Cooperative Capital

Cooperatives, like other businesses, need to raise money to fund their startup and ongoing operations. Whether it is to pay staff, invest in equipment, or open a retail location, cooperatives have capital needs like other business enterprises.

An image of a slide with the text, "Cooperatives need capital to operate!" with "Uses" and icons of a truck, retail store, and person, and "Sources" with icons reading "Equity," "Debt," and "Other."

When an individual person decides to start a business, the responsibility of capitalizing the business falls largely on that future owner. The same is true in cooperatives – members are responsible for financing the operations of a cooperative. Like other business enterprises, cooperatives also have additional options for raising money.

The ways cooperatives raise capital will include considerations about risk, legal requirements, and effectiveness, among other areas. Often, hired professionals like chief financial officers, accountants, and others manage and monitor the financial health of a cooperative and cooperatives work with financial professionals like bankers. However, the ultimate responsibility for safeguarding the assets and financial health of a cooperative belongs to the board of directors.

The main sources of capital for cooperatives include equity and debt.

View this narrated presentation to learn about the different sources a co-op can use to raise capital, including direct investment, debt, and other sources. *View “Cooperative Sources of Capital” Video Transcript

Equity Capital

Equity capital represents the portion of assets in the cooperative that are owned by members. You may be familiar with the mathematical representation of equity: Assets – Liabilities = Equity. In a cooperative, equity capital generally comes from members, although cooperatives may also have avenues for raising equity capital from nonmembers.

Find definitions of key cooperative financial concepts in the Glossary of the Co-op Mastery Workbook, beginning on page 38.

Member Equity

Cooperatives generally require some form of equity investment from their members. One of the internationally recognized principles of cooperatives is “member economic participation.” A member’s investment may come in the form of selling common stock or memberships that confer ownership and voting rights. For example, to become a worker-owner member of the cooperatively-owned restaurant and cantina, Casa Nueva, in Athens, Ohio, members must pay a fee of $1,800 to the corporation. According to the co-op’s “Rules of Operation,” the fee is deducted from the member’s paycheck over time. In Dayton, Ohio, community members can join the food cooperative, Gem City Market by purchasing a one-time $100 share; although anyone self-identifying as low or fixed income can select a $10 one-time membership share.

Cooperative members also continue building equity over time as they do business with the enterprise through deferred patronage refunds that are allocated specifically to a member’s account (also known as allocated equity). The cooperative enterprise also builds equity through retained earnings from member and non-member business that is not allocated specifically to a member (known as unallocated equity).

Generally, cooperatives set up a system to redeem, or pay back, the equity that members build in the cooperative over time. Learn more about cooperative equity redemption systems.

Non-Member Equity

Although there are avenues for raising equity capital from nonmembers for cooperatives, such as selling preferred shares, non-member investors often have limited voting and governance rights in co-ops to maintain the cooperative principle of democratic member control. Some cooperative forms, like limited cooperative associations, allow non-member investors to have voting and governance rights, like eligibility for seats on the board of directors. Other cooperative forms may give non-member equity holders only limited voting rights, like the ability to vote only when their interests are concerned, without eligibility for sitting on the board of directors.

In July 2020, the Bay Area Ranchers Cooperative formed to purchase and operate a livestock processing facility for use by ranchers in California[1]. The group estimated they needed $500,000 – $1.2 million to fund start-up. As part of their plan to capitalize the cooperative, the cooperative offered investment opportunities to nonmembers. The investments did not confer voting rights.

CROPP Cooperative is owned by more than 1,600 farmers and markets various organic products like milk under the brand “Organic Valley.” The co-op reportedly raised substantial funds from 2004-2010 by offering preferred stock offering a 6% dividend and limited voting rights to outside investors.

In some cases, the returns cooperatives can pay on non-member equity is limited by state or federal law. Cooperatives, like other businesses, must ensure their efforts to capitalize their enterprise comply with state and federal securities laws.

Cooperative attorney Carolyn Eselgroth, of Barrett, Easterday, Cunningham and Eselgroth, LLP in Ohio provides insight on cooperative equity tools and securities laws. *View “Securities” Video Transcript

Debt Capital

Debt is a contractual obligation that must be repaid according to the terms of the contract – for example, a bank loan. Cooperatives generally can access debt capital like other businesses, although there may be specialized considerations for cooperatives. Whether in the form of term loans, lines of credit, or other financing tools, debt capital may come from commercial banks, cooperative banks, or other sources. Some financial institutions are themselves cooperatives or specialize in serving cooperatives. For example, National Cooperative Bank has a mission of “supporting low-income communities and the expansion of cooperative initiatives,” while CoBank is a national cooperative bank serving industries in rural America as a member of the Farm Credit System and Shared Capital Cooperative is a cooperatively owned and managed lending and investment fund for cooperatives. Like other business enterprises, lenders will assess various aspects of a cooperative enterprise, including financial ratios, to determine risks, debt availability, and terms.

Notes

[1] At least one news article in November 2023 reported that the Bay Area Ranchers Cooperative had closed.  See: Murphy, A. (Nov. 9, 2023). “Bay Area Ranchers mobile slaughterhouse folds after less than 2 years, dealing blow to local livestock industry.” The Press Democrat. https://www.pressdemocrat.com/article/news/bay-area-ranchers-mobile-slaughterhouse-folds-after-less-than-2-years-deal/

References