About financing your business

This section aims to help you understand the key terms relating to financing your co‑operative.

What is finance?

Simply put, finance is lump sums of money that you can quickly and easily use for whatever purposes are required within your business.  It may be in the form of grants and gifts, loans, community investment or even credit.

Finance for co-operatives is in many ways similar to that for conventional business: the language, the concepts and the maths are essentially the same. The difference is that it is upside down.

In conventional enterprises, investment and ownership dictate how the business works; in co-operatives it is the members – the people most affected by the enterprise – that are in control, determining the direction of the organisation and the terms on which investment is raised. This simple, but subtle, reversal of power will provide the context for the way in which you finance your co-operative.

Getting you ‘investment ready’

Successfully financing your co-operative is likely to be the end point of a good deal of planning and preparation. As you begin the process of setting up your co-operative, you’ll need to consider what finance you need and how you will acquire it. However:

  • Whilst ALL businesses need finance
  • NOT ALL business will get the finance they need

So you need to make sure you stand out from the crowd. A co-operative, like any other business, needs to have a strong business case that clearly presents the need for finance and the model for managing that finance.

This is sometimes described as ensuring your organisation is ‘investment ready’ which is a term that is often used in understanding an organisation’s ability to take on repayable finance. However it is also relevant for co-operatives considering grants as part of their financing needs, as even grants can be regarded as a form of investing in a trading organisation.

Later sections of this site will help you create a business plan and in doing so ensure that your organisation is investment ready.

Two important things to consider at this stage are:

  • Return – financial and social
  • Risk – high and low 

Outlining your co-operative’s financial and social ‘return’

Co-operatives are businesses, but they are guided by a shared purpose – a set of values, or aims, that go beyond simply making money. As such, the ‘return’ for investing in co-operatives can result in financial and social return.

Most forms of repayable finance will require co-operatives to aim to offer some form a financial return to its investors, whether that is being able to generate surplus income to service a loan, or the ability to pay back and in some cases compensate your members who have directly invested through taking an equity stake in you co-operative. 

However, a social return is a key element of being a co-operative whereby benefit is felt/seen by the people impacted by the co-operative.

These two kinds of ‘return’ are the basis of the story you will tell about your co-operative’s intended future success.

The balance of ‘return’ between financial and social will likely affect the type(s) of investment you seek. For example:

  • If your returns are principally social, with few if any financial returns, the emphasis is likely to be mostly on grant funding, equity-based investments from the most closely involved stakeholders, and in-kind support;
  • If there are significant financial returns, with subtle or localised social returns, it may be more appropriate to look at more commercial finance

Outlining your co-operative’s risk

As well as outlining the benefits of investing in your co-operative, you also need to make it clear to potential investors the risks involved in the venture. We outline the need to undertake risk analysis, but essentially:

Risk is more than just uncertainty. It is the unavoidable, inherent uncertainty of a volatile or changing marketplace, and the extent to which those unavoidable uncertainties could impact on your organisation. There is no excuse for failing to investigate and gather information on critical issues before the organisation starts trading, but if that still leaves you not knowing exactly what kind of market will exist for your product in two years’ time, that is risk.

Risk should be considered at an early stage in the process simply because it will, to a large degree, shape the experience of the participants:

  • They reward people of very different temperaments, and anyone getting drawn into a new business activity has a right to know the level of risk involved first.
  • Your steering group should have an honest discussion about the level of risk that they are prepared to manage.

High risk

Low risk

A risky enterprise is stressful, exciting, high pressure and with the potential for both high returns and disappointment. A low risk enterprise is confined to well trodden paths, rulebound, safe and reassuring.

See also the section with advice and downloads relating to your financial projections: an important part of your business planning and important to help potential investers understand how you have worked out the investment your business requires, how you're sourcing this finance and your projections for at least three years.

Updated: 26/03/2019