Loan stock

Loan stock is one of several possible ways for a co-op to raise funds; for others see the Finance page. 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.

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.

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.

Getting ready to start a loanstock scheme

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.

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.

Repayment

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.

Setting the interest rates

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 issue and supplied to investors at the time of issue.