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Co-operatives are a different way of doing business, but like any other business they need to grow and develop to survive.
A growing co-operative will benefit from increased profits and market share, will be in a better position to grow its membership and take advantage of the co-operative difference.
Getting investment ready
All co-operatives need capital to grow. The availability and ability to access capital will depend on the business plan of your co-operative and whether it is deemed to be ‘investment ready’. This means that you have drawn up a business plan identifying the case for growth, identified any risks and offering financial projections. Look at Chapter 2 of Simply Finance for further information on getting investment ready. If you need any help drawing up a business plan or you just need to talk through your plans then the Co-operative Enterprise Hub offers free advice delivered via a national network of experienced co-operative development workers.
Sources of finance
Once you know how you want your co-operative to grow and what the financial considerations are, you need to decide what type of capital you need to make your plans a reality. There are several sources of capital, the main ones are listed below.
A route that many co-operative enterprises will consider is building up cash reserves by retaining profits. Obtaining capital by retaining (or reinvesting) the profits earned from trade in previous years, rather than distributing profits to members, can be an attractive way for any organisation to finance its growth.
Retaining profits can reassure members that the decision not to distribute profits does still lead to real benefits for them. As the co-operative uses the funds to grow and improve its services, the members should experience the benefits, and approve such retention in the future.
See Chapter 4 Page 21 of Simply Finance for more details.
Investment by the members
Co-operatives may choose to finance their growth through selling shares to its members. There are various ways in which share capital can be purchased and will depend on the legal form of the co-operative.
Community share offers are an increasingly popular method of raising finance. This is a way of raising money from communities through the sale of withdrawable shares or bonds in order to finance co-operatives serving a community purpose. Members may invest up to £20,000 in the co-operative for an undefined period of time and can receive a limited interest payment on their investment. Due to the nature of community shares this is a form of risk capital – if the co-operative does not survive, the member is likely to lose their investment. Generally this form of finance is only possible by co-operatives registered as industrial and provident societies. The Legal Team at Co-operatives UK can offer advice to any co-operative considering a share issue and more details can be found on the Community Shares website.
Loan capital finance
Loans come in all different shapes and sizes, for all sorts of different purposes, and from many different places. Typically their features include a rate of interest, a schedule of repayments and what happens if you default on the repayments. Wherever the loan comes from a proper agreement should be drawn up to specify the conditions upon which money has been lent. There are various sources of loan finance for co-operatives the main ones are listed below:
From your members and supporters – Co-operatives have a group of potential lenders that many corporate organisations don’t – their members and supporters. It is in their interest for the co-operative to grow and be sustainable and as a result some may be prepared to provide a loan for a set period of time and often at much lower interest rates. It is still very important whenborrowing from members and supporters to make sure that a loan agreement is drawn up and signed by both parties.
From loan stock – Another type of loan is the sale of ‘loan stock’. Unlike a more conventional loan, there are typically no regular repayments - just a date when the loan would need to be repaid in full. As a result this is riskier loan finance and generally it comes not from high street banks but from supporters of the co-operative. Any co-operative considering a loan stock issue should take financial advice. Unicorn Grocery carried out a loan stock issue when they wished to purchase a building.
From financial institutions – Co-operatives can apply for loans from high street banks and building societies just like any other kind of business – these may include an overdraft facility, top up loan or mortgage. Information regarding ethical lenders can be obtained via the move your money website, part of a national campaign for a better banking system.
In addition to high street banks, co-operative development finance initiatives (CDFIs) lend money to businesses operating for a social purpose who may struggle to get finance from major financial institutions. Some CDFIs are national, others have a more local remit. Further Information is available from the Community Development Finance Association (CDFA).
Co-operatives and Community Finance was set up to provide finance to co-operatives. They offer sympathetic loan finance to enable co-operatives to fund their growth sustainably, including working capital, purchase plant and equipment and moving premises.
It is understandable that many co-operatives seeking finance will look first at the availability of grant funding.
Grants, gifts and donations are money that is given by people or organisations who support the aims and objectives of an organisation, sometimes without any expectation of, or right to, a return. Applying for grants is always worth evaluating when considering how to finance your co-operative. However, to largely or entirely fund a co-operative with grant funding is another matter altogether.
If a co-operative is set up to be reliant on grant income and funding, this can change it in such a way that it becomes unsustainable and not a viable business. Changing how your co-operative operates in order to get a particular grant is not an ideal method; much better to decide how you want to grow your co-operative and then see if there is grant funding to fit the criteria.
See Simply Finance for more details.