In addition to traditional borrowing instruments, NPOs also have the option of raising funds from within their community. This is a brief guide to community bonds, a tool that is still largely unknown.
The concept of community bonds is simple. They are debt instruments, otherwise known as loans, issued by a non-profit organization (NPO) within its support community. This community may comprise members, users, partners, employees and anyone else who believes in the project, along with legal entities, such as foundations.
The fund raising takes the form of bonds that stipulate that, at the end of the term, the capital will be reimbursed to the investors, along with interest. They are executed without an intermediary, and the NPO is not obligated to issue a prospectus.
However, this administrative streamlining does not absolve the NPO of its responsibilities, and it must fulfil its obligations.
Advantages of community bonds
Community bonds carry numerous advantages for NPOs that are eligible to issue them. They give NPOs access to new private capital, which helps to diversify their sources de financing. This results in a sharing of risk between the community and traditional funding organizations.
Community bonds are also a flexible tool, because the board of directors of the NPO determines the specific characteristics (i.e.: amount to be issued, par value, payment terms, interest rate, conditions for renewal, term, etc.). As a result, the bonds are not only adapted to the needs of the organization, but also to its financial situation and investor profile. Interest rates are often lower than those offered on the market, and they take into consideration the NPO’s ability to pay back its investors in the future. The flexibility of repayment conditions also makes these instruments very attractive.
By issuing these over-the-counter loans with no involvement from a financial institution, the organization also strengthens its roots within its community by forging a reciprocal and long-term relationship. The project for which the bonds are issued gains visibility, which helps to strengthen its territorial and social ties. There is also a leverage effect on other potential funding organizations that may discover an incentive for investing as well.
How community bonds work
An NPO that wishes to issue community bonds should follow these five major steps:
- The team should begin by gathering information and assessing the situation to ensure that the organization meets all of the required conditions. More specifically, it is important to verify that it has the legal capacity, financial ability and necessary human resources to undertake this type of campaign.
- The next step is to design the campaign itself. This is the time to determine the issuing conditions, assemble the investor kit and develop the management tools (method for receiving payments, production of receipts, etc.). It is also time to think about the mobilization and communication strategy with the community.
- Issuing the bonds is the next step. This is executed over a specific period, usually a number of months. Some organizations prefer to issue bonds multiple times within a year in order to spread out the repayments.
- Once the bonds have been issued, the support community must be kept informed with respect to the progress of the project in which they have invested. This relationship will be developed over a number of years, which is why it is so important to implement effective communication tools in order to maintain ties with the investors.
- When the term expires, the NPO must repay the capital, plus interest, or renew the bonds for an additional period of time.
It is important to note that community bonds have their limitations, and cannot replace all other types of financing. In addition, they represent a debt that the organization must repay sooner or later, which is why it is necessary to implement a stringent strategy respecting community bonds.
The issuing process also requires a significant time investment to move from design to sales to managing the bonds. The team and the board of directors at the NPO will have to devote numerous hours to this process, so it’s better to be forewarned! On top of that, there is work involved in following-up and keeping the investors informed.
It is also important to remember that, when an NPO undertakes the issuing of community bonds, it must then assume the responsibilities of sound management and transparency. Prudence, thoroughness and adopting best practices are crucial.
Despite these limitations, community bonds are a tool that not only contributes to enhancing the NPO’s visibility and reputation, but also helps it to bring a project to fruition. For their part, the members of the supporting community are able to increase their savings while supporting a cause that they hold dear.
According to data published by Territoires innovants en économie sociale et solidaire (TIESS), as of December 31, 2020, seventeen (17) issues of community bonds had been carried out in Québec, for a total value of $1.6 million. The largest issue resulted in raising $600,000, and the most common interest rates ranged from 2% to 6%.
One major success story is the case of Le Grand Costumier, an organization whose mission is to preserve the integrity of the costume collection it received from Radio-Canada. In 2017, it became the first organization in Québec to issue community bonds, at a value of $20,000. A second campaign was launched the next year, raising an additional $30,000.
The Cinéma du Parc in Montréal also issued community bonds 2017 to raise $145,000 in order to restore and renovate its rooms.
Bâtiment 7, a community organization in the Pointe-Saint-Charles neighbourhood of Montréal, was able to acquire a building after issuing community bonds valued at $50,000, followed by a second issue of $25,000.
Another example of the possibilities that this lending tool can open up is Les jardins des cocagnes in Frelighsburg in the Eastern Townships, which was able to acquire farmland thanks to the issuing of community bonds in the amount of $600,000.
The Carrefour alimentaire Centre-Sud purchased a commercial space following an issue of $255,000.
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