Financing a Cooperative Business

(Submitted by Hannah Scott, Manager, Ohio Cooperative Development Center, OSU South Centers)

As with any business structure, securing start-up capital is a vital part of developing a co-op. But as businesses with multiple member-owners that prioritize member-benefit and democratic control, co-op financing includes some unique considerations.

Smart Phone PayWhen considering ways of securing start-up financing, cooperatives should consider both equity capital and debt capital. Members directly contribute equity capital in return for ownership of the cooperative and can do so in a number of ways including, 1) paying membership fees, or 2) purchasing common stock that confers ownership rights. In addition, cooperatives may be able to offer preferred stock to members and non-members that, in most cases, pay limited dividends, but do not grant voting rights.

When it comes to outside investment as a source of capital, cooperatives should understand the statutes governing co-ops in their state, as the regulations for non-member capital investment in cooperatives vary by state. In addition, co-ops should be careful to adhere to the principle of democratic member control that makes cooperatives a unique business model.

In comparison, debt capital is borrowed and must be repaid according to agreed upon terms. Cooperatives can approach traditional lenders for financing, making sure to address the issue of multiple owners with the lender when discussing guarantees. Cooperatives can also seek financing from institutions that are cooperatives or mutually-owned themselves or that have cooperative experience.

Various grant programs may also be available to cooperatives, but are often targeted toward the specific activities of the cooperative rather than the business structure itself.

To learn more about the financial resources available to cooperative businesses, contact the Ohio Cooperative Development Center at The Ohio State University South Centers.

Sources:
Financing a Cooperative,”Co-opLaw.Org, Sustainable Economies Law Center eResource Library

U.S. Department of Agriculture Rural Development, Understanding Cooperatives: Financing Cooperatives, Cooperative Information Report 45, Section 7, (Washington, D.C.: United States Government Printing Office,1999)