Why Cooperatives need Money and why Members need to Invest Money

Cooperatives March 07, 2011 Print Friendly and PDF


Author: Chris Peterson, Michigan State University, peters17@msu.edu


The fundamental principles of cooperatives clearly indicate that members use and own the cooperative. The user role does not entail anything more than normal patronage of any business. If you buy from the cooperative (or any other type of business), you need to pay for what you buy, or if you sell to a cooperative (and/or other type of business), the cooperative needs to pay you. There is nothing unusual or unique about this member role in terms of finance versus buying/selling to another type of business.


The owner role of the cooperative member does require a different commitment in terms of financial responsibilities. As owners, members are the primary source of ownership (equity) funds for the cooperative. Members must thus invest in their cooperative and not merely use or patronize it. In other words, members who do business with other firms can just do buying or selling, but in order to do business with their cooperative, they must invest as well.


Traditionally, cooperatives make the investment rather easy for members. When members join an existing cooperative, they may be required to invest a nominal amount and then agree to invest over time by allowing the cooperative to keep or retain a portion of each year’s cooperative earnings as equity capital. However, if a cooperative is just being formed, the required member investment may be significant and needed up front to give the cooperative the money to build the business.


Why do cooperatives need this member investment? Like any business, a cooperative needs to have adequate funds to pay bills, make investments in assets and have reserves for risk management. In any standard business (proprietary, partnership or corporate), the owners have to be ultimate providers of the funds that are needed, over and above what gets generated by the normal flow of internal business operations. In this sense, cooperatives are no different than other businesses. The difference is that member-users are the only source of equity capital for a cooperative. Other types of business, particularly public corporations, can raise equity funds from any willing investors. Cooperatives can only get these funds from member-users. Members are thus owners at risk and not just users. The good news here is that dividing the ownership equity among many members makes it easier and less risky to finance the cooperative than if only one or a few members tried to do it on their own.

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This work is supported by the USDA National Institute of Food and Agriculture, New Technologies for Ag Extension project.