Co‑ops and debt

Debt is money that is given with the expectation that it will be repaid in full, but that does not usually entitle the funder to other rights in your business. 

In most cases a lender expects you to pay a “rent” for the money in the form of interest payments, which can be fixed or variable. Debt will have a schedule of repayments at the end of which (term) all the money owed from the debt and interest should be paid.

You might incur large fines if you are unable to honour your interest payments or repay the funds at the end of the term. In some cases you will have to pay a penalty fee if you decide to repay the debt early, that will cover the cost of the interest payments the lender was expecting to receive over the borrowing period. 

Usually, the funds received can be used for any purpose at the discretion of the business owners, with no need to report to the lender, which will have no involvement in your business. However there can be cases where funds are offered for specific purposes with particularly favorable terms, for example when issued by the government. 

Debt mainly comes in the form of loans or bonds: 

• The terms of a loan are usually set by the lender, or are the result of a negotiation with the borrower. 
• Bonds instead are issued by a co‑op with a predetermined value and interest rate, which can then be acquired by bond holders, which in the case of co‑ops can be the community that they serve.

Debt can also be backed or not by a security or guarantee. In some cases a lender will put some extra conditions on the debt, to protect their money should the borrower not be able to pay back what is owed. These are called securities and can come in different forms. For example an asset-backed security loan is a loan backed by a specific asset, which would become property of the lender should the debt not be paid back. 

Unsecured debt is clearly less risky for a co‑op, but will tend to have higher interest rates and might be harder to obtain.

Platform co‑ops might find it difficult to access debt financing in their early stages especially since they often lack physical assets to use as securities. However, there are many different types of debt arrangements so it is worth exploring your options at every stage of your journey. 

As it does not involve governance issues, debt financing for co‑op is not dissimilar to that of other types of businesses so we will not go further into detail here.