Loan stock

One of the advantages of being a Co-operative Society is that co-ops can run and publicly advertise 'loan stock schemes' (sometimes written as one word, "loanstock"). Loan stock is a way of raising private arrangement finance, usually from individuals (including group members) and other co-ops.

Buying a property section is the most common reason for using a loan stock scheme, though loan stock can be issued at other times. Co-ops might issue loan stock to build an extension, to do extraordinary maintenance or to refinance.

Loanstock can be relatively short term, and interest is often cumulative, so compared with a mortgage at the same interest rate, it will cost you more over time. You can get around this by paying the interest annually if your cash flow can support this. On the other hand, you don't need to pay it every month, so it has a beneficial effect on your early years cash flow, when finances are often at their tightest. Investors can also choose to reduce or waive the interest when signing the loanstock certificate.

Dealing with other people's money is a matter of serious and continuous responsibility, but with adequate attention it is not difficult to master the process of managing a loan stock scheme.

Other ways of affording a house

Loan stock is one of several possible ways for a co-op to raise funds; for others see the Affording a House For some coops trying to raise the deposit on a property, loan stock is the only means but full members of Radical Routes would also be eligible for a Radical Routes loan. Loan stock is the only sort of loan a co-op can advertise for without being regulated in the same way as banks.

Getting ready to start a loanstock scheme

A well-subscribed loanstock scheme is useful in convincing other potential lenders that you already have a certain level of support and are not undertaking the venture entirely on your own. If you can raise enough this way it is possible to buy a property solely with loan stock.

To confirm loan arrangements in advance, give potential lenders a form with which they promise, on notice, to invest an amount when you most need it. You can start collecting such pledges before registration is complete but do not accept loans or issue loan stock certificates until you are registered.

The continual issues of loan stock is not allowed – you will need to set a start and end date for each period during which the co-op is accepting loan stock.

Beware of receiving loan stock funds before you need them – house purchases can drag on for months and your co-op will be liable for interest payments agreed during this time whether or not you have any rental income. It may be that you can put the funds into a high interest bank account to cover this, but this won't be the case during times of low interest rates.

Considerations while looking for investors

It's important to be careful about how you advertise a loan stock issue. You have to make it clear that it is an unsecured form of loan, and there's no guarantee the money will be paid back if the co-op fails. Normally, if everything goes wrong, loan stock investors are among the last people to be paid on the sale of the co-ops assets. If the house has dropped in value, or there's a failure early on, there may not be enough money to repay all investors.

Purchasing loan stock does not give investors extra status within the co-operative. The ownership of loan stock is totally separate matter from membership of the co-op. Non-members who own loan stock are not permitted to have any influence at all in the running of the co-operative. It is important that this is clearly stated at the outset and repeated when necessary, or relations between members and investors, who could well be family or friends, may become strained.

Loans can be made by institutions as well as individuals. If an institution is looking for an ethical financial investment, it is possible that you could offer them a rate of interest as high as any they could find elsewhere. It would be worth spending time researching this area as some of the more socially progressive charities could be sympathetic to investing money in a co-operative housing project.

What loanstock documentation is needed

Clear and detailed records of all loanstock transactions must be scrupulously kept.

Loan stock certificates are a legal document which guarantees the conditions of the loan. These are issued to lenders as a receipt for their money. The certificate, which can be impressed with the seal of the co-operative, is proof of the loan and stipulates the terms and conditions. This includes the agreed percentage of interest to be paid by the co-operative and the duration of the loan.

The loan stock register should record the copies and details of the loan stock certificates you issue.

Remember that money loaned to the co-operative must also appear in the co-operative's accounts.

HMRC (the government's tax collection authority) may ask for a list of your investors with details of the interest they receive. You must send them a list of all investors receiving more than £250 interest in any one year.

Budgeting for loanstock repayment

You must factor all loan and interest repayment schedules into your budgeting.

Repayment can be made on a fixed date, say 31 December 2025, or to a fixed schedule, such as three equal installments on agreed dates after 31 December 2025. Having one annual date on which you add interest and repay loans, which matches your accounting year end keeps things relatively simple for the co-op's bookkeeping. However, lots of small repayments over a wide spread of dates can be preferable to lots of money all going out at the same time.

Interest is often set at 0% to 5% per annum, leaving investors free to choose the rate they prefer within these parameters; set them differently if you wish. A lot of lenders really do choose to waive the interest. Alternatively, interest can be linked to an index, such as the Retail Price Index or the Property Price Index, but this has the disadvantage of making financial forecasting for your co-op harder since you never know quite how much interest you will need to pay over the period of the loan.

Your co-operative can offer interest rates competitive with commercial banks, but can organise its own terms of repayment. Interest rates on loan stock may be varied annually, but such alterations must be agreed at a General Meeting of the co-operative. All conditions covering loan stock issues must be published with the loanstock issue and supplied to investors at the time of issue.