Starting a new cooperative can create a need for substantial capital. A problem develops when trying to operate with limited membership equity capital and sizable total capital requirements. Therefore, member equity must be carefully weighed against projected cooperative capital needs.
Methods for acquiring capital and classification of financial instruments are covered under the “Feasibility Analysis” section. The task of financing a new cooperative with member equity alone is usually impossible. Therefore, additional sources for funds are needed. Local area banks are good possibilities. Others are the cooperative banks in the Farm Credit System, the National Cooperative Bank, State Rural Development offices, and other governmental funds, depending on what may be available at the time. Another option may be to sell preferred stock to members and others in the community.
The best source of financing for a cooperative is from members. The more financing members provide, the less the cooperative business will need to borrow from other sources. Usually, cooperatives sell common or preferred stock to members to raise capital. The common stock is usually tied to voting rights, but there are several types. For example, class A could be designated as voting stock and limited to one share per member while class B could be nonvoting stock that members could purchase based on their anticipated volume of business.
Preferred stock also can be sold to outside investors and members. Although owners of preferred stock have no voting rights, this stock carries less risk than common stock. Members of the community in which the cooperative is to be located may purchase preferred stock to keep the cooperative as a local business.
Conservatively estimate the amount of capital raised from preferred stock sales. Some States limit dividends that can be paid on both common and preferred, thereby making preferred stock unattractive to outside investors. Stock sale programs should be carefully reviewed by an attorney to ensure conformance with State and Federal security laws.
Commercial banks, particularly those in the area where the cooperative will operate, are an important source for loans. Personnel of these banks already are familiar with the economy in the area and probably know many of the cooperative’s prospective members. These banks also offer a variety of banking services the cooperative will need once it begins operations. New cooperatives often can get loans with the help of Federal Government agencies or other guarantees.
Farm Credit System banks, particularly the St. Paul Bank for Cooperatives and CoBank, both of which are nationally chartered, are major sources of credit to newly organized and established agricultural and rural utility cooperatives and their members. Farm Credit System banks make loans to cooperatives to purchase fixed assets and operating loans. Individual farmers borrow funds to purchase land and to finance farm operations. The system is used also to finance members’ share of equity capital for a new or expanding marketing, purchasing, or related service cooperative.
National Cooperative Bank is another source for loans and startup financing. Its financing activities are directed primarily to nonagricultural cooperatives including consumer, worker, retailer-owned, health, housing, and other types of cooperatives. Funds may be available for certain types of cooperatives, including those in rural communities.
Cooperative leaders need to carefully develop the loan application to make a good first impression on the potential lender. Lenders will insist on seeing certain key documents before considering a loan request. Special expertise is important in helping prepare these documents, including that of an economist, marketing specialist, attorney, certified public accountant, and perhaps others whose specialty is related to the activities proposed for the cooperative.
The most requested documents are:
Projected Volume of Business-
The best source for these projections comes from the potential member survey conducted as a part of the feasibility study. If the business is seasonal, it is important to accurately characterize how production or purchasing and sales occur to determine the appropriate facility and equipment needs.
Lenders don’t want to finance a proposed business without a market. They want to know who the customers are, if markets have been located, and expected prices and volumes.
Projected cash flow (Appendix IV) information may be the most important to the lender. It gives a continuous month-by-month cash income and expense prediction. Key items in the final analysis are the net cash flow for the month and the ending cash balance. Lenders are particular concerned with the net ending cash balance. Does the cooperative have sufficient funds to operate and pay bills? Should more equity capital be injected? Is additional borrowed capital needed, particularly for operating during heavy seasonal periods? Can controllable expenses be reduced during periods of low income? Are cash reserves adequate to overcome adverse market swings? And, most importantly, can the cooperative repay its loans? Most lenders want 3-year projections.
For a new cooperative, the projected operating statement provides an expected picture of operations for one or more years (Appendix IV). It contains information on sources of income as well as expenses. The key figure is the “bottom line” that indicates whether net margins (profits) are anticipated. A monthly operating statement provides information to lenders and assists the board in making major policy and management decisions.
For the newly formed cooperative seeking financing from outside sources, the projected balance sheet is extremely important (Appendix VI). It projects the future value of the cooperative and indicates its solvency and ability to satisfy creditors’ claims when due. In summary, it lists the cooperative’s assets, liabilities, and net worth.
Schedule of fixed asset costs and depreciation. Lenders look for collateral to secure their loans. A condensed listing (Appendix V) quickly conveys what the cooperative needs to purchase or lease. To assure the lender that depreciation has been accurately noted, it is also desirable to outline in table form the classes of assets, cost, life expectancy, and annual depreciation.
A summary of scheduled financing needs and sources saves the lender time in assembling the various pieces of data for analysis. It should show major items for which loans and member equity will be spent (Appendix VI). These items are extracted from the projected cash flow data. A brief resume of the designated manager should be included in the documents given to the potential lender. If a person has not been chosen, the manager’s job description should be included