Cooperative Financing

Cooperatives March 12, 2012 Print Friendly and PDF


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

 

What is finance and why does it matter to cooperatives?

In the context of business firms, finance encompasses all aspects of raising and using cash and related funds for the long-run and short-run purposes of a firm. Finance includes cash management (taking in and expending cash), extending and using trade credit (accounts receivable and accounts payable), investing in long-run assets (e.g., property, plant and equipment) and short-run assets (e.g., inventory), raising funds (e.g., short- and long-term debt, preferred equity and common equity) and returning funds to debt holders (principle and interest) and investors (dividends and stock retirement). Cash and related funds are the life blood of any firm. If their flow is not handled properly, the firm suffers. If the flow is handled well, the firm is in a position to prosper. The finance function within a firm ensures to the extent possible that the flow of funds fully supports the needs of the business for successful performance.

  • Defining Equity and Members’ Role as a Unique Source of Equity

How is cooperative finance different from conventional business finance?

One of the key differences between cooperative finance and conventional finance has already been noted: Members use and own the cooperative business. Therefore, members are the unique source of equity capital for cooperatives. It turns out that this primary difference directs several other critical differences between cooperative finance and conventional finance.

  • Return of Cooperative Profits
  • True Proportional-to-Capital Dividends
  • Where Profits are Generated


The bottom line is that unifying the user and the owner in a cooperative business structure does change the nature of cooperative finance in these three critical ways: (1) profits are paid in the vast majority of circumstances to patronage and not to capital (thus the classic cooperative term, patronage dividends), (2) capital dividends are strictly limited, and (3) some profits that arise from cooperative patronage actually occur at the member level and not the cooperative level.

Where do cooperative profits come from and how are they paid out to members?

We now move on to a deeper consideration of where cooperative profits come from.

  • Member-Level Profits

 

Resources

Current Challenges in Financing Agricultural Cooperatives, Choices magazine, Agricultural and Applied Economics Association, 2011 - Current challenges in agricultural cooperative finance are discussed. Finance is an important topic for senior cooperative leaders and boards of directors. Education is needed on how to align cooperative finance principles with cooperative principles and business models.

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  • Directory of Farmer Cooperatives, Service Report 22, USDA Rural Development, October 2013 - This directory contains a list, by state, of almost 1,500 farmer-owned marketing, farm supply, service, fishery and bargaining cooperatives. The information includes the cooperative’s contact information, type of cooperative and products that they sell. An online directory is updated every month.

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