At this time in our nation’s history the word “economy” is synonymous with hard times. Over the past year we’ve encountered more than enough examples of the economic despair that has caused small business financing as we’ve known it to dramatically change. Standards for approved loan applications have become more stringent in an industry forced to clamp down on its lending. Food cooperators working on expansion projects today are finding that their perseverance and abilities have been tested like never before.
Finding definite resolution to the challenges of financing growth and expansions can be trying even in good times. However, the business model for cooperation is compelling to its owners, and its strength of purpose is a strong selling point for raising member capital. This important cornerstone of cooperative financing—capitalizing on the idea that as a group we are stronger—is where food co-ops can gain the needed support and momentum to fully fund expansion and growth.
“I’m seeing banks are all over the place, some are expressing strong interest, some are offering weak, middling interest,” said Bill Gessner, expansion planning and business development consultant. “And the financial benchmarks are stricter. It is important to creatively seek out sources of subordinate debt that will help leverage the primary debt.” From his perspective, food co-ops will need to launch what he called internal fundraising, building momentum for the project from food co-op owners in order to enhance the co-op’s ability to attract outside lenders. It’s a connection that’s integral to the co-op’s success, in addition to financial soundness and stability.
Whether or not you look beyond bank loans for financing, the co-op will have to enhance the following business activities in conjunction with their search for support:
- Ramp up marketing and communication that showcases the co-op as a valuable and worthy community asset.
- Build alignment throughout your co-op on the shared vision of what you are trying to accomplish.
Continue to improve systems and staff training in your current operation.
- Use the business tools available to carry out your planned initiatives, including the Member Loan toolbox available for free download from Food Co-op Initiative, and the Expansion toolbox for sale to CGIN members. To order go to
- Don’t give up hope. Hold on to the excitement of what you’re doing, keep looking forward and continue to take steps toward your goals.
According to Gessner, accessing a greater pool of financial resources through members is also about staying focused and productive as a business. “You want to put yourself in the best position for financing,” he said. “In this economy, attracting financing means having to do more.”
In the first phase of securing bank financing, it’s important to develop your preliminary contacts and do your research.
Look at lenders as thoroughly as they will look at you—are they a stable business or not, what have they recently financed, and at what level of risk? What factors would make your project most attractive to them? Gessner also noted that throughout this process the co-op must educate the lender about the nature of the cooperative business model and the role of member financing so that they are comfortable with it. “It’s a big part of building that relationship,” he said. Then the co-op must do its best to meet the standards and criteria set forth, including meeting financing goals through member loans.
During the second phase of the financing process, the co-op will make a formal presentation, including business plan and pro forma, to demonstrate the momentum and buy-in the co-op has achieved for the project. For established co-ops, this usually means at least 30 percent of the financing has to come from members (the “owners contribution” including cash reserves, new member equity and member loans), and for startups, at least 50 percent. The more the better.
Retained patronage dividends can also be a good source of cash helping to strengthen the balance sheet and leverage other capital. By retaining the maximum amount allowed (80%) cooperative can accumulate tax free earnings to use to finance their vision and opportunities.
For a lot of co-ops, these benchmarks represent additional pressure to raise money from their constituents. For some it seems like a daunting challenge—but the opportunity it represents for the co-op is huge. CDS Consulting Co-op member Tami Bauers consults with food co-ops working on their member equity and member loan projects. Despite the economic challenges of the past year, she’s finding member interest in helping to finance food co-ops is strong, especially if the messages from the co-op about its expansion and growth plans resonate with them.
“It is easy to sell,” Bauers said, “because member loans have so many benefits.” Members get a good return on it (anywhere from one to five percent), and they get to see directly what their money is doing in the community. “People who are passionate about the co-op will come forward,” she said, and that’s why it’s important to give people as many opportunities as possible to do so.
Co-ops that have been successful at meeting their member loan goals are those that have a multi-pronged approach that includes raising media awareness (mainstream as well as internet social media), educating staff, talking with members one-on-one through tabling and calling blasts, mailings, and messages from board leadership demonstrating their commitment to the project.
“Most people are pretty motivated by the co-op being able to offer more services that reflect their values,” Bauers said. Additionally, some people consider food co-ops an alternative to big box chains, and want to support the growth of independent business in their community. Other movements, like Slow Money, have inspired people to consider the long-term value of their investments on the community and environment, not just to maximize short term gain. Investing in the food co-op is in alignment with those approaches to development. “People are really excited to do something important with their money.”
Bauers said that for startups it is a more challenging prospect to raise a higher percentage of financing from members, but not as much as one might think. “If you have been doing a good job of getting people to join, you are starting from a good base of members to draw from for additional financing,” she said. Both Bauers and Gessner stressed the link between raising strong member equity and loans, and securing outside financing.
For those who don’t have resources to lend to the co-op, it’s important to offer other ways for them to participate by offering preferred shares or other options. “Even something as small as encouraging them to buy a gift card for a new shopper makes a difference because you’ll need to build sales in the new store,” Bauers said. By doing all you can to execute the necessary steps to prepare to get equity and loans from members and thinking creatively about financing, the co-op will be positioned to reach its goals. “You piece it together if you have to in order to show outside investors the power of co-op ownership,” she said.