Community bonds and share offers

Small social enterprises in Scotland hit the same wall when they try to borrow. A bank wants a trading record, some security and a loan big enough to justify the paperwork. A village café that needs £4,000 to tide it over until a grant arrives usually has none of those. One answer that has spread over the past decade is to ask the people who use and care about an enterprise to lend it money, or to buy a stake in it.

The new bond

On 7 December 2017 Scottish Communities Finance, a community benefit society and community development finance institution, opened its first community bond. The target is £100,000. The money will capitalise a loan fund making small, unsecured loans, bridging loans among them, to social enterprises that belong to Scotland’s local and thematic social enterprise networks. Bonds start at £50 and go up to £5,000, pay 2% a year and are held for at least three years, with capital and interest repaid at maturity.

The idea is that the sector lends to itself: staff, trustees, volunteers and charities put in small sums, and the pooled money goes to organisations a bank turns away. It follows a principle set out when the Scottish Community Re:Investment Trust was formed at the end of 2014: that the third sector should pool some of its own money for the benefit of the communities it serves.

Shares and bonds are different things

A community share is a stake in a co-operative or community benefit society. It is usually withdrawable rather than transferable: it cannot be sold to anyone else, but the member can ask the society to pay it back, and the board can refuse or delay repayment if paying out would harm the society. Each member normally has one vote whatever the size of the holding. Under section 24 of the Co-operative and Community Benefit Societies Act 2014 an individual may hold no more than £100,000 of a society’s withdrawable shares. Interest can be paid, but it is meant to be modest.

Share offers have paid for community buyouts of pubs, shops and land, and for renewable energy. Edinburgh Community Solar Co-operative raised £1.4 million in 2015 to put solar panels on public buildings across the city.

A community bond is a loan. The investor lends a fixed sum for a fixed term at a stated rate and gets no ownership and no vote in return. Bonds suit organisations that cannot issue shares, such as charitable companies, or that want to raise money without changing who controls them.

What can go wrong

Both should be treated as money that could be lost in full. If the organisation fails, shareholders are repaid only after every creditor, and there may be nothing left for them. Bondholders are creditors, but usually unsecured ones, standing behind any lender that holds security. The Financial Conduct Authority states that it does not regulate withdrawable, non-transferable society shares, and that people who buy them cannot complain to the Financial Ombudsman Service or claim from the Financial Services Compensation Scheme. A community bond is not a bank deposit either, and there is no FSCS cover if the issuer cannot repay.

Getting money out early is the second risk. A withdrawal from a share account depends on the society having spare cash and the board agreeing to it. A bond is normally locked in until it matures. There is no market for either.

The return is low by design. At 2% a year the new bond pays less than inflation, which stood at 3% on the consumer prices index in December 2017. The reward is meant to be what the money does in the meantime, and that is the only sound reason to invest.

Before investing

Read the offer document in full, including the business plan and the rules on repayment or withdrawal. Check whether the organisation’s accounts are published and up to date. Ask what happens to the money raised if the target is missed. Keep the amount small enough that losing it would be a disappointment rather than a hardship.