many respects results­based contract. If this is still a closer to a service contract. It may form of grant (and there is a grey area provide some cash flow benefits if it is between grants and contracts for paid in advance; services) it will only provide finance if you have departed from the project for an organisation if it is paid in as it was described to the funder, or advance of costs being incurred. otherwise broken an agreement between you, they can demand repayment. Ideally, a grant is given – possibly in

is a distinction instalments, but at least partly in advance There outcomes There will very often be a contract to be between outputs, – with some expectation as regards the impacts: outputs are and produce, signed, obliging the recipient to account what you actually activities that it will be used for (as well as the direct, for expenditure, conduct themselves outcomes are and timetables and milestones) but without any immediate results, appropriately, use funds with regard to are the changes obligation regarding the results of those impacts best value and so on, but these are to do that your outputs and activities. It does not have to be paid back, contribute to as outcomes with honesty and transparency: in terms of among many. and if you have done what you said you one factor what is achieved, the funder is not assured would do, the funder accepts the risk that of getting anything in return. That is why it the consequences may not be all that were is different to making a sale, and why it is hoped for. That having been said: among the most highly prized forms most funders will have some of finance. It’s also why it is always in requirements on monitoring and short supply. evaluation. They will expect you to

16 3.2: Types of grant funding to day activities of the enterprise. This is particularly helpful to a trading Grants are provided for so many different organisation, as you can avoid having purposes that many enterprises – even to make grand claims for the social those that are relatively commercial – may benefits of your trade, and instead focus have the opportunity to apply for one. on a project which is more obviously For this reason, they are always worth charitable in nature. evaluating as part of the finance jigsaw. However, to largely or entirely fund a The risk is that the project may become project with grant funding is another a burden on the rest of the organisation, matter altogether. You have to be clear that effectively taking a subsidy from trading the potential social returns are exceptional, activity. That may be what you want, and the financial returns unavoidably but it certainly isn’t something that should slender. A trading business often has to If funding is available happen by accident. ‘Full cost recovery’ only for ‘charitable purposes , you may not need work much harder than a voluntary ’ describes the (potentially quite complex) to be a registered charity. organisation to justify its claim on funds. Funded activities should fall process of identifying all the things that under one or more of the your enterprise does that assist the project, ‘heads ’ (types) of charity. Grants may cover either capital or For more information on and allocating an appropriate share of revenue. Capital grants provide an this, see the companion their costs to the project budget. For organisation with funds to secure guide Simply Legal. example, if each year you pay an buildings, vehicles or other capital items. accountant £300 to prepare accounts, Revenue, on the other hand, is not and during the year that the project is intended for durable items but instead underway it accounts for 10% of the should cover labour, consumables and organisation’s turnover, then an other short term costs. Some programmes appropriate allocation may be to include may allow a mix of both sorts of funding, £30 for accountancy in the funding but there will often be a limit placed on application. That way, you make sure that the capital component. if you get funding, it covers all the costs – not just the obvious ones. Revenue grants can also be broken down into core and project funding. Core funding is usually non­specific, and so can 3.3: Before you apply cover the guts of the enterprises operation. It will pay for overheads, administration, Some crucial questions to ask before filling development; the basic needs of the in a grant application: enterprise. It may well be sought, and do they fund organisations like yours? paid, year by year; but sometimes it will Many funders will only give to registered be guaranteed for several years at a time. charities, and others only to Project funding is more specific. It can organisations with charitable objects; be attracted by describing to the funder some require non­profit distribution a particular piece of work, that can be clauses that would rule out payments carried out quite separately to the day

17 from profits to members or investors. 3.4: State Aid An asset lock in the governing document The rules of the European single market may be needed to ensure that proceeds make State Aid a potentially tricky area. on winding up go to an equally No state within Europe is meant charitable or non­profit distributing body; to give its businesses a competitive is it the right grant for you? Many grant advantage by subsidising their trading applications are rejected because the beyond a specified level. State Aid rules applicant did not check what the funder definitely don’t apply if: would and wouldn’t put money into. the recipient couldn’t be said to be a If funding suits your Almost all funders will provide either but is limited to business, as there is no real trading; or activity, registered charities, there a list of excluded activities, or a list of will may be a charity that activities that they are willing to support; the grant doesn’t favour certain goods act as your partner, or as a conduit. Try or services; or simply does what you are asking for fit with asking your local Council for for Voluntary Service what you want to do? There is rarely an the grant is not ultimately provided from assistance. exact match between what you want state resources; or funded and what they want to fund, but the grant couldn’t possibly distort or be cautious about adapting your plans threaten to distort competition; or to meet their criteria. It is one thing to trim your ambitions, but quite another to the grant couldn’t possibly affect trade embark on work that is not part of your between Member States. mission or purpose; However, these are all potentially hard to do you have the capacity? If you would prove beyond doubt: there are many other have to scale up, buy in additional skills, exemptions, such as support for female invest heavily in new resources, or ask entrepreneurs, some support for small staff to work harder than they are businesses, environmental initiatives, already doing, you may be which are too complex to go into here. overstretching yourselves. Of course, More commonly, funders will rely on the a grant can be used to build up an blanket ‘de minimis’ provisions – in other organisation: but you should be honest words, the level at which State Aid is about the cost of the reorganisation, and deemed too small to make a difference. ability of the present team to manage it. Current levels are ⇔200,000 in any three year period, or a percentage of the If you are unsure whether your eligible funding that may vary from organisation or activity is eligible for region to region. a particular grant, it is always worth phoning the funder to discuss it before you spend valuable time on complex applications. If you tell the funder what you are trying to achieve then they will be able to tell you whether any of their funding streams are appropriate and still available.

18 3.5: Sponsorship local Councils for Voluntary Service should definitely be consulted, Sponsorship deals occupy a grey area particularly for more charitable between trade and grants; many grant funding. They will often be able to funders will ask recipients to acknowledge provide access to the ‘funderfinder’ Many their support, and there is a fine line local authorities or ‘grantfinder’ databases; have a European Funding between this and more commercial Officer who can give further advice sponsorship arrangements. in rural areas, Community Councils on this. can be very helpful; Where there is an exchange of this sort, look out for training courses on writing you need to think through the compatibility grant applications; of the brands; in many cases, the donor’s brand will enhance yours and you will approach local businesses for benefit from the association and the sponsorship, particularly those that are implicit endorsement. In others, though, the large and well established and unlikely ethics, reputation or record of the sponsor to regard you as any sort of competition. may be incompatible with the brand you are trying to establish.

Because sponsorship is a trade rather than a simple donation, it can give rise to VAT and other tax issues.

3.6: Looking for grants Grant seeking is a notoriously inexact business – some grants are much better - advertised than others. However, you can GOCO, a co operative seeking to run rail and bus services, was fortunate prevent your search taking up too much enough to obtain a grant from the - Co operative Fund to carry out a time by approaching a few key sources: feasibility study. A condition of the grant was that - the ’ Co operative Group s your local co­operative development logo should appear on all publicity. In

body, or social enterprise advisor; practice this suited both parties: it enhanced the credibility of Goco, while providing tangible evidence of the local authorities usually have officers - ’ Co operative Group s support to involved in regeneration or economic emerging community enterprise. development whose job it is to keep track of grant funding;

19 Your route through Chapter Four

Are reserves available for re­investment? Yes Go to: 6: Equity finance and share issues first No

Do employees in the organisation have a say Yes Are some or all in its running? members willing to defer wages? No

Yes Is there a large, loyal membership? No Go to: 4.5: Sweat equity first No

Yes Go to: Go to: 4.2: Downpayments 4.2: Downpayments and 4.3: Credit and 4.3: Credit

Go to: 4.4: Membership fees first

20 Supply chain finance

This chapter describes ways in which the trading relationships that you are involved in can actually be a source of finance for your growth. The goods and services that businesses buy 4 and sell have to be paid for; but paying as late as possible, and receiving payment as early as possible, can dramatically affect the finance required. In effect, good credit control can be a source of finance. Creditors are those to whom you have an ve obligation – you may ha m received goods from the y but not yet paid, they ma This isn’t a luxury all businesses have: it does not have to be repaid; , have lent money to you for someone at the end of the chain has to or they may have paid no interest or dividend needs to have wait for payment to trickle down to them. something t h at you be paid on the capital; yet to deliver. Most often they are the small businesses, sole traders and businesses in the most there is no need to negotiate terms competitive markets. with any external investor.

There are ethical issues here – it may be However, there are limitations to this in your individual interest to delay paying source of funds. It is of course only bills as long as you can while insisting on possible to raise capital to the extent immediate payment by customers, but this of the surplus generated and not paid Debtors are those who owe money is clearly a double standard that is hard to out to members and investors. If the eq or a uivalent to y n example b ou, for justify. Nevertheless, some consideration of enterprise gives the impression of giving ec ha ause the what can reasonably be asked of suppliers poor returns to members and investors, ve received good y from you but n s and customers should be part of your it may find it hard to attract more. paid. Deb ot yet ts arise result of an im as a business planning. The appropriate use pl or explicit con icit of credit control will depend very much on There is also a danger that if large tract. the business sector that you are operating levels of unallocated reserves are built in; there is certainly no harm in asking up, for example in a co­operative, it may customers and suppliers early on what tempt people to join the co­operative with terms they would be prepared to consider. the sole intention of demutualisation, or tempt existing members to discourage new members from joining. In other types 4.1: Re­invested surplus of social enterprise, large reserves can A related issue is the make it a target for hostile takeovers. possibility of reducing Obtaining capital by drawing on the finance requirements by profits earned from trade in previous borrowing or leasing goods rather than buying them. years is (at first sight) the most attractive This touches not only on way for any organisation to finance its questions of cash flow and growth, because: interest costs, but also the tax implications. For this reason it is discussed in full in chapter 7.

21 Reinvestment can reassure members that transform your finance requirements. the decision not to allocate surpluses as If full payment isn’t likely, consider Demutualisation dividends does still lead to real benefits for whether this is a service that would suit happens when members

of a mutual organisation them. As the co­operative uses the funds to a deposit, or downpayment; maybe

vote to change its rules grow and improve its services, they should there is a discount that can be offered access to gain individual experience the benefits, and approve such for customers who pay early. to its wealth. Only charities, community retention in the future. and benefit societies All this can be backed up with continual CICs have clear legal

protection against this. It is tempting to nominally allocate reserves, two­way communication – at the sales but actually refrain from making payments point, through a newsletter, through your so that the liquid cash can still be used – website – that reminds customers of your for example, by crediting the members’ ethos, identity and social returns. share accounts. However, if reserves are Customers like to be loyal, and to allocated in such a way that a contractual form long term allegiances with businesses liability is created then there may be tax that share their values; give them the implications – see 4.5.3. opportunity to do so, and reward their trust with honesty and transparency. Unallocated surpluses are profits that have 4.2: Downpayments and been retained for advance purchases 4.3: Asking for credit reinvestment in an organisation, rather than Co­operative relationships can and Knowing whether or not credit terms are ’being ‘allocated for the payment of should extend to the whole trading likely to be available is a valuable piece dividends to members environment; the relationship with your of information that stems from knowing or shareholders. customer in particular can and should your marketplace; if you aren’t be more than just a formal contract. A immediately aware of whether this is consumer co­operative – a village shop, commonplace, it should be a warning perhaps, or a food co­operative – will that you may be something of an innocent already be aware of this and working with abroad, and you need to spend some customers will already be an integral part time talking to people with longer of its planning. experience of the sector.

For a customer to pay in advance for a Credit terms can be anything from the product may well be no big deal for them, generous – three months or more – to the There are issues of especially if you sell many small items very tight (full payment on delivery). It is fairness in offering rather than a few large ones. It can even often tempting to go for the supplier that discounts to customers paying by standing order offer benefits, for example by allowing offers the best price, but it is wise to look or in advance: customers them to pay in regular, predictable for a supplier that might charge a little who do not have the financial resources to instalments or avoid carrying so more but with more reasonable terms. pay in advance may much cash. If you can make a case That having been said, many businesses be disadvantaged. for advance payment, do: it could are understandably wary of new starts.

22 The government itself some offers limited credit businesses, terms; some for example, prepare will VAT returns quarterly, Many new businesses fail at an early Some of the terms that might be which means that for a period brief stage, so suppliers are understandably available are: of time you have your customers charged VAT without nervous that bills will not be paid and having had to immediately discounts; over hand the promised long term relationship will the cash to the Small government. businesses can not materialise. access to seconds; VAT also pay only on those have sales that been fully paid end of line products; accounting ). for (‘cash While your business is stable extended ’ See also 8.1.2. credit terms may offer limited benefit, but returned goods that would if your business is steadily growing, it will otherwise be of little value; seem as though you are paying the bills goods provided for a trial period of a smaller enterprise. or on hire purchase. Suppliers can, if you cultivate a good If you can persuade the supplier that you relationship, be part of your wider can make use of their otherwise idle stock community of supporters. It is very much in – and perhaps maintain its value by doing their interest to support potential customers so – you could have the basis of a good PAYE and NI payments and help them to expand their business. are reciprocal deal. usually made monthly but these can also be paid quarterly by small businesses if the monthly PAYE/NI payments be would on average less £1,500 than Case Study: per month. Brighton Rock Housing Co­operative This Co­operative was first established in 1997 as a short­life housing co­operative. ‘Short life’ means that it takes over properties where the owners are unable to make the improvements needed to obtain a commercial rent. The co­operative has a licence to occupy them for a fixed period of time, which can sometimes extend for many years. The owner of the three terraced houses used by the co­operative (Brighton and Hove City Council) benefits because the buildings are being looked after, and the co­operative has access to properties without the need for large scale finance. Makers is - a co operative consortium of craftspeople in and around Taunton. It has a shop in the town where the goods produced by its members are on sale. Conventionally, a business of this sort would have to buy the stock before it could put it on display in the shop window. However, ’ Makers members provide the stock on a - -sale or return basis. A fine display is possible without having to be financed.

23 Some of these relationships will be formal, 4.5: Sweat equity others will be informal and relaxed. Ipswich Food - Co operative Sweat, or work, equity may be the most to pay Informality is understandably preferred asks new members significant early source of finance for the a £12 joining fee. Dalnavert by many. But formal terms and written Community Co - operative businesses that are the household names agreements have the great merit of purchased a 150 acre farm in of today. Put simply, they got started 1983, and asked its members avoiding ambiguity, and can be referred to pay a £2000 because the people who were working at the time to later when memories have faded. joining fee. By contrast, the the hardest were not expecting to get Co- operative Group (the largest co - operative in the paid much, or anything, until much later. UK) still asks for only £1. It is common for small businesses to be 4.4: Membership fees run almost as a labour of love, and with Membership organisations, whether hourly rates (if they are calculated at all) they are made up of customers, workers, well below minimum wage. suppliers, service users or a mix of stakeholder groups, can raise some Tensions between founder members of their finance from a membership fee. (with memories of early struggle) and This recognises the future benefit that they newer members (with expectations of a will gain from membership and the costs steady job) are not unknown; work equity to the organisation of administering provides an objective measure of the debt their membership. owed that makes negotiations less fraught. However, it is a complicated area, Some argue that Most organisations will ask for at least and needs considerable thought and

co- operators who escape £1 on joining, but a larger minimum preparation at the outset. Some of the the exploitation of ruthless employers only to impose shareholding can be specified, or a fee issues to be addressed include: worse pay on themselves that is a condition of membership (which have only - achieved ‘self labour can be recorded as either a exploitation allows the income to be recorded as ’ . Recording debt, or as a share of the organisation’s unpaid or underpaid work income). In the latter case it can be a one­ as a form of investment equity. The pros and cons of each are off fee, or a regular annual subscription. in the organisation makes discussed in 4.5.1 and 4.5.2, and the clear that is not the intention. It can also tax implications in 4.5.3; provide a Co­operatives should take care to ensure record for observers of the organisation of the level that the level of the fee is not so high that conventional businesses are often of commitment made by people who could otherwise benefit from started by people who own them its founders, which may encourage them to the co­operative’s services are excluded. outright. If they add to the value of the offer support. business they have enriched themselves Higher annual subscriptions are most no less than if they were salaried. This appropriate where members are is not the case for a socially owned expected to get a long term benefit from business, and there is no direct the organisation’s services, and those connection between the number services are only available to members. of hours put in and the eventual worth of the business. Instead, a realistic value must be negotiated;

24 Many organisations seek to include and These details need to be in a written work with the poorest in society. They agreement drawn up before the work may well be unable to accept deferred begins. Instead of a regular schedule payment. In these cases work equity of payment, there might be a ‘trigger’

may prove to be incompatible with the for the payment – for example ‘when You could use an organisation’s mission; the co­operative makes a profit’, or ‘when amended loan the co­operative has a turnover greater such as co­operatives are often started by teams agreement, 4. than £30,000’. the one in Appendix of workers, and it may be divisive to ask some of them to accept work equity but An alternative is to not record hours of not others. A fair and voluntary work, but instead look at the product of arrangement should be negotiated; that work and place a value on it. It is social enterprises hold assets in order difficult, however, if there is no obvious to achieve their mission; common monetary value, or if several people have ownership co­operatives build up worked on one thing to varying degrees. indivisible reserves for future members. In reaching an agreement on how labour There is likely to be a tension between should be valued, all parties should UpStart Services Limited the desire to reimburse founders on the bear in mind that some degree of as ’a - workers formed co operative providing one hand, and protect the assets of the approximation is probably inevitable. support and advice other - co operatives. to A problem with these debt­based years, In its early organisation (and hence its mission) on it had few customers limited and the other. Payment of work equity could approaches is that as they accrue on income; staff very were paid poorly, if at all. be triggered by the achievement of the balance sheet they could make the detailed However, timesheets from were kept agreed targets. organisation seem highly indebted; it day one, that allowed co - operative the to track may even make it hard to recruit new its each year unpaid labour. This members when they see the debts that a substantial did create liability on the accounts, but funders 4.5.1: Historic debts they will be paying off. Limits should lenders and accepted that manageable it was be agreed early on to prevent the because Perhaps the simplest method is to record be repaid - it would not until the co operative obligation becoming too onerous. could the hours that are worked unpaid, and afford it. Five years the - co operative after agree a date by which they will be paid. was established, it refinanced with a loan and Pay and conditions in the organisation paid all the work equity at the 4.5.2: Shares for work more generous may well improve over time: it would be hourly rate that was then in effect. wise to agree to what extent the value of The very term ‘sweat equity’ suggests those unpaid hours will increase in line another way of managing this deferred with paid hours. The hours should be payment; by issuing shares in the recorded in sufficient detail that in the enterprise to the workers in lieu of cash. future there will be no difficulty accepting that all the hours that were worked in the In order for this approach to be followed, past were genuinely of value, and that the the enterprise will need to have a suitable worker was in some way accountable for legal structure that allows shares to be what they did. A payment of interest could issued to employees (and in the case of be made to compensate the worker for co­operatives, converted if the holder not having had access to the funds. ceases to be an employee). See chapter 6.2, which describes the different types of

25 share that could be used and the legal It may be that the payment of sweat structures that can use them. equity does not relate to an employment relationship – for example, someone Care should be taken to reassure anyone may have produced on asset for the that has invested in the organisation using organisation for sale in their own time, shares that the work equity represents and not as an employee. That might mean Some consumer co- operatives introduced real value that the organisation would that PAYE doesn’t arise, but the earner employee share ownership otherwise have had to pay for. They may should still declare it as self­employed schemes that allocated shares

on the basis of the number otherwise be concerned that their stake in income once they have received cash of hours worked. The ‘free the organisation has been diluted. or any other readily convertible asset. shares’ were eligible for tax relief provided that they

were retained for a minimum This is a complex area, and approval Others used period of time. a different approach; 4.5.3: Unpaid labour and taxation from your local tax office, or advice from ‘partnership shares ’ could an accountant should be sought at an a salary You might think that if no cash has been be gained through early stage. sacrifice, so that shares handed over, no tax needs to be paid. were issued in lieu of pay.

Again, the tax reliefs made That is not necessarily the case. It is in this an attractive option fact usual to include the value of shares even though the shares 4.6: LETS, Time banks and with pay when calculating PAYE. were fixed at a value of £1. alternative currencies However, there are some cases when this is not necessary. Many people around the country are now, or have been, members of a Local The issue is whether payments are made in Exchange Trading System (LETS). Along the form of a ‘readily convertible asset’. with time banks (which are similar, but What this means is if you are not paid in a bit more specialised to encourage cash, but you are given something that volunteering) these innovative alternative you can turn into cash quickly, then tax trading systems have created local and NI should be paid as if cash had currencies to enable trading that might been paid. If not, tax is payable at the not otherwise take place. point that it becomes readily convertible. Be warned that it is not always obvious The genius of LETS is that rather than what is and is not readily convertible. being tied to scarce resources (such as central bank reserves) it is based on a Promises to pay after a period of time, promise by the community to provide or on fulfilment of certain conditions, are an appropriate amount of labour on taxable only when the payment falls due. demand. That means that the currency Transferable shares are not considered to can be brought into existence as required be readily convertible unless they can be – the more trades that happen, the more traded on a recognised exchange; and all currency is issued. It is not scarce, so no shares can benefit from certain tax interest is charged, and no one ever has exemptions under an approved Employee to wait for payment. Share Ownership scheme.

26 The downside, of course, is that not 4.7: The bottom line everyone is a member of LETS, and What effect will these have on the bottom so the goods and services you can obtain line – the financial accounts that your are limited to a very local pool. Often they co­operative prepares? are not the things that a new organisation really needs to get started. However, there Advance payment by customers, late are some things that LETS quite commonly payment of suppliers and deferred wages does well – hire of common tools and are all promises to pay or deliver that must equipment, for example, work parties be kept: that means that for all the good made up of local unskilled labour, or they do for your cash flow, they will be surplus veg from allotments. very visible on your balance sheet as creditors ­ i.e. amounts owed to others If you can spot something useful, and by your organisation. you are willing to commit to being part of the trading community for the long When you accept an advance payment term, you can use LETS as a kind of zero for your services, you are obliged to give interest credit. something of that value in return. You might make a profit on that sale; but until The taxation and accounting implications the trade is completed, that profit will not of LETS are notoriously unclear, and such be visible in your accounts. definitive statements as have been made largely relate to income tax and benefits If you have undertaken to reimburse rather than company taxation; but we can sweat equity only in the event of certain say that if your LETS account achieves a conditions being met (the ‘triggers’ positive balance as a result of selling the discussed in 4.5.1) then the position goods that you normally trade in partly or is a bit more complex. You will have entirely for LETS credits, then this may well to make a judgement as to whether the contribute towards taxable profits and you condition is likely, or intended, to be should discuss the matter with your local met within the next year (a current tax office. liability); eventually but after more than a year (a long term liability); or not at all, in which case it need not appear. You will want to take advice from an accountant if you are at all uncertain.

27 Your route through Chapter Five

Will the business be able to make regular payments? Yes Can the loan be secured on durable No assets? No See 5.5: Will a CDFA offer an No Yes unsecured loan? No Are members or supporters willing to

lend money? Yes Will members or supporters provide personal guarantees?

Go to 5.4: Security and collateral Yes No Go to 5.4.1: Personal guarantees Could they be members of a co­operative or community benefit Go to 5.4: Security society? and collateral Is the finance needed for property? Yes

Go to 6.2.1: No No Yes Withdrawable shares

Go to 4: Supply Go to 6.9: Go to 5.10: chain finance Property leases Loanstock first

28 Loan finance

Loans come in all different shapes and sizes, for all sorts of different purposes. Typically, their features will include the following: a rate of interest, possibly varying but more commonly 5 fixed; a schedule of repayments, at the end of which the loan and all interest accrued will have been repaid; and penalties on default, which may include the loss of any goods or assets that you have offered as security.

There are many different kinds of lenders, Borrowing money means that when the and the best will work with you to help worth of the organisation is calculated, your organisation succeed and be willing loans will all appear as creditors to consider alternative repayment (liabilities), dragging down the value schedules and refinancing if difficulties of the organisation and advertising to arise. Also, they will go through your anyone looking at your accounts that a business plan carefully to ensure that there good chunk of your future earnings (or is no great chance of default and that the even your present assets) are spoken for. loan will do good things for your Borrowing is understandably sometimes organisation as well as for the lender itself. resisted by members concerned about their obligations. This scrutiny can be frustratingly slow and some organisations may struggle to present their financial plan in an 5.1: The benefits of debt acceptable form. This can make Nonetheless, there are many good things borrowing from friends and supporters to be said for loans as a form of finance. more tempting. However, meeting the They are regular and predictable. When requirements of a bank is a discipline that they are paid off, they are gone for good encourages careful planning, and can in and you are free to start contemplating itself improve your chances of success. the future with a blank slate. When there is a real win­win relationship, and both There are still a few that show an you and your lender can clearly see that unhealthy, predatory interest in your you will both profit from the arrangement, collateral (the security that you forfeit in the the availability of the finance will be event of a default) and less in your actual unproblematic compared to hunting business plan. This type of lending may down grants or investors. seem to meet an urgent need, but should be avoided nonetheless.

29 Where there is a competitive market for tax. Less than two would indicate that a that An organisation loans, you can be confident that you are great deal of the profits from trading are has borrowed £12,000 and has funds of its own paying no more for the finance than is doing nothing more than paying the

(perhaps from share necessary – lenders cannot make unlimited interest on debts (less than one, of course, capital, or perhaps from accumulated profits) of windfall profits at your expense. Loans can would mean that the organisation was

£2,000 has a debt/equity be provided by businesses that are actually making a loss). However, what ratio of 6:1,- (600% or you could say debt is 86% of ethically driven or mutually owned constitutes a suitable gearing ratio is very capital employed). That themselves. different for different businesses – what would usually be considered very high. is normal in one setting would be Should you wish to acquire a durable considered extreme in another. And it asset such as land or buildings, you may is possible that an organisation might well be able to spread the cost over not be borrowing enough. decades, making something very expensive quite affordable. The productive If there are opportunities to grow a power of a good piece of equipment is profitable business activity, and the often large compared to the loan organisation is confident that it will be repayments over the years of its life. In able to cover repayments easily, adding short, loans can really open doors and debt finance will help it meet its social enable you to work in the places and with objectives and serve its community better. For example, an the tools that you would really want. It would be a mistake to set gearing too organisation with an operating profit before low: debt is sometimes called ‘leverage’ interest and tax of because it magnifies the spending power £3000 a year, which is paying out £2,400 5.2: Gearing – the measure of your organisation’s own capital. a year in interest would of indebtedness have interest cover Some equity investors like to see judicious of 3000/2400=1.25. Businesses, like people, are careful not to use of debt; if the enterprise is getting a borrow more than they can afford – but it return on capital higher than the can be hard to establish where the limits anticipated interest rate, replacing some are. The issue is known as ‘gearing’ and equity with debt will concentrate profits the measure that is most commonly used is on a smaller number of investors. Pressure the ratio of debt to equity. A ratio of 1:1 from investors to do this should be resisted or 100% (as much debt as equity) is not if it would make the business unstable. uncommon. A highly geared organisation is at risk because it has to make substantial However, even if you don’t issue shares payments of interest until the debt is a similar benefit can be seen in retained repaid, with little or no breathing space. profits: assuming that there is plenty of scope for profitable activity, combining A less common measure of gearing is reinvested reserves with a loan allows interest cover, which measures the number you to build up those reserves faster. of times that interest payments are ‘covered’ by profits before interest and

30 There are some questions that can help so lower interest. Mortgages will with assessing an appropriate gearing normally only cover part of the purchase ratio. Start with the assumption that the cost; this is governed by the loan­to­value debt equity ratio should be around 2:1 ratio, which is typically around 70%; – or better still, draw on examples from top up loans. Sometimes used to cover similar businesses in the same sector. the gap between purchase price of a property and the mortgage, they are Social and co­operative enterprises secured using a ‘second charge’ and/or do face very different issues. They may personal guarantees. Typically medium reasonably have higher gearing if: interest rates and repayable over ten or some of their debt is in the form of fifteen years; equity­like securities such as loan loans for plant or equipment: may stock (see 5.10); be closely tied to the particular item there is grant funding or supporter or provided by a company specialising goodwill which, although it is not in the supply or finance of these items. technically equity or reserves, can May be repaid over a little less than also be used to cushion the business the life of the asset, for example five against shocks; or seven years; they are not seeking anything more loans for working capital: working than modest profits, and are taking capital refers to funds that can be correspondingly low risks; spent in labour and services. Spending money in this way may build up skills their business is largely about the and knowledge, goodwill, public profile management of property or other and business relationships. These are durable assets; all worthwhile, but it can be hard to inputs from volunteers make overheads accurately assess their value or use and running costs unusually low. them as collateral. For this reason, such lending is regarded as more risky, and may have higher interest and shorter 5.3: Different forms of lending repayment periods of one to three years; Having thought it through, an organisation overdrafts: a facility to borrow as may be clear that loan finance would be required up to a limit, with payment a sensible and effective part of its finance of interest but no repayment schedule. package. There are a number of different Generally limited in size, flexible in types of loan that might be available: application, but quite expensive with higher interest rates. They are usually the mortgage: a loan secured on repayable on demand, and should not property, typically over a long be used for long periods. repayment period of twenty years or more. Regarded as low risk, because of the durable nature of property, and

31 What is secured? What happens What are the on default? limits to liability?

Personal guarantee The funds belonging The guarantor will The guarantor will to a third party, be asked to pay the have set a maximum either individual outstanding debts, value of their or corporate. shared fairly among guarantee – but see all guarantors. 5.4.1.

Legal charge, Named, saleable The lender can require If the assets don’t or fixed charge items; usually plant that the named items sell for their full value, and equipment, but are sold to pay debts, the lender can force can cover goodwill or take possession of the sale of more of and intellectual property. them directly. them until the debt is cleared.

Mortgage Land or property. The lender can repossess If the property sells for the house, taking the keys more than the value of and selling or letting it to the debt, the surplus clear the debt. must be returned to the borrower.

Floating charge Unspecified assets The lender can require Assets will be sold until of the organisation. that assets are sold, enough funds have and can even seize them been raised to repay if necessary. outstanding debts.

Unsecured Nothing, other than the Funds can be sought The business can be organisation’s funds. through the courts. forced into liquidation if it is unable to pay.

32 5.4: Security and collateral these days, and individual guarantees are preferred. Different types of security carry very different penalties in the event that the However, since some guarantors may borrower defaults, or fails to comply with fail to pay up, the total value of the the loan agreement. It is important that the individual guarantees may exceed 120% security used is appropriate for the of the sum borrowed. Guarantors are organisation. usually expected to provide evidence that they have the liquid funds readily available without excessive hardship, and 5.4.1: Personal guarantees sometimes are even asked to place some Personal guarantees can be a useful way of the funds on deposit with the bank. of turning the community of support that many social enterprises and co­operatives Typically the lender (or hirer – guarantees enjoy into increasing confidence for are sometimes used for leasing, and lenders. However, they can also defeat referred to as ‘surety’) will provide a legal the purpose of the organisation by asking agreement to be signed, and the terms individuals who can’t share in the profits should be closely checked. When are to nonetheless take a share of the risks. guarantors released? Is it possible to Furthermore, the all­or­nothing nature of the provide replacement guarantors in order support really makes them only suitable for to release those who no longer have any people with substantial wealth to fall back contact with the organisation, or replace on – not something that the stakeholders of guarantees with fixed charges later? most community enterprises can count on. Can the same guarantee be used for additional borrowing in the future, or Where more than one person signs a will it expire at the end of the loan term? guarantee, it will be expressed as a How much time is allowed for the ‘joint and several’ guarantee. This means guarantee to be paid after the ‘trigger that the bank can demand that each event’ that makes you liable? guarantor pay the full outstanding amount of the loan or any lesser sum at the bank’s Guarantors can be rewarded with a discretion. Though there is a presumption modest payment of annual interest on that the people signing it will have equal the liability to which they are exposed; responsibility, if for whatever reason some in that case, a separate agreement will of them default, an unexpectedly high be needed between the guarantor and the burden can fall on the remainder. Joint borrower. More commonly however, their and several guarantees are unusual in the involvement with the enterprise is held to social and community enterprise sector be reward enough. The borrower should

33 not leave the management of guarantees Co­operative and Community Finance to the lender: they are best placed to (CCF) was set up to provide finance ensure that contact details are up to date, for co­operatives, and has proved and all guarantors ready at any time to very successful in raising investment for honour their obligation, so that the this purpose. They make small (up to burden is spread as evenly as possible. £50,000) loans to co­operatives and community enterprises from a number of different funds. Unlike some banks, 5.5: Lenders with a social purpose they do not favour the use of personal guarantees, seeing them as favouring When we think of lending, we think of people from a privileged background; banks. The big names on the High Street so they make much more use of floating do indeed have well developed systems legal charges. CCF also manage funds for lending to businesses, and there is on behalf of other organisations such as no reason why social enterprises and the Co­operative Fund. co­operatives should not approach them. However, local branch managers are often Many CDFIs are locally based (like unfamiliar with the legal structures and can Wessex Reinvestment Trust, or Aston struggle to accept that social ownership Reinvestment Trust) or specialists (like makes some forms of security difficult or Radical Routes); go to impossible. They also may not see the www.cdfa.org.uk/ for further details value of social aims in making the business of CDFI’s operating in your area. case more robust. Building Societies are also potential A different attitude is found among lenders to social enterprises, most of community development finance initiatives all when the loan is for the purchase of (CDFIs). They are specialists in lending for land or property. Smaller, local building the benefit of the community, and are very societies that are in touch with their mutual comfortable with trading for a social heritage may be the most supportive, and purpose, and familiar with the legal there are one or two specialists – the structures employed by co­operatives. Ecology Building Society has established They are diverse and often limited in their a great reputation for supporting scope, but do include some large banks eco­construction projects. with a nationwide remit. Triodos Bank is in fact international, with its roots in Holland, and lends to a wide range of 5.6: What needs to be in place projects including organic farming before applying for a loan businesses, housing co­operatives and renewable energy projects. Charity Bank The value of a business plan was noted was set up to provide finance to the in chapter 2, but when applying for a charitable and voluntary sector, but has loan it is absolutely essential. A lent to a wider range of enterprises than responsible lender will regard security its name might suggest. as necessary, but not sufficient. They will be more concerned with whether there

34 Case Study: Unicorn Grocery Unicorn Grocery is a worker co­operative fair and sustainable trade – the based in Manchester that’s been in co­operative trades preferentially in business since 1996. The co­operative products that follow a fair trade ethos. manages a store that sells local, organic, It also seeks to educate its customers fairly­traded and wholesome food about the benefit of fair trade, and products. The store also offers a selection wherever possible it lobbies for the of environmentally friendly baby products, use of reusable packaging; cosmetics and household goods made solidarity in co­operation – Unicorn from natural ingredients. Grocery aims to support other ventures, including social and community Since it was established, Unicorn Grocery enterprises, with similar ethics. It has grown considerably in size. Its donates 1% of its wage costs to a membership has expanded to over 50, fund to provide this support; and its annual turnover has increased from £3,500 to around £3.5million. As In 2005 the owner of the co­operative’s well as paying a flat­rate to its staff, the rented store wished to sell the property. co­operative also donates around 5% To avoid losing its premises and ensure its of wage costs to local and international long­term sustainability, the co­operative projects that relate to its clearly defined raised the finance required to purchase ethics and principles. These include: the property itself. This was achieved through £350,000 raised from loan stock secure employment – the co­operative bonds bought by customers and loans is committed to providing secure provided by The Co­operative Loan Fund employment for its members that in partnership with Co­operative & enables them to collectively control the Community Finance. business; equal opportunity – Unicorn Grocery More recently Unicorn Grocery has reserves some of its employment remodelled the roof of its premises to opportunities for people with learning create a natural environment featuring disabilities; small low moisture plants, wetland, and brownfield that will create a variety of wholesome healthy consumption – the habitats and improve the building's co­operative is dedicated to trading insulation. The co­operative hopes that the foodstuffs that have undergone minimal roof will also become home to the Black processing; Redstart – a rare breed of bird that only breeds in cities.

35 is a business plan that proves beyond Banks, for the most part, do not see it as reasonable doubt that the business will be their business to take risks. The business able to service the loan without difficulty. plan should all but eliminate the element of chance to find favour. That having All lenders will question the details in the been said, a good lender will also be business plan before deciding whether to prepared to put some time into working make a loan. Some of the danger signs with the borrower and helping them to that they will be alert to include: make improvements to the plan and resolve areas of uncertainty. is demand for these products vulnerable to changes in market conditions? You will also need to provide details of your legal structure, and it is important are sales forecasts speculative, or based to make sure that any unresolved issues on hypothetical customers, rather than with the governing document or other being based on confirmed orders? organisational matters are concluded are other businesses like this generally before seeking loan finance. geared rather lower? is depreciation fully accounted for 5.7: How will it change your and realistic? organisation? is the business dependent on occasional An organisation with a loan is, in some large sales? ways, different to one without: it should would additional investment be soaked have a life of its own, not depending on up by the organisational costs of growth, one person to drive it forward. Repayment or by high overheads? schedules over several years mean that it should have a regular, steady level of are returns on investment low? activity, not working in fits and starts or is there a lack of trading history, prone to strong seasonal fluctuations. or is there a new, untried product? It is not optional to be busy when its members feel like it and dormant the is the profit margin quite narrow, with rest of the time, a continual obligation costs of production accounting for most is needed. This is, however, what all of the sale price? businesses should aspire to, because are suppliers unspecified, and costs otherwise they are liable to be just a flash based on estimation rather than quotes? in the pan and of no lasting consequence. are there necessary permissions or The relationship with the lender will licences that are yet to be secured? be one of the most important relationships are key personnel yet to be recruited, you have, beyond your staff and members. or is project management neglected? They may well ask for higher levels of monitoring and reporting than you are

36 used to, but this can be the trigger to A qualification loan will normally make that same information available appear as a long term creditor – though to your governing body, members and depending on the conditions of the loan, stakeholders. That in turn can make it may move into current (short term) your organisation more intelligent liabilities if there is an expectation that it in its planning and its ability to will need to be repaid in less than a year. anticipate problems. When a member leaves it is normally hoped that their loan will be repaid, and that this will be financed either by the 5.8: Qualification loans qualification loan from an incoming new member, or the increased reserves of the A qualification loan is another way in organisation, or the reduced costs of being which members of the organisation can be a smaller organisation. However, it may asked to provide start­up finance for the be prudent to retain the power for the organisation. It is a simple loan, typically governing body to delay repayment until carrying little or no interest, with some the organisation is comfortably able to features more commonly associated with afford it. equity. For example, a qualification loan may not have a fixed repayment schedule, but instead may give considerable 5.9: Loans from supporters discretion to the governing body to determine when and how they are repaid. Of course, other supporters as well as members and banks can make loans, In co­operatives, the third co­operative and they can be made with a wide variety principle of equitable contribution of of terms and conditions. Although it is capital should apply. All members should possible to make such loans secured, be under an equitable obligation to make it should only be considered where a qualification loan, but the size of the one person is the main lender for the loan may vary depending on the size organisation and they are highly trusted. of the members’ transactions with the If a bank would not make the loan, co­operative. So each year, the scale it is likely to be because they were not of a member’s involvement will be persuaded that repayments would be reassessed, and it may lead to the loan maintained, and so such security would being reduced, and a repayment made, be at some risk. Legal charges are or the loan being increased. powerful tools, and it is safer to leave them with reputable and professional organisations that will not use them arbitrarily.

37 A rate of interest should be set with from banks and professional lenders but reference to typical rates in the financial from friends and supporters (possibly marketplace. A social enterprise or businesses, but more often individuals). It co­operative should not agree to rates usually has no schedule for making regular

Simple model loan of interest greater than would normally repayments – just a date on which the loan no security) agreement (with be necessary to secure the finance; it stock ‘matures’ and must be repaid in full. Appendix 4. – see would in effect mean that the assets of the It is unsecured and so embraces an organisation were being used for private element of risk. benefit. The governing document of the borrower may set limits on interest Because of the potential risks, it is payments. The term of the loan should be preferable to spread the loan among a shorter than it might otherwise be, as the number of people – it needn’t be the same circumstances of an individual can change amount lent by each person, but that is a lot faster than those of a bank. quite common because it is obviously seen to be fair. The investment is placed with Supporters can be offered a choice of the organisation for a fixed period of time; interest rates, from 0% up to the equivalent it may carry interest and (subject to certain Bonds are similar to loan stock – in fact, the two of a market rate. Many social enterprises conditions) it may be withdrawn earlier terms are sometimes used find that supporters will choose 0% than the closing date. The lender/investor interchangeably – ’ but ‘bond is often used to refer to or a low interest rate because they does not get any decision making power more complex arrangements, want to support the social aims of in the organisation. for example debt securities that can be converted into the organisation. equity shares. It is quite a good idea to ‘stagger’ the A written loan agreement is essential, dates of maturity so they don’t all fall at even if you are borrowing from a friend. once ­ this will also allow you to offer Always remember that two copies of the different terms to different lenders. Many agreement should be signed, so that schemes state that repayments can be each party has one to refer to. Some made early, and may suggest appropriate organisations go beyond their immediate ‘periods of notice’ for different amounts. circle of supporters to invite lending from However, the conditions should always the public. You should be very cautious in make clear that such early repayments the way this is advertised. See chapter may be suspended at any time if the 6.6.2 for further details. governing body of the organisation feels it would be imprudent.

5.10: Loan stock and bonds Loan stock is ideal for a highly targeted ethical investment because it does not Loan stock is something of an anomaly in require legal advice to issue, and so is the world of lending: it is a form of debt, available to smaller organisations (though for sure, but it has many of the features of large or unusual issues should carefully a risk investment. Typically, it comes not

38 assess whether legal support might be a maximum amount that can be issued; necessary). There is no danger of the a clear date of maturity (sometimes investors having control over the project, referred to as the ‘closing date’); and the stability of the investment can provide a great deal of support, especially a rate of interest (or a clear statement to a new enterprise. that no interest is payable). This rate of interest could be whatever is necessary Loan stock is repayable in full when it to raise the investment and whatever you matures, which means that the issuer does feel is possible within your business plan. not need to budget for regular repayments It could be paid in the form of further before the activity being financed has loan stock, if that is clear in the begun to generate profits. It is also conditions of the issue, with the same unsecured, and this all adds up to a closing date. Potential investors can be package which is more attractive to the offered a range of interest rates to borrower than the investors. For this choose from (including zero interest). If reason, it is usually most appropriate to there is strong support for your social approach members, friends, relatives, aims, investors are likely to choose the committed supporters and others with lower rates. a very strong interest in the project. Some organisations have linked interest At the same time, it does offer some to inflation or base rates, but this is benefits to the investor ­ a high level of complex and risky. You can allow accountability (since you know exactly yourselves to vary the rates each year, where your money is invested and what it but whatever you decide spell it out in is being used for), interest to prevent your detail in the conditions. If interest is set too investment losing value, and a close low, lenders may find it unattractive; if it personal connection with the project. is too high, you may find it an expensive form of finance. It should always be clear It is used mostly by Co­operative and to investors that it carries no voting rights. Community Benefit Societies (for example, Make sure that when the investment housing co­operatives) who are exempt is made, payments are made to the from the strictest legislation on soliciting organisation and not to individuals – when investment. Companies registered at handling other people’s money like this Companies House should not, in general, there must be no possibility of fraud. advertise loan stock schemes to the public The purchase of loan stock can look like without legal advice. More details about ‘deposit taking’, which is a regulated the legal promotion of loan stock and activity (see 6.6.2). In order to avoid other ‘securities’ is provided in chapter breaking the law, you need to ensure that 6.6.2. Each ‘issue’ of loan stock you do not make repeated issues of loan should have: stock with similar conditions. If in any doubt, take legal advice.

39 5.11: Debentures Because debentures are more complex than loan stock, but depend no less on Another example of a form of loan that trust, they are generally used by larger, behaves a little like equity is a debenture. well­established businesses. The fact that In some ways it is similar to the loan stock they are so similar to equity investment in described in chapter 5.10 – in fact the the level of risk, and the manner of term ‘debenture’ actually refers to the delivering returns, makes them extremely signed agreement, and the finance itself useful for companies limited by guarantee might well be referred to as loan stock that cannot issue shares. However, as they or a debt security. It is a long term debt, A simple unsecured are ‘financial securities’ the restrictions debenture is provided in bearing interest at a fixed rate, but unlike around marketing and promoting these Appendix 4 – for more loan stock: complex debentures, schemes are no less onerous (particularly seek legal advice. it can be transferable, allowing it to be if the debenture is transferable); see 6.6.2 sold to another person; for further details. it is usually secured with either a fixed charge on a specific asset or a floating 5.12: Personal liabilities as a result charge; of borrowing it has no closing date, but instead is Limited liability is one of the main features repayable on dissolution of the issuing of incorporation. Many take it to mean organisation, or if the asset it is secured that debt (the most common liability that on is disposed of; you might want to be protected from) interest may be fixed (usually when it is cannot become a personal responsibility. linked to a specific asset) or dependent on the success of the business; Up to a point, this is true. Provided you behave honestly and don’t sign any debenture holders can organise agreement to the contrary, you will not themselves to influence the organisation normally be liable for the debts taken (for example approving rescue on by your organisation. However, there packages), without having a vote as are exceptions. In the following situations shareholders would normally do; a director may be held liable, not only the debenture is subordinate to other to the organisation but to a third party creditors, so debenture holders are such as a lender: taking a greater risk. However, debenture holders will still be paid before any shareholders.

40 illegal or ultra vires acts. If a director party to a fraud. If the claims made to does something that is illegal, such as a lender at the time a loan is made are accept stolen goods and then resell false (whether because of negligence, them, they could be personally liable deceit or ignorance), the individual to repay the organisation if it is required directors making those claims are liable. to repay the true owner. An ultra vires act is one where the organisation does Remember, most lenders don’t like risk – if something which is outside its powers or they did, you would be more likely to read outside its objects. This is unusual, as about them in chapter 6 – so they only let most governing documents include a go of their money when they are satisfied general enabling power; it is only likely that steps have been taken to protect them. to arise in the context of charities; fraudulent trading. If the organisation continues to trade when one or more of the directors know it cannot pay its debts as and when they fall due it is very likely to be trading fraudulently. If it is then put into liquidation, the Court can make an order for directors to become personally liable for the debts of the organisation. In these circumstances they can be debarred from being a director for several years; acting without authority. If a director, for example, were to enter into a loan when in fact the organisation’s governing body had not agreed to doing so or delegated the authority, the director could become personally liable. This is equally the case if they gave the impression that the loan was to them personally while they expected the organisation to service it in practice;

41 Your route through Chapter Six

Are you seeking in Yes excess of £2M? Go to: 6.5.2 No Companies (PLCs)

Looking for less than Yes £100k or approaching Will investors have any fewer than 100 people? voting rights?

Yes

No Will you be democratic – one member, one vote? Yes

No Go to: 5.10 Loanstock or 5.11 Debentures No Will investors, as opposed to members using your services, No have limited voting Yes rights?

Go to: 6.2.1 and 6.4 Go to: 6.2.1 Shares and co­operation Go to: 6.2.2 Company Withdrawable shares (multi­stakeholder Transferable shares co­operatives)

42 Equity finance and share issues

Equity comes from the Latin word for fairness, but in the field of finance has come to mean one’s fair share of a joint enterprise. It covers the various ways in which a ‘share’ of an 6 organisation can be allocated to an individual. These shares can be of many different types – they can be transferable (typical of private, profit­making business) or withdrawable, and they can be fully at risk or have their value protected in some way.

In general, having partial ownership of that mimic some of the features of equity. a business means that to some degree at However, there are many reasons why least the value of your holding depends they may still not be adequate: on the worth of the organisation and the because bonds and loan stock proportion of the issued shares that you grant no rights of participation in the hold, and continues to do so indefinitely. organisation, they do not build a sense of community and membership. This The term is not well understood by many can be very important to community people; others may understand it, but not enterprises and co­operatives; like the implication that the business is controlled by profit motivated owners. because debt must be shown It is often assumed to mean that an as a liability, it can appear that organisation’s founders can sell it to no­one is willing to risk their funds investors, who can sell it on again. If the on the organisation, which makes business has become more valuable it seem vulnerable; between sales, this will be reflected in because most loan stock and bonds increased share values, and the seller have a date of maturity, periodic makes a profit. This is, however, not re­capitalisation is necessary, which always the case, and organisations more creates unwanted pressure. focussed on meeting a social need will want to avoid such speculation. Equity, in the form of shares, is a secure, durable underpinning to an organisation, provided it does not inadvertently place 6.1: Distinctions between loans the wrong people in charge of decision and equity finance making or encourage speculative, There are a number of forms of lending, greedy behaviour. such as loan stock, bonds and debentures,

43 Companies have on occasion issued ‘redeemable ’shares which are similar, but this is very 6.2: Different types of shares governing body believes it is necessary to unusual and debentures are maintain capital stocks; there is no usually preferred for The rights associated with a share are this purpose. absolute right to withdraw. As there is no determined by the rules of the issuing need to find a buyer for shares, organisation, and any conditions or withdrawable shares are easier for non­ agreements entered into by the buyer and expert investors in smaller organisations. seller. Though they are very flexible, there are some typical forms that they take. One Withdrawals must be processed organisation can issue more than one type impartially, in the order that they would of share – they are known as different be due. The organisation cannot prioritise ‘classes’ of share. one person’s withdrawal over another. rules Some societies ’ With the only route of exit for investors for withdrawable allow in to be reduced being one that would reduce the shares if the business 6.2.1: Withdrawable shares value may capitalisation of the organisation, losses; they suffers but Withdrawable shares are largely linked thought needs to be given to maintaining recover this value, the sum for never exceed to Co­operative and Community Benefit liquidity. There are broadly speaking were issued. which they Societies (formerly known as Industrial two options: and Provident Societies). They can ‘investor churn’ means that new normally be withdrawn on request at shareholders are joining as fast or the same value that they were bought faster than old ones are leaving; (traditionally £1). If the organisation is wound up, the shares are worth no more ‘reserves replacement’ means that than what was paid for them. They benefit accumulated profits are building up ‘Ordinary ’ share capital from exemptions to the rules regulating the society’s reserves faster than usually means those shares that are most at share issues, which make them much share capital is declining. organisation risk if the loses money; easier to use (see 6.6.2 below). holders of ordinary shares are the last ones with a claim on the assets They are, however, full risk shares, 6.2.2: Transferable shares creditors and investors.after all other appearing ‘below the line’ on the balance Transferable shares can be sold to any sheet (see chapter 7 for more details company or individual, and so can on these accounting conventions). increase or decrease in value. There is no Withdrawable shares are not protected certainty over what that change will be, or by the Financial Services Compensation indeed whether any buyer can be found. Scheme and investors do not have access This uncertainty and potential for to the Financial Ombudsman Scheme for individual windfalls has made them less matters relating to those shares. Although popular in the social and community they are withdrawable, there is usually a enterprise sector. Liquidity means period of notice required and withdrawals the ability to turn shares can be suspended altogether if the into cash; a liquid asset is one that can or be sold redeemed quickly and easily.

44

shares are not listed If the is any exchange (there on There are normally two ways that the 6.2.3: Preference shares speculation that a some buyer can value a transferable share: social enterprise stock Just as some forms of debt can behave a may be formed i) what the track record of dividend exchange a the future), finding little like equity, some forms of equity can in The payments is like, and what dividends are buyer can be difficult. behave a little like debt. Preference shares might help anticipated in the future; ii) what share organisation providing a ‘matched differ from ordinary shares in that: by of the assets of the organisation holders bargain service ’ , though not this is still rare and of transferable shares can call on if it is they usually carry a fixed dividend, altogether reliable. dissolved. In a social enterprise, a buyer more like interest, which is paid before may also attribute value to the social any other dividend is allocated; if this aims of the enterprise. is added to the share balance rather than paid, they are ‘cumulative To avoid speculation and hostile takeover, preference shares’; the possible increase in value should not they may be withdrawable or come principally from access to the assets, (for companies) redeemable after but only from the history and expectation a fixed period of time; however, of dividend payments. This can be ensured they may also be transferable; by putting appropriate conditions on the shares, such as: there may be an option to convert them into ordinary shares after a a ban on investors voting on resolutions period of time; for the dissolution of the organisation; The possibility of they may have no voting rights, speculation dissolution clauses that require some or has led to the or limitations on participation; promotion of transferable all residual assets to be transferred to a shares being much more tightly charitable or asset­locked body; they may be paid before other shares regulated – see in the event of dissolution – in other 6.6.2 below. an asset lock such as those applied to words, their holders are ‘preferred’. CICs and Community Benefit Societies. Preference shares need to be carefully Transferable shares in Co­operative defined in the governing document and Community Benefit Societies carry of the organisation or in a shareholder identical voting rights to withdrawable agreement, with advance from a legal shares – one member, one vote. That is expert. They are usually used to bringing not necessarily the case in companies. in investors who want reduced risk and an opportunity to participate, but are prepared to defer repayment. They are usually only employed by companies.

45 6.2.4: Membership shares the wider use of withdrawable share capital, which is not subject to Of course, shares can be issued that are speculation; neither withdrawable nor transferable but are forfeited when the member leaves the social enterprises being unable to organisation. These are the typical form penetrate some sectors using debt alone; of the shares in most common ownership learning from organisations in other co­operatives. From the point of view of European countries that have issued raising finance, they are of limited worth equity without compromising their since there is no reason for anyone to hold principles; more than one; they rarely attract interest, though it is not impossible. However, community and consumer co­operatives if a co­operative attracts a very built up experience of issuing small large membership they can make numbers of shares to a large body of a significant contribution. people showing that finance could be provided by ordinary people; the emergence of a number of 6.3: Consequences of equity specialised social investors keen to In the case of conventional companies, obtain a more ‘balanced return’, the possibility of accessing the wealth supported by financial advisors with of the business through dividend or an interest in ethical investments. dissolution can mean that owners make the organisation increasingly The idea that a business should be concerned with short term profit. ‘proprietorial’ – controlled by its owners – For socially responsible entrepreneurs, is actually just a convention. Organisations this is not a desirable outcome. are best run by those who can most clearly see or experience the For many years it was assumed, not consequences of its actions. unreasonably, that this meant equity finance was quite inappropriate for Social enterprises have now developed co­operatives and social enterprises. increasingly sophisticated structures for This view has changed as a result of: separating ownership and control, and regulating access to profits. The aim is to acknowledge the risk taken by the investor, but keep the organisation focussed on its mission – not least by retaining a fair share of the profits to reinvest.

46 6.4: Shares and co­operation Whilst co­operatives will be one member, one vote, it is possible to have creative use Shares need not contradict the of collective voting to ensure balance in international principles that guide multi­shareholder co­operatives. co­operatives, provided that the rules under An indivisible reserve: which the shares are issued protect those reserves that are indivisible Principle 3: Fair contribution to capital cannot principles. be distributed, under and distribution of profits, with some any form, both during the profits retained for future co­operators. life of - the co operative and Principle 1: Open membership to all who during its dissolution. The terms of the shares would need to can make use of the co­operative’s services. include limits on dividends, to ensure that Someone may wish to invest in a reserves are built up in the co­operative co­operative’s shares, but not be a user and to ensure that rewards were no of the co­operative’s services. One solution greater than necessary to attract and retain is to widen the definition of the community investment. They might also reserve some from which the co­operative draws its profits for distribution according to use of users – for example, being a community the co­operative. co­operative rather than a workers’ co­operative – but this may defeat the If subscription of a substantial amount original purpose for which the co­operative of shares is a condition of membership was formed. for users of the co­operative, it should not treat some members differently to others Instead, it is possible for co­operatives or exclude a significant number of to have classes of share that have members by making membership very limited voting rights but allow unaffordable (offering a low interest withdrawable or transferable investments. loan from the co­operative to the member This creates a ‘multi­stakeholder’ to cover the purchase of shares might co­operative in which people with be one way of avoiding that). different stakes in the business can contribute in different ways. The retention of an indivisible reserve should be clearly specified in the rules, Principle 2: One member, one vote. and ideally protected with a regulated Conventional company shares convey asset lock. If there is no regulator, the voting strength in proportion to the rules could specify an ‘asset guardian’ number held, but this is not acceptable that is the ultimate beneficiary of the for a co­operative where small investors reserve if the co­operative is dissolved. are considered of equal importance to large ones.

47 Principle 4: Autonomy and independence. 6.5: Legal structures used Co - operatives often pay a The co­operative needs to be confident for share issues dividend to their members from that large investors cannot use their profits; however, this The actual mechanics of equity investment is quite different to the financial muscle to destabilise the dividends differs quite substantially depending paid to investors, co­operative. That might mean restrictions as it is based on the on the legal form used. It is wise to members on the proportion of share capital ’ transactions with the consider future requirements for share society. It is, in effect, that can be held by one person or a discount on internal finance at the point the organisation sales organisation, or a veto on the transfer rather than a return registers its legal structure. These are on investment. of shares to persons that the co­operative the main options available: does not approve of. And in the case of co­operative companies it might also 6.5.1: Co­operative and involve measures to prevent speculation on Community Benefit Societies the value of shares, most importantly by preventing non­users from voting on Co­operative and Community Benefit a motion to dissolve the co­operative. Societies (which were until 2011 known as Industrial and Provident Societies) are Principle 5: Education. corporate bodies with limited liability No great implications for equity that are the less well known alternative investment, beyond the opportunity for to companies. investors to learn more about the wider are no exact limits There to what rewards co­operative movement. They are currently registered by the in law as investors are legitimate, to ‘no Financial Services Authority (the future many understand but Principle 6: Co­operation between of which, at the time of writing, is being more than is necessary and retain co­operatives. reviewed). They are favoured for social to attract investment’ to suggest should be a Some co­operative share issues have purposes because of their inherently that there cap on interest payments greatly benefited from investment by other democratic nature (all members than a few points higher a co­operatives. This is helpful in forging have one equal vote each) and the the lending rate of

high street bank. close and supportive links, and a good limitations on the distribution of profits. way for successful co­operatives to use reserves for diversification. They come in two basic forms: the Co­operative, and the Community Principle 7: Concern for the community. Benefit Society (or Bencom for short). Again, it is important that the rules do not The difference is that while Co­operatives enable investors to pursue short term profit are self­help, mutual aid organisations, over the long term and the concern for the Bencoms are intended for delivering wider community, by limiting their influence on benefits, and may be charitable in nature. day to day decision making.

48 Case Study: Baywind Energy Co­operative Limited A good case study is the Baywind Energy HHL become a service company, which Co­operative Limited, the first of a series had a guaranteed contract to operate of large scale wind turbine developments the wind farm for five years; after that, managed by co­operatives under the Baywind could change the arrangement umbrella of Energy 4 All. Energy 4 All if it wished. As its resources permitted, is a secondary co­operative, and Baywind it went on to buy more plant from Triodos and the other projects are its members. in 1998. The private sector partners involved are Triodos Renewables plc and Energy 4 All was formed with the aid of Vindkompaniet, the Swedish manufacturer grant funding to help this and other wind of the plant. Unusually, the co­operative farms produce authorised prospectuses was formed at the instigation of the and secure planning permission; it would manufacturer – it is an arrangement that charge for these services, generating the they are used to working with in Sweden. profit necessary to invest in developing new projects. Initially, the finance was provided by Triodos, who formed a special This model proved effective in some purpose vehicle (Harlock Hill Ltd) with key respects; the autonomy of the local Vindkompaniet (Triodos having 80%). projects ensured that local communities However, local enthusiasm for a could see that profits were being co­operative proved to be present in ploughed back into their locality and gave abundance, and the the new co­operative them loyalty to the development. The raised £1.2 million finance with a share manufacturer made sales they might issue (aimed at, but not restricted to, the otherwise not have done, and had little local community) buying part of the difficulty exiting from the location overall development. The shares were as the well­financed co­operative took transferable, but also withdrawable after on more and more of the ownership. a period of time, so investors had good options for their ‘exit’.

49 Because it is easier to offer members a any case there are some important ways way to end their involvement, most rely in which organisations and individuals on the unique ability of the Co­operative wishing to invest larger sums can be and Community Benefit Societies to issue accommodated: withdrawable share capital, or simple there is an exception for organisations membership shares. that are themselves Co­operative or Community Benefit Societies; they can While both Co­operatives and Community invest more than £20,000. Benefit Societies can pay interest on withdrawable shares, a feature of the law is that this must not be the primary purpose 6.5.2: Companies limited by shares, of the society. Co­operatives must be including CICs and plcs carrying on a genuine trade or business activity, and Community Benefit Societies For share issues the company limited by must pay only modest compensation to shares is the traditional form, used by their members and keep their main focus countless businesses to agree the sharing on the benefit to the community. of risk in a joint undertaking. Experience with speculative investment ‘bubbles’ Co­operatives and Community Benefit led to a strengthened form of regulation Societies can both offer transferable for companies that wished to make their shares as well; however, Bencoms have offer of equity to the general public – an exemption from the regulation of the Public Limited Company, or plc. transferable share issues that co­operatives Today, most of the large businesses that generally cannot call upon, and the option dominate their sector use the plc format of a ‘statutory asset lock’ that will limit any to prove their worthiness to potential rise in value of those shares. Promotion of investors. To become a plc requires financial securities is discussed in more substantial resources (a minimum detail below. subscribed share capital of £50,000) and you should seek professional advice. A significant limitation of this legal form is The advice here is limited to private the £20,000 limit on share capital issued companies limited by share. to any one investor. There is good reason to think this may be increased soon, but in

50 More recently, the Community Interest 1. The maximum dividend per share limits Company has been introduced to enable the amount of dividend that can be paid companies to prove and improve their on any given share. Currently, the limit is social performance and work to a social 20% of the paid­up value of shares. mission rather than merely enrich their members. CICs can be both Companies 2. If interest paid on debt is variable Limited by Guarantee (which is most dependent on performance, it can be common) or limited by share; CICs can no more than 10% of overall debt. even be plcs, though this would be quite unusual. 3. The maximum aggregate dividend limits the total dividend declared in terms of the CICs are best used when strong external profits available for distribution. Currently, regulation of a social mission is wanted; the limit is 35% of the distributable profits. otherwise, the reporting requirements are going to be onerous and a drain on 4. The ability to carry forward unused resources. There are some difficulties in dividend capacity from year to year to a amending CIC rules to satisfy co­operative limited extent. Currently the limit is 5 years. standards of democracy, but they are not generally considered insurmountable, and Other companies are free to pay model rules for a co­operative CIC are dividends to investors in accordance with available; however, a co­operative CIC the law on distributable profits and their cannot put its members’ interests first as own governing document. a co­operative might be expected to.

They have a well­regulated asset lock, 6.5.3: Limited Liability Partnerships (LLP) but this can make issuing share capital Limited Liability Partnerships are a form difficult. They cannot issue withdrawable of incorporated body that is like a shares, and the combination of capped company in most respects except that its dividend payments and no access to profits are taxed through its individual reserves on dissolution means that it could members’ income tax rather than through be hard to find a buyer for transferable corporation tax. It may have a partnership shares. The cap, which applies to all agreement specifying profit sharing dividends except those paid to bodies arrangements rather than shares as such. that are themselves asset­locked, has four elements:

51 LLPs are profit distributing entities and The big question is: will the issue be so relatively rarely used in the social and attractive to investors? They will look community enterprise sector. However, at the performance of the sector, the The Community their lightweight administration and relief success record of similar enterprises, the Shares ’ Practitioner s from some company regulation makes expected returns (monetary and social) Guide is a useful them attractive for some purposes. and the quality of the management team. resource for anyone planning a share issue In some cases the members of an LLP are It may also be an issue whether you – see Appendix 3. themselves corporate bodies, using the have, or are associated with, any known LLP to share profits from a joint venture ‘brands’. Name recognition will boost and limit their liability to the amount of investor confidence. Larger and their initial stake. experienced investors will study the business plan in much the same way as a bank would. 6.6: Carrying out a share issue Share issues can be carried out in a 6.6.1: Corporate shareholders number of different ways, in order to ensure that the funds are raised when Shares can be held by individuals they are needed and in a way that suits or by corporate investors. In the case prospective investors. Some of the main of corporate investors, they will be questions to resolve are: represented in general meetings by deputies. Those deputies can then be is the offer time bound, with a closing elected to the governing body as though date, or open to new investment at they were themselves members, though any time? the governing document will often provide is there a minimum sum to be raised, that if their nominating organisation with smaller amounts being returned withdraws their support, the deputy if it is not met? will have to stand down. is there a maximum sum, beyond which An increasing number of charities further investment will not be accepted? and social enterprises are now making ‘programme related investments’. Rather A share issue can be publicised than simply investing their reserves for to the appropriate investors, often via maximum financial benefit, they are intermediaries such as financial advisors, investigating whether there are investments investment matching services, and that, while providing adequate returns, social investment networks. Many can also further the charities’ aims. of the organisations that can arrange introductions to investors will want a commission for doing so; 3% to 5% of the sums raised is not unusual.

52 6.6: Carrying out a share issue Different types of share offer for a Co­operative or Community Benefit Society issuing withdrawable shares public

The

Membership offer

interest Very small investments primarily Open offer for the purpose of building community A society with and accountability strong a proven record seeks a

to well­defined finance to replace debt a with and enable growth,

of quite possibly with made no specific targets is Time bound offer or closing date. The offer A thorough offer

Members community document is regularly document, with little offer updated. The track uncertainty, provides record and low level the a business plan. There is of risk enables a wide a fixed sum to be raised; range of investors investors any excess is returned, and to be approached. if a minimum sum can’t people be raised the offer of

funds, wealthy must be re­run. There is

or a closing date after about Pioneer offer three months. A high risk offer supported by only Number investment an outline business case. Only supporters, IFAs, experienced members and experienced social investors are approached. There may be no key minimum sum to raise; usually of no explicit closing date, but you can’t pioneer for ever. handful

A supporters

Well­established New start with Plausible but untested business contracts and business case permissions in place Level of risk

53 6.6: Carrying out a share issue

Different types of share offer for a private company limited by shares issuing transferable shares without an authorised prospectus public

The Offers to the public may be illegal to Consider using a co­operative or community benefit society instead,

made or for very large amounts a plc.

is

and offer only

the

individuals investors

Time bound offer people worth A detailed offer, sent only to specialist investors, of

net in order to raise a fixed sum of less than £100K;

any excess is returned, and if the full amount

High sophisticated can’t be raised the offer must be re­run. There is a closing date after about three months.

Number Pioneer offer A high risk offer supported by only

key an outline business case.

of Only a few committed supporters are approached. handful

A supporters

Well­established New start with contracts Plausible but untested business and permissions in place business case

Level of risk

54 6.6.2: Legal restrictions of the main expenses being incurred, so on marketing securities some of the costs can be met from the share issue itself (provided there is Any promotion or advertising of your confidence that any minimum will be met). shares will be subject to laws designed to protect unwary investors. It is very The difference is one of the quantity of important to comply with the laws, money you are seeking to raise, but it is as the consequences could be very also a matter of the regulatory obligations. severe – unauthorised controlled investment It is vital for small share issues to have a is a criminal offence. legal structure with low costs of regulation and compliance, otherwise a large portion Share issues are of widely varying cost of the funds raised will be offset by the cost and complexity. By following the law of raising them. As a rule of thumb, if the correctly, it is possible to issue shares cost of the promotion will be more than without expensive legal advice, outside 10% of the sum raised, a different route regulation, formal publications or share should be found. certificates but just an annual statement on the balance of each member’s share account. However, even small projects 6.6.3: The laws that affect may find that some of the things they share issues would like to do are tightly regulated. Regulation comes from four main sources: The largest issues carried out by social banking laws that prevent ‘deposit taking’ enterprises, of around £5 million, require by anyone other than an authorised firm; advertisement to the general public, the Financial Services and Marketing Act specialised legal structures (up to and 2000 (FSMA), which protects consumers; including a Plc, as used by Café Direct), the prospectus regulations, which require and intense legal scrutiny to ensure documentation for a regulated share issue compliance with prospectus regulations. to reach a high standard; and laws on Some suggested figures are £100K for fraud and misrepresentation, which could accounting and management, £100K for be used against you if any statements you legal costs, the organisation’s own made in the course of the issue were false, management costs and however much you incomplete or dishonest. spend on marketing the issue (which could Regulation is most applied to be in the vicinity of £100K). The money tightly unsolicited, real time might well start to come in within six weeks – communications for example, cold calling passers by or stopping - High Street. These on the should always be avoided one - off instances (though exempt, for example are if the subject happens to come up in a conversation).

55 The last will always apply, no matter how 6.6.4: Unregulated investors large or small the share issue, and you are There are, however, some financial strongly advised to: promotions that are currently exempt produce a document explaining from the FSMA and the prospectus the offer, and never rely on verbal regulations, although financial promotion self - certification A form for sophisticated or informal information alone; rules might apply:

investors is included in Appendix 4. create a further internal verification non­transferable shares or debt document by checking through the securities (i.e. loan stock) issued explanation document line by line to by a Co­operative Society; ensure that every statement is verifiably any securities (i.e. shares or loan stock) correct, there are no relevant facts issued by a Community Benefit Society; omitted, and nothing in it conveys a misleading impression; investments made by high net worth individuals (HNWI). Someone who retain the verification document in case has certified themselves as a HNWI you need to produce it at a later date. by claiming to have an annual salary of £100K or net assets of £250K has Note also that although financial waived their protection under FSMA; promotion regulations are most commonly cited in the context of share issues, they investments made by sophisticated also apply to ‘debt securities’ as well, investors (SI). Again, SIs can self­certify including loan stock, bonds and themselves as such if they have passed debentures (prospectuses, however, are on of a number of qualifying actions, only required for transferable securities). such as being professionally involved in business finance, being a director Redeemable debt securities may also fall of a company with a £1M+ turnover, foul of regulations on deposit taking. If, for or having made an investment in example, you were to offer loan stock on any unlisted security in the previous request at any time, it could be argued two years; that you were acting as an unauthorised any communication to someone who deposit taker. Co­operative and Community is already a shareholder or creditor or Benefit Society withdrawable shares, (in most cases) an employee; issued as risk capital, are exempt from such regulation, as are issues for a investment by any body corporate with specific, one­off purpose or in connection more than 20 members and net assets with membership. over £500K; investment by an unincorporated association or partnership with net assets over £5M;

56 investment by a trust with gross assets If a loss is recorded on that business in excess of £10M; activity, those shares may be reduced in Co- operative dividends, value while other shares are unaffected; a promotion in which fewer than which are paid to the same applies in reverse. The protection in proportion members 100 people are approached; to their transactions is not absolute – the funds are still at risk are with the society,

a promotion in which the total sum if the organisation as a whole becomes quite different to dividends. The being raised is less than ⇔100,000 insolvent – but it does mean that profits investor co- operative dividend more (full prospectus regulations apply over and losses can be ‘focussed’ on the is intended as a way to ⇔2.5M; an authorised advisor is investors that financed the activity that equitable profits, because distribute required for sums over ⇔100,000). generated them. For clearer separation not favour those it does of different business activities, consider with capital to invest. If you are relying on the exemptions using special purpose vehicles as relating to High Net Worth Individuals described in 6.8 (Joint ventures). or Sophisticated Investors, any written materials you produce should include this disclaimer: “The content of this promotion 6.7: Payment of dividends has not been approved by an authorised and interest person within the meaning of the Financial Once the organisation has recorded some Services and Markets Act 2000. Reliance profit, and has covered any losses and on this promotion for the purpose of profit distributions from previous years, engaging in any investment activity may it may decide to make a payment of expose an individual to a significant risk dividend (or in the case of withdrawable of losing all of the property or other shares and debentures, pay discretionary assets invested”. interest). It may be hard to see at first why an organisation would be at all generous, rather than simply reinvesting as much 6.6.5: Special purpose share funds profit as possible. The answer is that a Sometimes it is desirable to raise funds track record of paying dividends is one of for part, rather than all, of the activities the key motivators that persuades the large of an organisation. Investors may wish body of risk­averse investors to support to support one activity, without being future share issues. If you hope to expand exposed to the risk from another. This can in the future, and expect to use equity to be done by identifying shares as being for achieve it, it helps to be able to show solid ‘a special purpose’ (ideally, provision for dividend payments in the recent past. this will exist in the rules of the co­operative – if not, it is especially important to make it clear in the conditions of the shares at the point they are applied for).

57 A common way for investors to weigh 6.8: Joint ventures up the value of a proposed investment It is obviously desirable to ensure that is the ‘internal rate of return’. This all the activities your organisation engages calculation, which can be carried in are entirely owned and controlled by out using most spreadsheet software, a legal structure that fully reflects your takes into consideration the value and values. However, it isn’t always possible, the timing of: if the key sources of equity finance the initial subscription, which is involved are determined to maintain expressed as a negative figure a for­profit ownership of their share of the business activity (or for other reasons have the expected ‘exit’ – the sale or a separate identity), or if the business withdrawal of shares sector being entered requires specialist dividends or interest payments expertise or credibility that is just not available in the social and community tax reliefs enterprise sector. The calculation returns a single percentage figure which can be compared with 6.8.1: Forming partnerships between alternative investments: including, for organisations example, the interest that could be obtained in a savings account. It takes Available partners, often industry into account the fact that although a specialists with long track records and 10% dividend may sound good, it is less strong reserves, may wish to support valuable if you have to wait five years the new venture. However, the precise to get it. Early payment of even small relationship needs to be carefully defined. dividends can be helpful in showing Among the issues are: a healthy internal rate of return. branding. Is the organisation seeking to be a supplier to multiple brands, or does The governing body will normally take it seek to own and develop brands itself? a decision on how much of the profits Its members may well expect brand to distribute, and hence what level of values to be applied throughout the return to make. However, best practice supply chain as far as possible. For this is to make this into a formal resolution reason it is better to have clarity and at a General Meeting of the organisation. honesty over the limits of its influence.

58 instability. Can the private sector partner 6.8.2: Special Purpose Vehicles transfer its holdings? Is the partner in Another step down this road is to form a danger of reputational or business subsidiary company to carry out a trade failure? Might the partner be bought by between several partners, one or more of another entity with different intentions? which might be social or community If the private partner has no control over enterprise. This kind of ‘special purpose the joint venture, it will expect an exit vehicle’ would conduct the trade as an route – could replacement finance be incorporated body in its own right. obtained at short notice? Special purpose vehicles (SPV) offer separation of tasks. Partners may significant benefits in terms of mobilising be available for some of the projects local participation and support; protecting the organisation is undertaking, but the core business from debt and risk; and not others. It may be necessary to building partnerships with other businesses split the organisation to make a that bring expertise, assets or access to partnership effective. finance. The following safeguards should be observed: pricing. If a private investor is buying a share of the organisation, what if possible, the SPV should have the valuation of the existing organisation is same standards of social responsibility, this based on? If it is low, it may have to and means for enforcing them, as its give up a great deal of control in order parent. Otherwise the SPV could behave to raise the funds it needs. If the in ways that bring the parents into organisation needs to attract future disrepute. funds, too high a valuation could make it be aware that any funds invested vulnerable to falls: its future would using Enterprise Investment Scheme depend on the value placed on it by (see chapter 8.2.1) must be employed outsiders. in a qualifying trade by the organisation they were invested in, or by a 90% The simplest joint venture is a partnership owned subsidiary. If the SPV is less governed by a simple profit sharing than 90% owned by the organisation, agreement. However, this does not it must ensure that its income (from provide the partners with limited liability, which investors will gain returns) does or a distinct ‘legal identity’. not come from investment or financial services, but from a real trade. That could include consultancy and business development carried out for the SPV, which could be paid as a commission on the SPV’s operations.

59 care should be taken to ensure that 6.9: Property leases support for the local project does not as a form of equity eclipse the ‘parent’ organisation, Organisations investing in property – which needs to be able to reinvest in whether housing or workspace – can raise connecting services, and developments a kind of equity from tenants by offering elsewhere. One way to do this is to long leases purchased with a one­off sum create a significant overlap between the instead of rental payments. This has the membership of the SPV and the parent, advantage of reducing the capital and the opportunity for some profit to required to acquire the property in the first flow back to the parent organisation. place; but unlike true equity it makes One way to do this would be for all borrowing funds harder because the applications for membership of the SPV organisation has effectively reduced its to be made to the parent organisation, assets by handing rights over them to which would then act as an ‘approved someone else. nominee’ in the SPV. debt finance can be used by the A lease is transferable – it can be sold just special purpose vehicle as well as like the freehold – and if it is of sufficient equity. Debt may be preferable to large length (99 year leases, or even 999 year investor equity because it will demand leases, are quite common) it can feel very less of the profits over the long term. much like full ownership (for example, See chapter 5.2. leaseholders may be able to secure a mortgage of their own against their lease). You can put conditions in the leasehold agreement, allowing the organisation to: veto the transfer of the lease under certain conditions, require a service charge for maintaining shared facilities, or other provisions, or limit the profit that can be made in the event of resale.

However, too many of these conditions will damage the value of the lease.

60 Case Study: Green Valley Grocer In early 2009 the owner of the “Our projections indicated that we greengrocers in Slaithwaite, West needed £15,000 to buy the fixtures and Yorkshire, decided to retire. The business fittings from the current owner and get the had been gradually winding down for business up and running,” says Graham, years beforehand and the community “so we decided to do a share issue.” was concerned that nobody would buy “The shop shut on May 29 so we held a the business and the greengrocers second public meeting that day, saying would disappear. that if we could raise £15,000 in the next couple of weeks then we could re­open Not only would this mean the loss of a job the greengrocers. By the middle of June but it would also be bad for the town’s we’d raised £18,000.” thriving high street – if the greengrocers disappeared, members of the community The co­operative had sold £10 shares to thought, people would have less reason to members of the community. It was made come into town and use other shops like clear that buying shares in the co­operative the butchers or fishmongers. was risky, but over 100 people invested in the business in those few weeks. The “Nobody wanted to be a greengrocer,” largest amount invested by a single said Graham Mitchell, one of the member was around £1,500, but most residents who has worked to save the invested £100 to £150. These members shop, “but nobody in the community can now own and control the business wanted to lose the greengrocers either.” and can stand for the board.

A small group of residents realised their The co­operative paid £6,000 to the best option was to bring the shop into former owner for fixtures and fittings, and community ownership. They began by the new shop was opened on the 10th putting the idea out through networks July 2009 by the Mayor, six weeks after it and, after getting a positive response, closed. The buyout has really brought the held a public meeting. Attended by community together, says Graham. around 60 people, there was Members volunteered in advance of the overwhelming support for the community shop opening, helping to sort out, refurbish buying the shop. and clean up the premises. Local businesses helped too – Graham’s worker Next, a core group developed a business co­operative fronted some of the costs and plan and formed a co­operative that another member of the co­operative, who would enable the community to buy is a structural engineer, offered over shares in the business, own and control it. £5,000 worth of their time and expertise.

61 Documenting finance raised

All organisations should be keeping a cash book, showing how liquid funds come and go from the organisation. The arrival of

7 finance should be clearly visible from the cash book. In this simplified example, an organisation receives a grant and a loan, and uses them to purchase a field on which to grow vegetables:

Table 1 Summary Transactions

Date Cash book Income Expenditure Bank balance

01­ Mar ­10 Opening bank balance £250.00

01­ Mar ­10 Lottery grant £1,500.00 £1,750.00

05­ Mar ­10 Co­op bank loan £2,500.00 £4,250.00

12­ Mar ­10 Purchase of land £3,800.00 £450.00

14­ Mar ­10 Closing bank balance £450.00

Outstanding purchases

18­ Mar­10 Purchase of seed (on credit) £78.92

Loan repayments

Dec­10 Bank loan repayment 1 Year £500.00

Dec­10 Bank loan interest charge 1 Year £500.00

Dec­10 Bank loan repayment over 1 Year £2000.00

62 7.1: The balance sheet made up of the purchase of seed and the anticipated interest payments of £50 on This tells us very little about the true health the loan). of the organisation, only how much funds they have available to them. A more One thing we can see straight away informative picture is given by a balance is that this organisation is quite highly sheet, which shows the net worth of the geared – about 60%. It would be much organisation at a moment in time, and higher were it not for the grant and the how that value is financed. The two totals reinvested profits. How can it improve should match, or ‘balance’ each other. this situation? Here is the same organisation viewed through its balance sheet on the 15th of Imagine that the organisation secures March (at which point the seed had been another grant of £1,000 on the 20th purchased, but not yet paid for). The of March, which is to run free training reserves are the resources of the courses for local people. How does that organisation that belong to it and it alone; change the net assets? they are the accumulated profit from trading. In this case, you can see that they As you can see, nothing has changed. are made up of the grant (which has been That is because, at this stage, the work that used for the purpose intended, and so the grant was intended to fund has not carries no further obligation), the opening been carried out. balance and the trading loss (which itself is

Balance Sheet (based on table 1 transactions)

Fixed assets Land £3800.00

Current assets Cash at bank £450.00

Current liabilities Creditors (seeds) £78.92 Bank loan repayment in 1 Year £550.00

Net current assets/liabilities £(178.92)

Long term liabilities Bank loan repayment £(2,000.00)

Net Current Assets £1621.08

Financed by Share capital £15.00 Reserves £1606.08

£1621.08

63 Table 2 Summary of transactions

Date Cash book Income Expenditure Bank balance

14 ­ Mar­10 Opening bank balance £450.00

20 ­ Mar­10 Lottery grant (2) £1,000.00 £1,450.00

20 ­ Mar­10 Payment of seed creditor £78.92 £1371.08

Balance Sheet (based on table 2 transactions)

Fixed assets Land £3800.00

Current assets Cash at bank £1371.08

Current liabilities Lottery grant (2) £1000.00 Bank loan repayment in 1 Year £550.00

Net current assets/liabilities £(178.92)

Long term liabilities £(2,000.00)

Net Current Assets £1621.08

Financed by Share capital £15.00 Reserves £1606.08

£1621.08

64 As the funds of the organisation are used the balance sheet increasingly concerned to deliver the grant according to the as to how the organisation will succeed budget agreed with the funder, the grant in servicing all this debt. reserve liability will go down; but, most likely, so will the cash in the bank. A share issue to members would help. The fifteen members are each willing An issue of loan stock would improve the to purchase £100 of withdrawable net current assets, because it is entirely a shares. They hope to earn some interest long term liability. However, it is debt and on these, but that will be up to the would only increase the gearing of the governing body to decide when the organisation, making anyone looking at organisation shows a profit.

Table 3 Summary of transactions

Date Cash book Income Expenditure Bank balance

14 ­ Mar ­10 Opening bank balance £1,371.08

20 ­ Mar ­10 15 members pay £100 for shares £1,500.00 £2,871.08

Balance Sheet (based on table 3 transactions)

Fixed assets Land £3800.00

Current assets Cash at bank £2871.08

Current liabilities Lottery grant (2) £1000.00 Bank loan repayment in 1 Year £550.00

Net current assets/liabilities £1,321.08

Long term liabilities £(2,000.00)

Net Current Assets £3121.08

Financed by Share capital £1515.00 Reserves £1606.08

£3121.08

65 Now the gearing ratio is 44%, which is all the participants in the organisation stay more manageable. The organisation has more closely in touch with which activities enough funds to invest in generating profit, are working and which aren’t. You without too much of those profits being should ensure that your copy of the loan taken up with loan repayments. But those agreement is kept in a safe place and fifteen members have put their funds very easy to find, as well as any legal charge. much at risk – if things go wrong, they will not receive any funds until all creditors and Bonds and loan stock are not usually lenders have been repaid in full. As long provided for in governing documents as the organisation has reserves, that (other than a general enabling power), should not be a problem. But if the so application forms should be used that reserves are reduced by a year or two clearly show the conditions of the issue. of trading at a loss, they may become These application forms should be retained much more nervous. by the organisation, and a corresponding certificate issued. The certificates should be individually numbered and recorded 7.2: Record keeping requirements in a register so that you can quickly see All finance imposes some obligations which are ‘live’ and which have been on record keeping as too does company cancelled. A sample certificate is law and other legislation (such as that for provided in Appendix 4. Co­operatives and Community Benefit Societies). Grant funders will expect that Shares can be recorded in one of two as well as your general accounts, you ways: either you issue share certificates, will be able to produce income and in which case you will need to maintain expenditure records in detail for the grant a register of shares, showing which funded activity. This should be reasonably certificates were issued to whom and consistent with the budget you originally when; or you can dispense with share presented to them, and in particular should certificates and record share accounts, not show unfunded activities of the sending members a statement of their enterprise profiting from grants given for account each year. The latter is more another purpose (other than by way of full­ suitable when the sums of money being cost recovery as described in chapter 3.1). handled are small, and the organisation is a Co­operative or Community Benefit Lenders often expect quarterly Society. The governing document may management accounts, which can be a specify certain records to be kept. challenge for businesses more used to producing annual accounts (and those Application forms for shares should be after much delay). It is a worthwhile used and retained. If you are dealing with discipline to adopt, however, and can help people who are not well known to you,

66 you should have the agreement clearly spelt out; also, if there are conditions to the shares that are not clearly spelt out in the governing document, they can be recorded here. Lastly, you might also be called upon to prove that this income was not earnings subject to corporation tax.

7.3: Communication One very good reason for keeping funders’ contact details up to date and regularly maintaining the organisation’s vital statistics is to communicate your achievements and your difficulties. Funders can be seen as having done their job once they have sent the cheque, but recipients can gain a great deal from nurturing a relationship: advice, publicity, contacts for further support, reputation, market intelligence and sympathy, to name but a few. The same applies to guarantors, suppliers and of course customers. Newsletters should be circulated on a regular basis, and as well as updating stakeholders on the latest developments, they can be used to introduce the people behind the organisation. Open days can be good opportunities to get to know supporters, as can Annual General Meetings – the need to conduct formal business need not be incompatible with a celebration of progress. The internet has made this type of regular communication even more flexible and interactive, with web forums, twitter accounts, blogs and more.

67 Tax efficient finance

The choices that an organisation makes regarding finance may have implications for the amount of tax that they, and

8 their members, customers and supporters, end up paying. In general, this will not be the overriding concern in choosing forms of finance, but it is worth understanding some of the implications so that there are no unpleasant surprises. Taxes are applied both to businesses and to individuals connected with them; very often, what is tax efficient for the organisation is not what best suits individuals.

8.1: Business taxation a trade) which are themselves taxable. If for capital expenditure, the Inland Businesses are subject to many different Revenue may accept an offset of the forms of taxation, and the forms of finance relevant expenditure directly against the used to capitalise the organisation will grant for tax purposes. If a grant is funding have substantial implications for many of non­trading activities, such as charitable these. As well as the other considerations work, then it is probably not taxable. that may apply, finance should be tax efficient. Organisations which are fully mutual, such as credit unions and some housing co­operatives are not subject to 8.1.1: Corporation tax corporation tax on trading income but are This is a tax on profits, or to be precise, taxed on other forms of income, such as on certain types of profit. It is paid at a interest on investments. Fully mutual means smaller level on modest profits than on that the organisation only trades with its very large ones. Interest payments on members. See chapter 8.1.4 below. loans, bonds and withdrawable shares tend to reduce profits and hence reduce Capital allowances encourage businesses corporation tax exposure; dividends on to invest in plant and equipment, and can transferable shares, by contrast, are paid make buying assets attractive compared to after tax (though the effect of this in the leasing. By allowing expenditure on some overall picture for the shareholders is fixed assets (and the rules are quite cancelled out by the lower rate of complex) to be 100% deductible from income tax paid on dividend income). taxable profits, they in effect offer a significant contribution towards the cost. The actual receipt of a loan from a bank In the future, the asset will be a cost to the or other lender is not taxable because it is organisation as it will depreciate – but it not income. However, the receipt of a will have a residual value beyond which grant from a funder is taxable if its function it cannot lose much more value. is to support or subsidise activities (such as

68 By comparison, lease payments provide 8.1.2: VAT you with no assets and are likely to be Value added tax is both very simple more than the equivalent depreciation. and very complex. When you register So whether or not it is wise to lease rather for VAT, you are obliged to charge VAT than buy depends on the type of finance on most goods and services that you offer available. If it is possible to raise the funds for sale (known as output VAT). However, easily, without creating excessive gearing you can claim back VAT on most goods (see chapter 5.2), and the interest and services that you buy (this is payments are less than the difference known as input VAT). As long as your between the lease and depreciation, volume of trading is below the VAT it is probably worthwhile (company threshold (currently £70,000), registration cars require a different calculation, is optional. Above the threshold it as special rules apply to both capital is compulsory. allowances and VAT).

Type of supply VAT status For example Count towards threshold?

Non­business Outside Work funded by grants supplies the scope or donations No

Exempt Education, healthcare, cultural No services, charitable fundraising events, insurance, some rent

Taxable All business supplies that Yes Business are not exempt supplies of goods Zero rate Food, books, children’s or services clothes, various supplies to charities (eg advertising)

Reduced rate Tampons, various reliefs

Standard rate All other supplies

69 This table shows the VAT status of unless the exempt VAT falls below different kinds of supplies, and whether de minimis limits. Partial exemption they count towards the threshold for is complicated to administer. not ‘Zero rated ’ does compulsory registration. mean the same as ‘exempt’ . Exempt Loan finance has no impact at all on supplies also attract If customers are themselves mostly VAT your VAT status. This is because the receipt a zero rate, but you as registered businesses, there is little to be of the loan is not a supply. The loan cannot use them a justification to lost by registering – your customers being interest payments are not subject to VAT. claim back VAT on registered themselves will be able to claim your purchases. back the tax you charge them, and you Grant funding can have an impact on VAT. will be able to save money on the things The receipt of grant funding can be either you purchase. It is also worth making an standard rated for VAT, exempt, or outside early VAT registration if the goods being the scope. A grant will only be standard sold are mostly zero rated for VAT. If the rated if it is in reality a payment for the organisation sells to individuals, VAT supply of standard rated services. Some registration may create a competitive Service Level Agreements (SLAs) with disadvantage and should be postponed Primary Care Trusts (PCTs) or local until it is unavoidable. authorities are like this, and social enterprises bidding for such contracts If your enterprise is VAT registered then should take care to assess the VAT status VAT on purchases is not a cost to you as of the contract, if necessary by engaging you should be able to reclaim any VAT a VAT specialist. You can ’ opt for ‘flat rate incurred. It follows that in accounting for VAT, in which case your any grant funding, you should include the A grant will be exempt from VAT if it is in sales will be taxed at the average level for your sector costs net of VAT. That said, if a proportion reality a payment for services, and those without your needing to of income of your enterprise is outside the services are exempt (such as education or provide information on your purchases. It is less scope or exempt for VAT then this could healthcare). Again, many SLAs are of this paperwork, and will benefit reduce the amount of input tax that you nature. Care is needed to check that the an organisation that uses less VATable purchases are able to recover. If you are unsure precise terms of any exemption are (for example, by being more about this then it may be worth obtaining complied with. labour intensive) than its competitiors. specialist advice as VAT errors can be expensive to rectify. A grant (or donation) will be outside the scope of VAT if it is not a payment It is not unusual for a social or community for goods or services, but is simply a enterprise to supply exempt services. straight donation. Any input tax related This means that they cannot reclaim input to this grant will not be recoverable VAT relating to those activities. If an on a VAT return; however, as there is organisation has some exempt activities no related supply there should be very and some taxable activities, then it may little non­recoverable input VAT. Non­ register for VAT and will be “partially recoverable input VAT should be limited exempt”. In this case, it can reclaim VAT to the VAT on costs related to soliciting relating to the taxable activities only, donations or grants.

70 8.1.3: Capital gains tax It is important to note that it is much more difficult to achieve mutual tax Organisations may be considering status once an organisation has already raising finance for the purchase of started to trade on a non­mutual basis. property. This may expose them to capital As payments from that income must be gains tax if the property is disposed of for confined to the members from whom it more than its purchase price. Individuals is derived, there can be no payment of benefit from a capital gains tax allowance, interest on members’ investments, only but incorporated entities have no such a dividend based on their trade. relief. It is advisable to seek advice before deciding whether to buy or rent. Some trade with non­members can be managed (and taxed) with the formation of a service company (a company owned 8.1.4: Mutual trading status usually by the members of the co­operative Mutual trading refers to the business and itself a member of the co­operative) of a co­operative that only trades with through which non­member trade could be its members. Any and all surpluses from channelled. The value of this trade would the trade can be said to belong to the have to be reasonable in the overall members, rather than to the organisation context of the co­operative. as a separate entity. The benefit is that the co­operative does not have to pay tax The basis of members’ contributions to the on trading profits, only on other income co­operative and the basis of distributing such as bank interest, because trading its surpluses need not be exactly the same profits will be taxed through income tax but usually contributions are made in the when they are eventually distributed to form of charges paid under the members’ the members. agreement and payments (distributions) are in proportion to charges. You are recommended to use a legal structure designed for mutual trading, and Related to this is the tax exemption for fully apply for mutual tax status before you start mutual housing co­operatives under Section trading. A small amount of non­member 488 of the Income and Corporation Taxes trading is allowed, but be careful to limit Act 1988. This is similar except that a this. Also, make sure reserves don’t get co­operative can be common ownership higher than needed for working capital, (no distribution of surpluses) and the or you may have to make taxable exemption applies to Capital Gains Tax dividends to reduce them. as well as Corporation Tax.

71 payments to Although co- operative members are based on trade to as often referred they are 8.2: Individual taxation and live overseas. Any payments to overseas a dividend, very differently treated deduction of tax at source investors should be accounted for using investor dividends to form CT61(z). Although these societies for tax purposes. If an organisation pays interest to a do not otherwise need to complete form company such as a bank then there is CT61(z), they do need to report all no need to deduct tax from the payment. payments of interest to HMRC within 3 months of their period end. If they do not, If a company (registered at Companies then HMRC can deny tax deduction for House) pays interest to individuals such as the interest in the society’s accounts. loan stock holders, then it must deduct tax at 20% from the payment. This applies

There There is a tax credit that is available to is a scheme similar even if the “payment” of interest is in the to recipients of dividends but not to people EIS for businesses that form of new loan stock. In the latter case, invest in unlisted who are paid interest; that is because enterprises; it is called 80% of the interest payment is added to the dividends have been paid after Corporate Venturing their loan stock balance. A company may Scheme. There corporation tax. This cancels out what is an online guide only pay interest gross to an individual if available would otherwise be a major tax from HMRC, the individual has completed form R85. or you can seek advice advantage to withdrawable share capital, from If a company deducts tax from interest an accountant. and means that interest from withdrawable payments then it must account for the tax share capital is, pound for pound, not as deducted to HMRC every quarter using good a return as the same payment in the form CT61(z). At the end of the tax year form of a dividend. The exception here is (5 April) it must also issue a tax deduction low income investors who are not liable certificate to the individual, so that they for income tax; as dividends are received can claim the tax back on their tax return. net of tax, and the tax credit can’t be refunded, withdrawable shares will be A Co­operative Society or Community more tax efficient for them. Benefit Society (formerly Industrial and Community Investment Relief Tax Provident Society) can pay interest gross is available to people that invest in special even to individual investors, unless they funds loan targeted at the deprived most areas. Several CDFIs offer investments that benefit from this tax relief.

72 8.2.1: Enterprise finance, property development, farming Investment Scheme and forestry cannot benefit. It is available on withdrawable shares, but some The Enterprise Investment Scheme was problems have been encountered set up by the government to encourage when rules suggest there is a ‘right’ to investment in the riskiest businesses – those withdrawal; this constitutes protection that were still quite small and had not against risk. achieved listing on any stock exchange. There was no social purpose intended Before telling investors that they will be in it, however many Co­operatives and able to get it, you should seek ‘advance Community Benefit Societies carrying out assurance’ from HMRC. They will tell you share issues have found it very helpful. whether your organisation would be It is a tax incentive for investors; if they eligible. You can then tell investors that the invest money for at least three years at full relief is available, and three months after risk (that is, using ordinary share capital) you have commenced trading you can they can claim back the income tax that request the forms that your investors will they notionally paid on it (a bit like gift aid need to use to get their tax refund. for charitable donations). 20% over three years is a significant top­up to the limited dividends that can be expected in the 8.2.2: Stamp duty on shares early stages of a small business. If the investment is lost altogether – the shares If someone buys transferable shares from are declared null and void – there is a an existing shareholder, they are liable further ‘loss relief’ that can be claimed to pay stamp duty. The exact level will against either capital gains tax or income depend on whether the transaction is tax. There are also other benefits relating electronic or on paper, but is typically to capital gains and inheritance tax. 0.5% of the ‘consideration’ that is paid for the shares. It does not apply if the shares EIS is not available for all businesses: are transferred as a gift, without payment. it is targeted at businesses that are involved in productive trade, and so a range of enterprises based around

73 Next steps

This guide has provided an introduction to the diverse ways in which organisations can seek finance to develop new businesses. 9 As outlined in chapter 2, a complete package of finance will probably involve elements from several different parts of the guide. Grants, supply chain finance, loans and equity may all have a role to play.

Having identified which options are Once the finance comes together, and going to be most effective in taking your your business plan comes into effect, you business idea forward, you will need to can begin changing the world. Or at least, adopt an action plan to ensure that the your bit of it. different parts of your finance package come to fruition at the same time. Plot This edition of the guide has been timelines for each; some grants will published using funding from the Big take a long time to prepare, and loan Lottery Fund as part of the ‘Making Local applications and share issues may need Food Work’ project. The main aim of this detailed planning and preparation. Some project is to reconnect people and land options may even require rules changes and promote access to fresh, healthy, at a general meeting, or the formation local food with a clear provenance. of completely new legal structures. The project uses the social and community Plan your actions so that they all come to enterprise sector to develop collaborative fruition more or less together, and those responses to meeting the needs of all that can be put in place more quickly sections of the community in regard to are implemented in the light of earlier access to local food. developments. This project will run until 2012 and The action plan should be widely comprises six delivery strands and understood and supported within four supporting themes, each seeking to your organisation, so that everyone is refine and replicate a form of community committed to the obligations that funders, enterprise model to reconnect food lenders and investors will place you under; producers and consumers. and everyone knows what their role in the process is.

74 Appendix 1

Summary table of legal forms

Issue shares? Approval Investor Capable of Access needed for dividends mutual trading lottery larger share payable? status? funding? issues?

Company limited No ­ ­ Yes, but Yes by guarantee not a CIC (inc. CIC)

Company limited Yes Yes Yes Yes Not usually by shares

CIC limited Yes Yes Yes, No Yes by shares but capped

Co­operative Yes No, if Yes, if Yes Common Society using necessary ownership withdrawable to finance co­operatives shares a trade only

Community Yes No Yes, if No Yes Benefit Society necessary to benefit the community

Limited Liability No ­ ­ Yes No Partnership

Charitable No ­ ­ No Yes Incorporated Organisation*

* The Charitable Incorporated Organisation form is not likely to be available as a legal form until late 2011.

75 Appendix 2

Sources of finance

Community Social housing: Big Issue Invest Development 01782 408507 1­5 Wandsworth Road Finance Associations martin.latham@ London britannia.co.uk SW8 2LN Triodos Bank 0207 526 3434 Brunel House Unity Trust Bank www.bigissueinvest.com 11 The Promenade Nine Brindley Place Bristol Birmingham Baxi Partnership BS8 3NN B1 2HB Evans Business Centre 0117 973 9339 0845 140 1000 Pitreavie Business Park www.triodos.co.uk www.unity.co.uk Dunfermline Fife Ecology Building Charity Bank KY11 8UU Society 194 High Street 01383 749672 7 Belton Road Tonbridge www.baxipartnership.co.uk Silsden Kent Keighley TN9 1BE Venturesome BD20 0EE 01732 744 040 Charities Aid Foundation 0845 674 5566 www.charitybank.org St Andrew’s House www.ecology.co.uk 18­20 St Andrew Street Radical Routes London Co­operative 16 Sholebroke Avenue EC4A 3AY and Community Leeds 03000 123 300 Finance LS7 3HB www.cafonline.org Brunswick Court 0845 330 4510 Brunswick Square www.radicalroutes.org.uk CAN Invest Bristol CAN Mezzanine BS2 8PE Rathbone Greenbank 49­51 East Road 01179 166750 10 Queen Square London www.coopfinance.coop/ Bristol N1 6AH BS1 4NT 020 7922 7757 0117 930 3000 www.can­online.org.uk The Co­operative www.rathbonegreen Bank P.O. Box 101 bank.com Adventure 1 Balloon Street Capital Fund Manchester Bridges Ventures 5th Floor M60 4EP 1 Craven Hill 6 St Andrew Street www.co- London London operativebank.co.uk/ W2 3EN EC4 3AE 020 7262 5566 020 7842 7760 Specialist teams www.bridgesventures.com www.sibgroup.org.uk/? id=1176 Charities: 020 7977 2121 charities@co­operative bank.co.uk

76 Appendix 3

Sources of further guidance and advice

National CDFA Co­operative Futures Support Bodies Room 101 City Works Hatton Square Business Alfred Street Co­operatives UK Centre Gloucester Holyoake House 16/16a Baldwins Gardens Gloucestershire Hanover Street London GL1 4DF Manchester EC1N 7RJ info@co­operative M60 0AS 020 7430 0222 futures.coop 0161 246 2900 www.cdfa.org.uk 01452 543030 www.uk.coop Social Finance Avon CDA BRAVE Ltd Social Enterprise 42 Portland Place The Coach House Coalition London 2 Upper York Street 49­51 East Road W1B 1NB Bristol London 020 7182 7878 BS2 8QN N1 6AH [email protected] [email protected] 020 7793 232 0117 989 2536 www.socialenterprise.org.uk Co­operative and Social Enterprise Coventry & The Co­operative Development Bodies Warwickshire Enterprise Hub Co­operative 0161 246 3020 Wales Co­operative Development www.co­operative.coop/ Development & Agency Ltd enterprisehub Training Centre Limited Doe Bank Building Llandaff Court Doe Bank Lane Energy 4 All Fairwater Road Coventry Unit 33 Cardiff West Midlands Trinity Enterprise Centre South Glamorgan CV1 3AR Furness Business Park CF5 2XP [email protected] Barrow­in­Furness [email protected] 024 7663 3911 LA14 2PN 02920 554 955 01229 821028 Greenwich www.energy4all.co.uk Hackney Co­operative Co­operative Developments CIC Development UKSIF­the Sustainable 62 Beechwood Road Agency Ltd Investment and London Unit 6, Greenwich Centre Finance Association E8 3DY Business Park Holywell Centre [email protected] 53 Norman Road 1 Phipp Street 020 7254 4829 Greenwich London London EC2A 4PS SE10 9QF 020 7749 9950 [email protected] www.uksif.org 020 8269 4880

77 Harlow CDA Ltd Tower Hamlets CDA Co­operative 2 Wych Elm Unit 6, Business Assistance Network Harlow Development Centre The Coach House Essex 7­15 Greatorex Street 2 Upper York Street CM20 1QP London Bristol [email protected] E1 5NF BS2 8QN 0203 239 4090 info@co­operation.coop [email protected] 020 7247 1056 0845 373 3616 Humberside Co­operative Social Enterprise The Guild Development London CIC St. John’s House Agency Limited 3rd Floor 25 St. John Maddermarket 90 Marlborough Avenue Downstream Building Norwich Hull 1 London Bridge Norfolk East Yorkshire London NR2 1DN HU5 3JT SE1 9BG services@the­guild.co.uk [email protected] [email protected] 01603 615200 01482 449 877 020 7022 1920 Community LCCDA Management Sheffield Co­operative Enterprise Unit Co­operative Ltd Development Group Garden Floor New House Aizlewoods Mill Suite 1 94 New Walk Nursery Street 11­15 Dix’s Field Leicester Sheffield Exeter Leicestershire South Yorkshire Devon LE1 7EA S3 8GG EX1 1QA enquiries@case­da.co.uk [email protected] [email protected] 0116 222 5010 0114 282 3100 01392 666281

Northamptonshire CDA Community Economic Partnerships 214A Kettering Road Empowerment Limited Limited Northampton 90 Locksway Road The Old Post Office Northamptonshire Southsea 63 Saville Street NN1 4BN Hampshire North Shields sarah@enterprise­ PO4 8JP Tyne and Wear solutions.org.uk [email protected] NE30 1AY 0845 456 8281 01329 223 043 info@economic partnerships.com Southampton Lincolnshire CDA Area CDA Commerce House Co­operative and 135 St Mary’s Street Outer Circle Road Mutual Solutions Southampton Lincoln 7 Cecil Street Hampshire Lincolnshire Lytham SO14 1NX LN2 4HY Lancashire [email protected] [email protected] FY8 5NN 0845 3733616 01522 845005 [email protected] 07967 815321

78 Co­operative Co­operative Wessex Business Consultants Development Scotland Community Assets 35 Heaton Grove Spectrum House Great Bow Wharf Bradford 1a North Avenue Bow Street West Yorkshire Clydebank Business Park Langport BD9 4DZ Clydebank TA10 9PN [email protected] G81 2DR 07795 528801 0845 456 0238 carol.smith@ www.wessexca.co.uk cdscotland.co.uk Mutual Advantage 0141 951 3055 Co­opportunity Partnership Unit 59 24 Blashford Street Somerset Co­operative Easton Business Centre Hither Green Services CIC Felix Road London 12 North Street Easton SE13 6UA Stoke­sub­Hamdon Bristol info@mutual­ Somerset BS5 0HE advantage.co.uk TA14 6QP 0117 941 5345 020 8698 0712 [email protected] www.coopportunity.org.uk 0845 458 1473 Social Economy Slade and Cooper and Co­operative Natty Platy 6 Mount Street Development Cornwall 174 Manor Farm Road Manchester 3 Trenhaile Terrace Southampton M2 5NS Malpas Hampshire 0161 831 0100 Cornwall SO18 1NX www.sladecooper.co.uk TR1 1SL [email protected] info@cornwall­switch.org 07903 918 798 Specialist Independent 01872 262 259 Financial Advisors Ex­cell Solutions Ltd and Funds Social Enterprise The Wesley The Ethical Investment and Co­operative Enterprise Centre Association Development Limited Royce Road Holywell Centre Wallsend House Hulme Phipp Street The Old Rectory Manchester London Church Lane Greater Manchester EC2A 4PS Bowness­On­Solway M15 5BP 0207 749 9950 Cumbria info@ex­cell.org.uk ethicalinvestment.org.uk/ CA7 5AF 0161 232 1424 [email protected] 01697 351010 Co­operative Finance Clearly So Consultants and 4th Floor Specialist Accountants 20 Old Street Baker Brown Associates London 31 Ambrose Street EC1V 9AB Bristol 020 7490 9520 BS8 4RJ www.clearlyso.com 0117 925 0824 www.bakerbrown.co.uk

79 Resonance 42 St Thomas Road Launceston PL15 8BX 0845 0043432 www.resonance.ltd.uk

Equity Plus P.O. Box 163 Ware Herts SG12 0ZN 0845 527 9227 www.equityplus.org.uk

Investing for Good 40, Stockwell Street London SE10 8EY 020 7060 1175 www.investingforgood.co.uk

Books and Online Resources Simply Legal www.uk.coop/simplylegal

Community Shares Practitioner’s Guide www.communityshares.org. uk/resources

Co­operative Capital www.somerset.coop/ sites/default/files/ Co­operative_Capital.pdf

80 Appendix 4

Forms and agreements

Model loan agreement This agreement is made on the …………...... ……… day of ……...... ……….. 20……...... Between: (1) Name: …………………………………...... …………. [“the Borrower”] (full registered name of corporate body i.e. company or society including Limited) Address: ………………………………………………………....……………………………... Registration number: ………….………………...... ………

(2) Name: ……...... ……………………………………….. [“the Lender”] Address: ………...………………………………………………………………………………

NOTE: if Lender is also a corporate body i.e. company or society the full registered name should be inserted along with the register number. It is agreed as follows: The loan The Lender has agreed to advance to the Borrower the sum of £…....………. subject to the following terms.

Agreed terms Clause, schedule and paragraph headings do not affect the interpretation Definitions and Interpretation of this agreement. The definitions and rules of interpretation in this clause apply in this agreement. A reference to this agreement (or any provision of it) or any other document shall be construed Business Day: a day (other than a Saturday as a reference to this agreement, that provision or a Sunday) on which commercial banks are or that document as it is in force for the open for general business in London and time being and as amended, varied or deposits are dealt with on the London supplemented from time to time in accordance Interbank Market. with its terms, or with the agreement of the Facility: the term loan facility made available relevant parties. under this agreement. A reference to a person shall include a Indebtedness: any obligation to pay or repay reference to an individual, firm, company, money, present or future, whether actual or corporation, unincorporated body of persons, contingent, sole or joint. or any state or any agency of that person. Loan: the total principal amount of the A reference to a statute, statutory loan outstanding under this agreement. provision or subordinate legislation is a reference to it as it is in force for the time Sterling and £: the lawful currency being, taking account of any amendment of the United Kingdom.

81 or extension, or re­enactment and includes Repayment any former statute, statutory provision or The Borrower shall repay the Loan and subordinate legislation which it amends all accrued interest in monthly instalments. or re­enacts. Payments A reference to writing or written includes faxes The payment made by the Borrower under but not e­mail. this agreement shall be in Sterling: A reference to continuing in relation to an in full, without any deduction, set­off Event of Default means an Event of Default or counterclaim; and which has not been remedied or waived. in immediately available cleared funds on the The Facility due date to the account that the Lender may The Lender grants to the Borrower an specify to the Borrower. unsecured sterling term loan facility of a total Event of Default principal amount not exceeding £______At any time after an Event of Default has on the terms, and subject to the conditions, occurred and is continuing, the Lender may of this agreement. give notice to the Borrower, stating that the Purpose Loan (and all accrued interest and all other The Borrower shall use all money borrowed amounts accrued or outstanding under this under this agreement to pay for ______agreement) is immediately due and payable

______or payable on demand. On receiving this

The Lender is not obliged to monitor or notice, the Borrower shall immediately repay

verify how any amount advanced under this the Loan, the accrued interest and all those

agreement is used. other amounts.

Drawing Calculations, accounts and certificates

The Borrower may draw the Loan in a single The Lender shall maintain accounts

amount on or before______. To do this, the evidencing the amount the Borrower owes it,

Borrower shall give the Lender at least 24 in accordance with its usual practice. Entries

hours’ prior notice of the date on which the in those accounts shall be prima facie evidence

Borrower wants to draw the Loan. of the existence and amount of the Borrower’s obligations as recorded in them. Interest

The Borrower shall pay interest on the Loan at If the Lender issues any certificate,

the annual rate of ______%. determination or notification of a rate or any amount payable under this agreement, If the Borrower fails to make the payment due it shall be conclusive (in the absence of under this agreement on the due date for manifest error) evidence of the matter to which payment, interest on the unpaid amount shall it relates and shall contain reasonable details accrue daily, from the date of non­payment to of the basis of determination. the date of actual payment, at 1% above the

rate specified in clause 1.10. Remedies, waivers, amendments and consents Costs Any amendment to this agreement shall be The Borrower shall pay, on demand and on in writing and signed by, or on behalf of, a full indemnity basis, all costs and expenses each party. (together with any value added tax on them)

that the Lender incurs in connection with the Any waiver of any right or consent given under

negotiation and preparation, amendment, this agreement is only effective if it is in writing

extension, alteration, and enforcement of and signed by the waiving or consenting party.

the Loan and/or this agreement. It shall apply only in the circumstances for

82 which it is given and shall not prevent the party Governing law and jurisdiction giving it from subsequently relying on the This agreement and any dispute or claim relevant provision. arising out of or in connection with it or its

No delay or failure to exercise any right subject matter or formation (including non­ under this agreement shall operate as a waiver contractual disputes or claims) shall be of that right. governed by, and construed in accordance with, the law of England and Wales. No single or partial exercise of any right under this agreement shall prevent any further The parties to this agreement irrevocably agree exercise of that right (or any other right under that the courts of England and Wales shall this agreement). have exclusive jurisdiction to settle any dispute or claim that arises out of or in connection with Rights and remedies under this agreement are this agreement or its subject matter or formation cumulative and do not exclude any other rights (including non­contractual disputes or claims). or remedies provided by law or otherwise. This agreement has been entered into on the Severance date stated at the beginning of it. The invalidity, unenforceability or illegality of any provision (or part of a Signed by provision) of this agreement under the for and on behalf of the Lender. laws of any jurisdiction shall not affect the validity, enforceability or legality of the other provisions. If any invalid, unenforceable or illegal ...... provision would be valid, enforceable and for and on behalf of the Borrower. legal if some part of it were deleted, the provision shall apply with whatever modification as is necessary to give effect to the commercial intention of the parties...... Counterparts This agreement may be executed and delivered in any number of counterparts, each of which is an original and which, together, have the same effect as if each party had signed the same document. Third party rights A person who is not a party to this agreement cannot enforce, or enjoy the benefit of, any term of this agreement under the Contracts (Rights of Third Parties) Act 1999. Notices Each notice, request, demand or other communication under this agreement shall be: in writing, delivered personally or sent by pre­paid first­class letter or fax (confirmed by letter).

83 Model loan stock application

Application for loan stock in

Name ……………………………………………………...... [the Co­operative] (full registered named of corporate body i.e. company or society including Limited)

Registered office address ……………………………………………………......

Registration number: ………….………………...... ………

I ……………………………...... ………………….. (name)

of …………………………...... ……………………………. (address) wish to apply for loan stock in the above co­operative on the basis of the attached conditions.

Amount applied for £ ………………………………………..

I have read the conditions attached and I accept them.

…………………………...... …………….. (signed) …………………………….. (date)

Conditions considers that there are sufficient funds available, or if a replacement investment 1. Interest can be arranged. a. Interest shall be paid at the rate specified i. A written notice stating the amount to be above on each full £100 of loan stock held, repaid, must be sent to the co­operative on the 31st December of each year, or upon together with the loan stock certificate. the withdrawal of loan stock. ii. Repayment will normally be made within b. In the event of the loan stock having been the following periods of time after receipt of invested for less than the full year, interest shall notice: up to £500, 1 month; up to £2000, be paid pro rata. 2 months; up to £5000, 3 month; or over c. No amount less than £1 shall be credited. £5000, 4 months. d. Loan stock certificates for interest carrying iii. Where part of the loan stock only is the same conditions as the principal shall be repaid, a new certificate for the outstanding despatched no more than four weeks after the amount shall be issued to the holder. interest becomes due. iv. Applications for repayment shall be dealt with strictly in the order of the dates they 2. Repayment are due according to ii above. a. This loan stock will be repaid in full on the c. The co­operative may repay loan stock at 31st December of the year specified above any time at its discretion, including interest as the closing date. paid up to that point. b. The co­operative may accept applications for early repayment of this loan stock if it

84 3. Repayment on default 4. General a. The co­operative shall repay this loan a. These conditions shall not give the stock in full immediately if the co­operative: lender(s) any rights to attend meetings or i. is in breach of these conditions; or participate in any way in the management ii. is overdue on any payment by 21 days of the co­operative other than those she/he or more; or might have as members. iii. passes a resolution for winding up, or b. These conditions shall not in any way be goes into liquidation, or has an administrative affected by the Lender becoming or ceasing receiver appointed over any of its assets, or to be a member of the co­operative. has an administration order made against it, c. These conditions may be varied at any or an effective instrument of dissolution is time by decision of the co­operative. made by the members of the co­operative. d. Loan stock is non­transferable.

Model loan stock certificate

……………………………………………………...... (full registered named of corporate body i.e. company or society including Limited)

Certificate no.………………………...... Amount of Loan Stock £ ...………………….....….

This is to certify that …………………………………...... ………… (name) of

………………………………………………………(address) is the holder of £ ……...... fully paid of loan stock in the above co­operative issued subject to the conditions set out overleaf.

Signed for and on behalf of the co­operative

……………………………………………. (Director)

…………………………………………….. (Director/secretary)

NOTE: the conditions on the loan stock application form should be repeated on the certificate.

85 Corporate application for withdrawable shares issued by

Name ……………………………………………………...... [the Co­operative] (full registered named of corporate body i.e. company or society including Limited)

Register number………………………………......

To become a corporate member requires a minimum of ...... shares. Each share costs £1. Each shareholding member has one vote, regardless of the size of their shareholding. The maximum permissible shareholding is £20,000 except for other Co­operative and Community Benefit Societies.

Applications must be received at the office of the Co­operative before ...... 20......

I/We wish to become a member of ...... Limited [the Co­operative] in accordance with the rules, & apply for: shares, and enclose payment for that amount (cheques payable to ...... Limited [the Co­operative]).

Full Official Name ………………………………......

Address for correspondence ......

Registration number ...... Contact name ......

Telephone ...... Email......

Agreement We agree to be bound by the Terms and Conditions included in the attached prospectus and the Rules of the Co­operative.

We understand that the Co­operative’s Board may reject our application and does not have to tell us why it has been rejected.

Data protection & money laundering The data provided by you on this form will be stored within a computerised database. This data will only be used for the Co­operative’s purposes and will not be disclosed to a third party.

It is a term of the offer that to ensure compliance with the Money Laundering Regulations 2003, the Co­operative may at its absolute discretion require verification of identity from any person/organisation seeking to invest.

Signed as a deed Director Director / secretary

Signature ......

Name ………………………………......

for and on behalf of ......

Date ......

86 Application for withdrawable shares issued by

Name ……………………………………………………...... [the Co­operative] (full registered named of corporate body i.e. company or society including Limited)

Register number………………………………......

This form should only be completed if you wish to nominate a person to receive your shares on your death. You can nominate a person to whom you wish your shares to be transferred on your death. We will respect those wishes (so far as the law and our Rules permit).

If you are a joint holder and you do not wish your holding to pass to the other joint shareholder(s) then you must complete this form. You may nominate a person to whom you wish your joint shareholding to be transferred on your death.

Name ......

Address ......

Phone ...... Email ......

I understand that it may not be possible for the Co­operative to action this request and I and my heirs will not hold the Co­operative responsible for its actions.

I understand that these instructions can only be revoked or amended by my giving clear written instructions to the Secretary of the Co­operative at the registered office.

I understand that trustees will need to be appointed if my nominee is under 16 years of age.

Signed as a deed

Signature ...... Date ......

Witness signature ......

Name and address of witness ......

......

Terms and Conditions for applying for Your application must be considered for Withdrawable Shares approval at the next convenient Board of You cannot withdraw your application for Directors meeting and these normally take shares after we receive your application form. place four times per year, and therefore you We do not have to accept your application for should not expect an immediate response. shares. We may decide not to issue shares to you. Or we may decide to issue to you fewer We will acknowledge receipt of your cheque shares than you apply for. We do not have to and application. We may cash your cheque as give any reason for our decision. soon as we receive it. But until we issue shares to you, we will keep your money in a separate account. We will hold that money on trust for you until we issue shares to you.

87 We will return your cheque to you (within The money will belong to us (and we no seven days of the Board of Directors longer hold it on trust for you) as soon as meeting at which we consider your we issue shares to you (to the extent that application) if we decide not to issue we take it as payment for shares). We will shares to you. If we decide to issue to you, not pay you interest on any money we fewer shares than you apply for, we will return to you. return the balance to you (within seven days of that Board of Directors meeting). The law of England applies to these terms. The courts of England and Wales have non­exclusive jurisdiction. You will be bound by our rules (as may be amended from time to time) if we issue shares to you.

88 Sophisticated Investor Self­Certification Form

I declare that I am a sophisticated investor for the purposes of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001.

I understand that this means: (a) I can receive financial promotions that may not have been approved by a person authorised by the Financial Services Authority; (b) the content of such financial promotions may not conform to rules issued by the Financial Services Authority; (c) by signing this statement I may lose significant rights; (d) I may have no right to complain to either of the following: (i) the Financial Services Authority; or (ii) the Financial Ombudsman Scheme; (e) I may have no right to seek compensation from the Financial Services Compensation Scheme.

I am a certified sophisticated investor because at least one of the following applies –

(a) have been a member of a business angels network for at least six months; or (b) have made at least one investment in an unlisted security in the previous two years; or (c) have worked in a professional capacity in the provision of finance to small­or medium­sized businesses in the last two years or in the provision of private equity; or (d) be or have been within the last two years a director of a company with a turnover of at least £1m.

I accept that I can lose my property and other assets from making investment decisions based on financial promotions.

I am aware that it is open to me to seek advice from someone who specialises in advising on investments.

Signature ...... Date ......

Please print name ......

89 Appendix 5

Glossary

Allotment Shares can be allotted to Community Interest Company (CIC) an investor without funds having actually This is a normal limited company been received; the shares are ‘paid up’ (registered at Companies House) but is when the money has been handed over. subject to an “asset lock” and special rules about dividends. Can be limited by The Alternative Investment Market guarantee, by shares or be a Plc. If it The part of the London Stock Exchange for issues shares, it is subject to strict limits small companies or ones too young to on the amount of profits it can pay meet the requirements for full quotation, in dividends, and the level of the often abbreviated to AIM. dividends themselves.

Authorised share capital Community Investment Tax Businesses issuing transferable shares can Relief (CITR) A tax relief worth slightly be authorised by its members to issue a less than the Enterprise Investment limited number of shares, to avoid dilution. Scheme for people investing in funds It is not compelled to issue all of them and that themselves lend to or invest in many companies like to keep some in businesses meeting very specific criteria reserve for rights issues, employee of deprivation, mainly according to incentives etc. geography and business sector.

Base Rate The UK’s core interest Company limited by guarantee rate and the rate at which the Bank of A company formed with no share capital: England deals with the market. It is set the only thing backing it is the ‘guarantee’ at monthly meetings of the Monetary of its members. Usually used as a vehicle Policy Committee. for not­for­profit activities.

Bonds An agreement to repay a sum Convertible preference shares invested, with interest (usually at a fixed May be changed after a fixed term into rate). Normally the investor will expect ordinary shares. to get the initial investment back on a predetermined date. Co­operative and Community Benefit Society A form of incorporated Class Shares Shares can be issued in body administered by the FSA, rather than different classes. They may have different Companies House. Until 2011 they were conditions in terms of their redemption (see known as Industrial and Provident redeemable shares), the payment of Societies. They must be either for the dividend or the degree of risk (see benefit of the community, in which case preference shares) or may have special they should give a minimal return on or limited voting rights. investment, or a co­operative, in which case they must carry out a bone fide trade. They benefit from some limited exceptions to the prospectus regulations, and must give their members equal voting rights.

90 Cumulative preference shares Not to be confused with co­operative Accumulate dividend arrears and carry dividends, which are a member’s share them forward, but non­cumulative shares based on their relationship with the co­op. receive dividends only if the company pays them. Dividend cover The number of times a company’s net earnings cover its dividend. Debenture Interest bearing stock, usually issued by private companies to raise Dividend Yield The percentage return money in return for a rate of interest to the on your investment in a share. lender. The stock may be secured against the assets of the company, and may be Earning per share (EPS) Profits made transferred to others. by a company and attributable to the ordinary shareholders averaged over the Depreciation A provision made in the number of ordinary shares in existence. accounts for the fall in the value of assets held by a business. Depreciation only Enterprise Investment Scheme (EIS) impacts on cash flow at the point when an A tax relief for people investing directly in asset is sold or replaced, but an estimate productive small businesses; it provides in based on the durability of the asset makes effect roughly an extra 6% dividend for the profit and loss statements more realistic. first three years, provided you leave your investment there that long. Dilution If a company issues shares to more people, existing shareholders may Gearing The ratio of a company’s debt see their stake ‘diluted’ because dividends to its assets. A highly geared company has are more widely spread. For this reason, borrowed heavily and may be considered issuing more shares may require a motion risky; a lightly geared company may be at a general meeting, giving shareholders spreading its dividends among too the chance to object; the new shares many shareholders, leading to dilution. may also be issued at a higher price, so that existing shareholders get a Gross The total before any costs or disproportionate return. deductions.

Dividend The payment an organisation High Net Worth Someone who has makes to shareholders from available certified themselves as having a great profit. UK companies will usually pay any deal of money, according to a specific annual dividend in two parts – an interim definition. Any company can offer shares and a final dividend. Final dividends to a High Net Worth individual without require approval at AGM to become an authorised prospectus. legally binding on the company but interim dividends only need to be declared by the Indivisible reserve Reserves that are governing body. Withdrawable shares are indivisible cannot be distributed, under said to pay interest, rather than dividend; any form, both during the life of the though it can behave in very similar ways. co­operative and during its dissolution.

91 Industrial and Provident Society Non­user members In a Co­operative (IPS) See Co­operative and Community Society, non­user members are Benefit Society. shareholders that do not make use of the services of the co­operative (in a worker Internal rate of return A measure co­operative, workers are considered used by economists to compare different users as the main service provided is the investments. It can allow for different levels provision of employment) – they are of return each year and treats early returns instead just investors or supporters. They as being more valuable than later ones. can hold shares, but must have strict limits It is sometimes known as the ‘effective on their voting rights. interest rate’. Ordinary Shares Having a ‘full risk’ Issued share capital The shares the stake in a company. The shareholders company has actually sold as opposed are entitled to vote at annual general to the authorized share capital that it meetings, gives the investor a share in the is allowed to sell. company’s dividend, and a stake in the assets. The shareholder is not personally Loan stock Essentially the same as a liable for any part of the company’s debt debenture or a bond. Normally has a provided it is either a ‘limited liability’ or ‘closing date’ on which investment will a ‘public limited company’. Shares can be be repaid, with repayments before that a comparatively risky form of investment. date being at the discretion of the governing body. Preference shares Carry a fixed dividend which is paid before dividends Matched bargain A way of selling are paid to holders of ordinary shares. transferable shares that are not listed They have priority over ordinary shares on an exchange; a broker will put if the company has gone into liquidation. shareholders wishing to sell in touch They own part of the company but have with shareholders wishing to buy and no voting rights. will help determine a fair price. Price Earnings (P/E) Ratio Equal to Members The shareholders of a the share price of a company divided by company or society, or the guarantors its EPS and providing a measure of how in a Company limited by guarantee. well the share price represents the ability of the company to generate earnings. Net The value after costs and deductions are taken into account. Prospectus Document which lists the financial and other details of an Nominal value/ face value/ organisation which is seeking to issue par value The stated value of the share new shares. An authorised prospectus is as frequently printed on it. The market required under the Financial Services and value of a share is that derived from Markets Act for any issue of transferable freely trading. The Market Value of a shares, or any issue of company shares, company is obtained by multiplying the to more than 100 members of the public. price of the shares by the number of An authorised prospectus is very shares in existence. expensive to prepare.

92 Public Limited Company (PLC) Sophisticated investor Someone A well capitalised company that is certified who certified that they have bought shares to issue shares to the public. recently or is otherwise a knowledgeable investor. Any company can offer shares Redeemable shares A time limited to a sophisticated investor without an share that cannot be traded; the investor authorised prospectus. is repaid the nominal value of the shares on a specified date. Stock Any agreement that implies part­ownership of a business and gives Rights Issue When a company raises the holder a claim on its assets. (But loan capital from shareholders by issuing new stock holders do not have any ownership shares to them pro­rata to their existing rights or claim to assets other than the holdings. The new shares will be cheaper amount invested.) than the existing shares but they are under no obligation to participate. A rights issue Subordination If one creditor or investor can fail. agrees to receive repayment on dissolution only after another one has, they are said Scrip issue (Bonus issue) When to be ‘subordinate’. free shares are issued to existing shareholders through a transfer within User members In a Co­operative the company’s reserves. Society, the user members are the main stakeholders in and are entitled to join and Securities Stocks, bonds and any vote on a one member, one vote basis. investment with an element of ownership. Non­users may have some voting rights, Share premium. The difference between but users must have effective control: the nominal value of the company share normally at least 75% of voting power. e.g. 20p and the issue price e.g. 50p. Dividends paid to user members should The difference of 30p is in the accounts be no more than is necessary to attract as the share premium account. and retain capital.

Share split When the nominal value Venture Capital Tax Relief A tax of a share is split. As a result the number relief for people investing in Venture of shares is multiplied and the share price Capital Trusts that themselves invest in diluted in proportion. A company’s share businesses that would be eligible for price will often rise on news of a planned Enterprise Investment Scheme. share split or scrip issue. Investors prefer to have low­priced shares than high­priced Withdrawable shares Pay the ones. The reverse of a share split is a investor the nominal value of the shares consolidation. on request (subject to a period of notice) unless the governing body has suspended all withdrawals.

93 Co­operatives UK Holyoake House Hanover Street Manchester M60 0AS

Tel: 0161 246 2900 £15 Fax: 0161 831 7684 ISBN: 978­0­9549677­8­9 Web: www.uk.coop First Edition June 2011