Sources of finance

In this guide you will learn about: 

  • What types of finance are available to your co-operative
  • Where you can hear about possible sources of finance
  • How to increase your chances of getting finance

This information is intended as a guide only and further information, including professional advice where appropriate, should be sought in all cases.

The information below has been sourced from a number of different organisations, all of which are credited (with a link to their documents in full) at the bottom of this page.

Type of finance: Debt

Bonds and loan stock

Detail

Suitable for

Advantages

Disadvantages

A bond is a form of loan agreement between an individual and an enterprise. Capital is loaned in small denominations, typically between £100 and £500, and evidenced by a bond or agreement that the society promises to pay interest and to repay the capital to the bondholder on a set date.

There are other ways of raising loan capital from the public, including the offer of loan stock or debenture stock (summarised below): the former is fully at risk, while the latter is usually secured against a specific asset held by the enterprise.

For secured loans, co-operatives will need to have a suitable asset to borrow against. Often this is a building which the co-op is using to accommodate its activities.

Loan finance is mechanistic and so the co-operative will need to demonstrate strong assumptions on its ability to repay at the agreed timetable. This means having confidence with your income streams over the duration of the period in which investment.

Loans stock can be suitable for co-operatives which are looking to secure finance but do not want to allow those investors to have a stake in the business. 

As they offer greater security and certainty, bonds may be a more attractive financial proposition for investors.

Co-operative and community benefit societies are usually exempt from financial promotion regulations associated with selling debt products to the public but it is more complex than models like community shares so organisations should seek advice before offering.

Lender/investor does not get any decision making power in the organisation which may be of value to the enterprise. 

Stability of the investment can provide a great deal of support, especially to a new enterprise.

There are now a number of social and community-focused investors and finance providers that are looking to see a social as well as a financial return. 

Debt has to be repaid according to a pre-agreed schedule and normally carries a pre-arranged interest rate.

Bonds do not provide for community engagement. Bondholders are not members, and they have no voting rights in the affairs of the society. There is not the same scope to engage bondholders in the business activities of the society as customers, volunteers or management committee members. Bonds do not give legal title to the enterprise or convey community ownership.

Debentures

Detail

Suitable for

Advantages

Disadvantages

A corporate bond which is backed generally by the borrower's specific assets.

A form of loan which behaves a little like equity.

A long term debt, bearing interest at a fixed rate, but unlike loan stock: it can be transferable, allowing it to be sold to another person.

The debenture is subordinate to other creditors, so debenture holders are taking a greater risk. However, debenture holders will still be paid before any shareholders.

Have the same suitability as other loans and bonds, although debentures are usually secured against a specific asset held by the enterprise.

The investor has a more ‘risk sharing’ role with the return linked to performance of the enterprise.

Because they behave more like equity, they are of use to companies limited by guarantee that cannot have shareholder equity.

Co-operative and community benefit societies are usually exempt from financial promotion regulations associated with selling debt products to the public but it is more complex than models like community shares so organisations should seek advice before offering. 

Because debentures are more complex than loan stock, but depend no less on trust, they are generally used by larger, well-established businesses.

Like bonds, debentures do not provide for community engagement. Debenture holders are not members, and they have no voting rights in the affairs of the society. There is not the same scope to engage debenture holders in the business activities of the society as customers, volunteers or management committee members. Debentures do not give legal title to the enterprise or convey community ownership.

Commercial loans

Detail

Suitable for

Advantages

Disadvantages

Loans or mortgages from banks and building societies are options for organisations looking for funding over the mid- to longer-term.

Enterprises with a strong asset base. 

Organisations usually have relative freedom over how the finance is spent.

Applications are assessed on their own merits, rather than in comparison to other applicants. This means that winning funding is not dependent on the quality of other applications.

Commercial finance can be relatively expensive.

Lenders may require security over assets, which can be more of a risk for organisations to take.

Bank overdraft

Detail

Suitable for

Advantages

Disadvantages

Granted with permission from your bank, enables you to borrow an agreed amount of money on top of your bank balance as and when you need it. 

Enterprises with a substantial trading history. 

Can be available at relatively short notice.

Can be useful in the case of short term cash flow issues.

Not suitable for start ups.

Permission can be withdrawn at very short notice.

Not suitable if you are looking for long term funding.

Often have high interest rates, making this an expensive way of getting core borrowing.

Type of Debt: Internal finance

Re-invested surplus

Detail

Suitable for

Advantages

Disadvantages

Obtaining capital by drawing on profits that have been retained for reinvestment in an organisation, rather than being ‘allocated’ for the payment of dividends to members or shareholders.

Existing co-operatives with a trading history 

Does not have to be repaid.

No interest or dividend needs to be paid on the capital.

No need to negotiate terms with any external investor or funder. 

Not available to start ups.

Only possible to raise capital to the extent of the surplus generated and not paid out to members and investors.

If the enterprise gives the impression of giving poor returns to members and investors, it may find it hard to attract more.

If large levels of unallocated reserves are built up in a co-operative, it may tempt people to join the co-operative with the sole intention of demutualisation, or tempt existing members to discourage new members from joining.

Type of Debt: Membership finance and equity

Membership fees and shares

Detail

Suitable for

Advantages

Disadvantages

Shares can be issued that are neither withdrawable nor transferable but are forfeited when the member leaves the organisation. These are the typical form share in most common ownership co-operatives.

Membership fee. This recognises the future benefit that they will gain from membership and the costs to the organisation of administering their membership. Most organisations will ask for at least £1 on joining, but a larger minimum shareholding can be specified, or a fee that is a condition of membership (which allows the income to be recorded as income). In the latter case it can be a oneoff fee, or a regular annual subscription.

Enterprises with a strong and engaged member base. 

If a co-operative attracts a very large membership they can make a significant contribution.

Of limited worth from point of view of raising finance since there is no reason for anyone to hold more than one.

Co-operatives should take care to ensure that the level of the fee is not so high that people who could otherwise benefit from the co-operative’s services are excluded.

Higher annual subscriptions are most appropriate where members are expected to get a long term benefit from the organisation’s services, and those services are only available to members.

Community Shares

Detail

Suitable for

Advantages

Disadvantages

The term 'community shares' refers to withdrawable share capital; a form of share capital unique to co-operative and community benefit society legislation. 

Can provide long-term, patient risk capital to fund a business.

As shares can only be sold back to the enterprise, this type of investment can be compatible with the enterprise's social purpose.

Community shares are an ideal way for communities to invest in enterprises serving a community purpose.

Often suitable for start-up community enterprises as it provides a source of long-term patient risk capital which helps attract other forms of finance (grant, donations and debt) giving the enterprise a good chance of viability and sustainability.

Each member has one vote, making community shares democratic, unlike company shares where each share has a vote.

Investors can be rewarded with payback of initial investment plus interest, linked to the performance of the enterprise.

Community ownership means stronger connections with potential customers, workers, volunteers and suppliers, creating competitive advantages for the enterprise.

The enterprise must have the legal form of community benefit society or co-operative with an asset lock.

Interest can only be paid at a level sufficient to attract investment.

There is a legal limit on the amount of withdrawable share capital that can be held by an individual member, currently standing at £100,000 (£20,000 in Northern Ireland).

Transferable shares 

Detail

Suitable for

Advantages

Disadvantages

Most companies use a form of share capital known as transferable or ordinary shares, which can be transferred or sold by shareholders to a third party at a mutually agreed price based on their personal valuations. Investors buy shares in the expectation of two types of financial return: a regular dividend on shares, and the possibility of capital appreciation, in which case they would expect to sell the shares at a higher price than they paid for them.

If these shareholders want to cash in their shares, they will usually find a buyer who will purchase all the shares in the company. Larger companies that decide to go public will normally be listed on a stock market, which provides a mechanism for buying and selling shares. Market forces and speculation on the future value of those shares determine share prices.

Large co-operatives that may be able to list the shares on a secondary market to allow investors to transfer their shares. 

Transferable share capital is part of the permanent capital of the enterprise, freeing it from any responsibility to make provision for liquidity (paying it back to investors).

There is no legal limit on the amount of transferable shares that can be held by an individual member (unlike community shares). 

No certainty over future value or whether any buyer can be found. This uncertainty and potential for individual windfalls has made them less popular for co-operatives.

They are not exempt from financial promotions regulations if issued by a co-operative society, which means that this type of society must have their communications vetted by an FCA authorised adviser if they do decide to issue transferable shares. It may also need to comply with the prospectus regulations if the amount of share capital on offer is above the minimum level. The only exception to this is a community benefit society, which is exempt from the prospectus regulations when issuing transferable share capital as long as the money raised is used for its business purposes. However, a community benefit society offering transferable share capital may be making a direct offer financial promotion, which is subject to Financial Promotion Order 2005.

Type of Debt: Supply chain finance

Credit

Detail

Suitable for

Advantages

Disadvantages

For example, suppliers may defer your payment of goods until you have used them to make a profit.

Enterprises with a substantial trading history and good supplier relations. 

Can help smooth an enterprise's cashflow without having to take on more onerous forms of debt finance. 

Generally not available to start ups, as many new businesses fail at an early stage.

Knowing whether or not credit terms are likely to be available is a valuable piece of information that stems from knowing your marketplace.

Visible on your balance sheet as creditors - i.e. amounts owed to others by your organisation.

Downpayments and advance purchases

Detail

Suitable for

Advantages

Disadvantages

Customers may be willing to pay in advance for a product, especially if you sell many small items rather than a few large ones.

Enterprises with a substantial trading history and good customer relations. 

Allows customers to pay in regular, predictable instalments or avoid carrying so much cash.

Customers who do not have the financial resources to pay in advance may be disadvantaged.

VAT

Detail

Suitable for

Advantages

Disadvantages

The government itself offers some limited credit terms; some businesses, for example, will prepare VAT returns quarterly, which means that for a brief period of time you have charged your customers VAT without having had to immediately hand over the cash to the government.

Small businesses can also pay VAT only on those sales that have been fully paid for (‘cash accounting’).

 

 

 

Type of Debt: Grants

Grants

Detail

Suitable for

Advantages

Disadvantages

Funders often offer grants to organisations which fulfill their charitable aims. These usually require organisations to complete an application form, which is judged against other applicants.

Because co-operatives have social benefits both to their members and to the wider society, they may qualify for grants.

Enterprises with a clear social, community or public benefit. 

Don’t need to be repaid.

Funders may be able to offer other advice and support to your organisation.

Opportunities to network with other organisations that have received grants.

Can be inflexible.

The terms and conditions of the grant often specify that the money can only be spent on certain things.

Reliance on grants prevents you from building up cash reserves for harder times.

Donation Crowdfunding

Detail

Suitable for

Advantages

Disadvantages

Donation Crowdfunding is a way of collecting donations online. Donors are sometimes given small gifts or some kind of recognition for their donation and will like to be kept in the loop about how things develop.

Enterprises with a clear social, community or public benefit and an engaged community or membership. 

May be a quicker way of reaching a wide range of people – it’s possible to attract donations from anywhere in the world.

Allows you to easily keep in contact with donors even after the campaign has finished.

Requires sustained effort to promote the campaign and build a crowd.

Best for one-off, clearly defined projects rather than for continuous core funding.

Not everyone is necessarily online.

Sponsorships

Detail

Suitable for

Advantages

Disadvantages

Local businesses may be willing to offer funding in exchange for some sort of recognition within a project or at an event.

Enterprises with a clear social, community or public benefit.

Doesn’t need to be repaid.

Lots of businesses already have a budget to spend on local sponsorship as part of their efforts to be socially responsible.

Your organisation’s reputation can become linked to your sponsor’s reputation, which may be an issue if they face negative publicity.

Donations

Detail

Suitable for

Advantages

Disadvantages

These can range from individuals throwing a few coins in a bucket to businesses donating quite considerable sums of money.

Enterprises with a clear social, community or public benefit.

May be spent quite flexibly by community organisation or social enterprise.

Through Gift Aid, registered charities can reclaim tax on donations made by UK taxpayers.

May be unpredictable, so can be hard to rely on.

Level of donations can depend on ability of people in the local area to contribute, so may be lower in more deprived areas.

Where can you find out about possible funding?

Bank account

If you haven't set up a business bank account yet, you may want to look at the community accounts of our partner The Co-operative Bank. Their community accounts are designed specifically for co-operatives, social enterprises and charities and combine sound business practice with ethical values. Find out more.

See also the section with advice and downloads relating to your financial projections: an important part of your business planning and important to help potential investers understand how you have worked out the investment your business requires, how you're sourcing this finance and your projections for at least three years.

Updated: 26/03/2019