Raising the funds you need to start a new business isn’t easy. If you want to open a store, for example, that could require a big chunk of money – especially if you need to pay for the construction of a new building.
Beyond possible building costs, entrepreneurs often need to pay for things like a business plan, start-up inventory, or legal fees. This tool provides some guidance for groups who want to know how to finance a co-operative business.
First, we recommend that you avoid long-term debt for as long as possible. This might be difficult, but it’s a good idea to explore other, non-repayable options first to keep monthly expenses low.
That said, loans are a common way to finance a new business. A loan can be amortized based on the co-op’s business plan. To qualify for a commercial loan, your co-op will need to have a strong proposal to assure the lender that you’ll be able to repay the loan. A solid business plan can help with this.
Most co-operatives build their membership by selling membership shares (sometimes called “common shares”). When someone buys a membership share in a co-op they become an owner of that business — they can vote, run for the board, and (in some co-ops) get a share of the profits. The co-op’s steering committee/first board of directors decides how much membership shares cost when they first incorporate the co-op. They choose the value based on its needs and goals. For example, if a co-op wants to have a large membership, selling shares for a smaller amount (e.g. less than $20) may be the way to go. If the co-op will need a lot of capital, and/or could provide significant benefits to members (like with a community investment co-op), it might be practical to charge a higher cost for that share.
It may be a good idea to offer different classes of membership shares that are open to different interest groups. For example, a theatre that is co-operatively owned by movie-goers and staff could have two share classes. This may be a useful strategy for raising capital and creating a specific governance structure.
Some co-ops require annual membership fees — these are separate from membership shares (which you only pay for once). This is common in non-profit co-ops that don’t raise a lot of capital from selling shares. Requiring members to pay an annual fee is a good revenue stream, and also weeds out inactive members.
Co-operatives have the unique ability to borrow funds from their members. To do this, they should create an agreement between the lender (member) and the co-op that outlines specific arrangements both parties agree to. Also, in the co-op’s bylaws, outline the maximum interest it will pay on member loans, based on provisions in co-operative legislation.
Selling investment shares is one way for co-op businesses to raise a larger amount of capital. These shares usually cost much more than membership shares and are purchased by people who want a return on their investment. Investors will normally enter into an agreement with the co-operative that outlines their investment’s rate of return, payment schedule, and other stipulations. Investment shareholders can hold multiple share, but they still have to purchase a membership share to be an owner and gain things like the right to vote. Once a co-operative is in a stable financial position, it can buy investment shares back from its investors. Also, investment shares can be issued while the co-op is operating, if it needs to raise capital for a special project.
Co-operative businesses tend to be connected to their communities. This gives them the ability to raise money through donations from residents or local businesses.
If your co-op is a non-profit and wants to be able to issue tax-deductible receipts to people who give donations, it can get charitable status. You can also consider non-financial donations, like volunteer time and in-kind services that can help build the business. A co-op’s leaders should make the co-operative’s services and benefits clear to people in their community to encourage them to get involved.
Another option is using online fundraising tools like Kickstarter or Indiegogo. These will work better for innovative, new business ideas that get the public excited. These platforms allow individuals, businesses, or groups to raise funds, usually for a start-up, with the intention of providing donors a product/reward once they’re in business. Using these platforms requires a very good understanding of your budget and capital requirements to ensure you can follow through on delivering the promised product.
In some cases, co-operative businesses may qualify for financial assistance from granting agencies. These grants are often ideal for the exploratory stages of a business, and can help finance things like early legal fees or developing a business plan. The grant process will often require an application to a government, NGO, or large enterprise. Big credit unions or co-operatives often fund business or community development initiatives. Co-operatives First can help you find the right funding agency for your business.
Raising money for a co-operative is an ongoing process in the early stages, with different steps requiring more funds than others. Depending on the type of co-operative you are forming, the sources of capital may be very different; this is especially true for non-profit co-operatives versus those that issue share capital. The following development steps provide some insight into the cost that may emerge when developing a co-op:
In these early stages, many costs can be covered by volunteer time and member fees or sale of shares. It is also common to access grants or donations to help cover the costs of the business plan, especially if you seek out an expert to do it. Depending on the capital requirements of the co-operative’s business, a loan may be required to get operational, but this should always be a last resort.
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