Co-operative FarmingAttracting funding for a new idea requires planning from the start. There are two phases requiring finance in the development of all new co-operatives:
Funding sources for these phases are different because the funding instruments, risks and returns are different. Before registration, the costs will be those associated with a feasibility study, developing a business plan and the registration documents, and registering the co-operative. Funding will generally come from those leading the project to form the co-operative or it may come from grant funding.
Once the co-operative is registered, the costs of the co-operative relate to starting the business operation. For this phase, there are different funding options such as offering shares or accepting membership subscriptions.
It is important that for each phase that you have a clear idea of how much finance is required. This should be identified in your business plan. If you have not finalised a business plan, you can look at the fundamentals of identifying your finance needs by accessing Business planning for co-operatives or by going back to Plan.
Download and read BCCM’s in-depth guide to raising finance, Community investment for Australian co-operatives: A Handbook.
If your co-operative is considering raising funds for growth or new projects, access the Capital Builder to learn about co-operative capital and guidance for raising funds.
Certain co-operatives operating in South Australia, New South Wales and Western Australia may be eligible for state government co-operative loan programs. Find out more:
Loans to cooperatives scheme – PIRSA
Where do people get the money to start new businesses? For most people, the answer is that they use their savings or ask friends or family for support. The same is true when it comes to co-operatives.
Co-operatives are designed for people to work together and the founding group will contribute their skills and sometimes their money to get things started. Often the founders will work hard and without financial reward to develop and test the idea for the new co-operative. The return for this group may be the satisfaction of establishing the co-operative and the prospect they will be rewarded for their efforts by the co-operative after it is up and running.
The time and resources from the co-operative’s founders may not be enough. To attract the required assistance or finance, the founders may need to engage others to put their time or money into the project or look for grant funding. Those who commit money or time during this stage of a co-operative’s development do not have any formal way of recovering their money or being compensated for their time.
Co-operatives are designed to engage as many people as possible to join and support a business idea. Part of the planning process for a new co-operative involves identifying the potential members. These are the people who can be approached to support co-operative by providing some financial help.
Engaging individuals and communities to support the development of a new co-operative can help raise finance. Holding meetings for potential members, community meetings or starting a crowdfunding campaign through a crowdfunding platform can be useful ways not only to scope the potential membership numbers, but also to ask for financial or other support. Each of these techniques provides opportunities for you to test your idea, refine it and gauge how much finance you can expect from potential members and others to launch the co-operative.
Crowdfunding platforms can be useful to raise interest and potential financial support in this development stage.
Crowdfunding is all about pitching an idea to people who are likely to support it and asking them to provide some money to help it get started. People will contribute money if they believe that the idea is a good one or because they expect to receive a return, albeit that the return may be limited. Contributors to a crowdfunding campaign manage their risk by either limiting how much they donate or by choosing a reward they are confident will be provided. Co-operatives that are built from the ground up by people or communities who support the project are strong exemplars of the co-operative model as a self-determining business.
You can read more about and see some examples of funding for this first phase for a start-up co-operative in Part 1 of the Community Investment Handbook). For a brief overview of co-operative securities, read BCCM’s Crowdfunding for co-operative securities paper.
If you are seeking finance at this stage you cannot make an offer of shares in the proposed co-operative, shares can only be offered if the co-operative has been registered.
If you accept any money as a prepaid membership subscription before registration, then this money must be returned if the co-operative is not registered within two months of the payment being made.
Access links to resources and organisations that can help with this phase.
Applying for grants from government agencies or philanthropic bodies should be considered at this early stage.
Many not for profit co-operatives have been facilitated by grant funding. Federal and state government agencies have a range of grant funds to help start-up businesses.
You should identify in your business plan how the start-up of the co-operative is financed. If the co-operative is one with share capital (either distributing or non-distributing) then the co-operative will begin by offering its shares to people who have been identified as potential members.
Distributing co-operatives must have prepared a disclosure statement as part of their formation and registration. The disclosure statement becomes the document that can be given to potential members to invite them to become members and to buy shares.
A non-distributing co-operative is not likely to have a disclosure statement unless the Registrar has required it. If there is no disclosure statement, then a non-distributing co-operative can prepare a document that includes the share offer and provides information that would be normally included in a disclosure statement.
A disclosure statement or other share offer document is similar to a prospectus for a company share offer. It describes the shares, the rights and obligations of membership and sets out what a shareholding member can expect from their investment.
Disclosure statements or share offer documents are the co-operative’s primary marketing tool to raise finance. The content and accuracy of these documents are closely regulated and false statements or omissions that are misleading can result in prosecution and claims for damages by members.
If your co-operative’s rules require members to pay a subscription, getting your membership application forms out to potential members to join and pay the subscription is part of your finance raising activity.
Once the co-operative is registered, it has the status of a legal person. Like any other person or corporation, it can apply for a loan or credit from a financial institution.
Financial institutions lend when there is adequate security or where the borrower (the co-operative) can demonstrate a strong business idea that justifies the risk of lending. This can be difficult to show at the time of start-up.
Borrowing does not have to be from a financial institution.
Certain co-operatives may be eligible for government co-operative loan programs in South Australia, New South Wales and Western Australia.
The co-operative can borrow from its members and from other people in the community. When a co-operative borrows from its members or from other people, it does this by offering debt securities called debentures or bonds. In the same way that willing community members might contribute to the initial financing of the co-operative before registration, there may be community investors willing to finance its start-up business operations for a financial return.
Offering debt securities to your members or to the broader community is regulated by requirements for full and accurate disclosure.
Learn more about offering securities in part three of the Community investment for Australian co-operatives – A Handbook.
Read these simple examples of a disclosure statement for an offer of debentures to members:
You can learn more about marketing an offer membership of a co-op and/or investment in the marketing share offers section.
If your co-operative is considering offering securities, then it is advisable to seek professional assistance. Access referrals, resources and other information.
For a brief overview of co-operative securities, read BCCM’s Crowdfunding for co-operative securities paper.
Recently, co-operatives have been formed to buy an existing business. In these situations, there is the basis of a business plan and of how much finance must be raised to buy the existing business.
A buyout might be by local producers, a local community group or by the employees of the business.
Forming a co-operative to buy an existing business does not require a different formation process, and the same avenues for raising finance exist.
When a co-op wants to launch an offer for membership and/or investment for a community buyout it is recommended that it develops a planned approach. The Marketing an offer section provides a step-by-step guide to create and implement an offer-specific marketing plan.
You can read more about buyouts at The Hive – this site is managed by Coops UK and refers to UK laws.
A co-operative buyout will require professional advice and assistance.
Kevin Franey, TNR Chartered Accountants, on the distinct advantage of the co-operative model.
“The co-operative model provides a distinctive advantage in relation to tax benefits. It’s largely similar to a company tax environment but it allows co-operatives in certain circumstances to gain a competitive tax advantage on their borrowings where the government or the Income Tax Assessment Act allows them to claim a tax deduction for the repayment of debt.”
