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 finance the construction of a new building.
Beyond the possible costs of building a physical structure, entrepreneurs often need to pay for things like a business plan, start-up inventory, or legal fees. For groups interested in financing a co-operative business, there are several options to consider.
Loan from a Financial Institution
Commercial loans are a common way to finance a new business, and 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 good proposal in place to assure the lender that you’ll be able to repay the loan. Avoiding long-term debt for as long as possible is a good strategy that will help keep monthly expenses low. It’s a good idea to draw on other, non-repayable sources of money first.
Membership shares and fees
Most co-operatives build a membership by selling membership shares (sometimes called “common shares”). Buying a membership share in a co-op gives you the rights and responsibilities of being an owner of that business — you can vote, run for the board, and (in some co-ops) get a share of the profits. The co-op decides how much these shares cost when it first incorporates; it chooses 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-operative will need a lot of capital, and/or could accrue significant benefits to members (like with a community investment co-op), a higher share cost may be practical.
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-operatives that don’t raise a lot of capital from selling shares. Requiring members to pay an annual fee is a good way of maintaining a revenue stream while weeding out inactive members.
Selling investment shares is one way for co-op businesses to access a larger amount of capital. These shares usually cost much more than membership shares and are purchased by investors who want a return on their investment. Investors will normally enter into an agreement with the co-operative that outlines the rate of return, payment schedule, and other stipulations of the relationship. Investment shareholders can hold multiple shares (but still have to purchase a membership share to gain voting rights). Once a co-operative is in a stable financial position, it can purchase 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, and raise a portion of their start-up capital through donations from residents or local businesses.
Obtaining charitable status allows a co-operative to issue tax-deductible receipts to donors, but this option is only available to non-profit co-ops. Many co-operatives also benefit from non-financial donations: volunteer time and in-kind services are valuable contributions that help build a co-operative business. A co-op’s leaders should make the co-operative’s services and benefits clear to community members 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 assist in financing things like early legal fees or developing a business plan. The grant process will often require a formal application to a granting agency such as a government, NGO, or large enterprise. Being aware of the opportunities available to developing businesses will help access different sources of capital as they are made available. 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 opportunity.
Raising money for a co-operative will be 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.