I am Treasurer to a private members club and we are currently experiencing financial difficulties as several major repairs/refurbishments are urgently required. It has been suggested we issue Members Bonds at a value of £100 each (maximum of 20 each) in order to raise funds, but this would involve using a solicitor to draw up the details.
I have now been advised to try promissory notes as they are easier to prepare.
The idea is that if the Club is still trading in three years time the bonds would be repaid with interest, but if the Club folds then the bonds would be repaid from the proceeds of the sale of the property. (We have just had a small loan from the bank, who would not give us more as they are concerned about our ability to repay).
We have approx £12,000 pledged in principle at this time.
Anyone with any experience in this area?
Glenys Spencer
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Replies (2)
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Not much difference
Bonds and promissory notes are much the same thing. Both are documents which describe an obligation to pay a sum of money. Bonds always document a money-lending transaction, whereas in the case of a promissory note the obligation to pay could arise through some other transaction. As you are talking here about documenting loans, the two are essentially no different.
At a minimum the documentation should cover:
- who owes whom (identity);
- how much (quantity);
- when it is due to be (re)paid (maturity);
- the interest rate (price).
Other things you might want to include are:
- clarification of the method of calculation of the interest (eg simple or compound, but there are many variations of method);
- any restrictions on what the borrower can do with the money (eg repairs and refurbishments only, or general use for club business);
- any acceleration events (ie events which cause the loan to be repayable earlier than the normal due date, eg the member ceases to be a member);
- any other restrictions on the activities of the borrower (eg not giving a charge/mortgage over the property that could outrank the bond/promissory note in the event of the club folding);
- whether the benefit is assignable (ie if a member leaves the club, can they get a continuing member to buy the note from them).
If you don't feel you need any of the extras, then you probably don't need to involve a solicitor. If you feel you do need those safeguards, then it's probably best to get them properly drafted.
Thanks
Thank you David for such a comprehensive answer. You have noted many things that I would never have thought of and this has clarified my thinking.