How to Get Co-op Financing

Co-operatives have never found it particularly easy to raise finance either for starting or expansion, but the number of sources of funding specifically oriented towards co-operatives is beginning slowly to increase.

The worker co-operative sector – as distinct from the long-established consumer co-op movement, which has its own capi­tal funding problems – now comprises some 1500 businesses with an estimated combined turnover of £200 million a year.

Yet in spite of this and its recent growth the sector still suffers from a shortage of capital in the right quantities and on the right conditions from sympathetic lenders, even though there is evidence to show that co-operatives can have a better survival rate than conventional small businesses.

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Industrial Common Ownership Finance (ICOF), for example, the best known source of funding for co-operatives, has an annual write-off rate of only 10 per cent for loans it makes, which com­pares very favourably with commercial bank experience on bad debts with small firms in general.

ICOF has now been lending to co-operatives for 15 years, during which time it has lent more than £1 milion to more than 100 co-operatives from its own revolving loan fund and the funds it administers for regional authorities, such as the West Midlands and West Glamorgan county councils.

ICOF’s own general fund, started by donations from individ­uals and co-operatives when the organisation was founded in 1973 and augmented by a £250,000 government grant in 1976, is not tied to any one region as the local funds obviously are.

In the past year ICOF has raised a further £500,000 with the launch of its Industrial Common Ownership Fund, which was set up for the specific purpose of raising new money to lend to worker co-operatives, and enabled the public to subscribe for ‘co-operative shares’ in multiples of £250 with a 6 per cent re­turn.

ICOF is a revolving loan fund, recycling its funds within the worker co-operative sector, each pound being used over and over again as the borrowers repay their loans, with interest.

ICOF is not, however, a soft touch and only lends where there is a strong chance of commercial success as well as co-op­erative success. In addition, and probably one of the reasons for its low loss rate, there is a continuing link between the fund and the borrower during the period over which the loan is repaid.

Typically, ICOF lends amounts between £7500 and £10,000 over periods ranging from six months to six years. The average loan is £7000 and the minimum £1000. Personal security is not required but security is taken over the co-operative’s business assets in the form of a floating and fixed charge.

Repayments are made regularly throughout the life of the loan with interest on the reducing balance. The rate is main­tained at a steady level over reasonably long periods of time and in practice has been below the rate on business loans from the main banks.

ICOF also encourages and advises local organisations on setting up revolving co-operative loan funds as well as administering funds for local authorities and supporting individual co-oper­atives with financial packaging and management accountancy and help with business plans. But ICOF is not the sole source of funds for worker co-operatives in the country and there are now various co-operative loan funds, often run by local authorities or local co-operative development agencies (CDAs).

The local CDAs also have an important role in carrying out feasibility studies, drawing up business plans and assisting with finance applications, as well as linking potential sources with potential borrowers and providing the often essential after-care.

Among other major contributors to funding facilities for co­operatives are the London Co-operative Development Fund, established by the Greater London Enterprise Board, and the venture capital fund for worker co-operatives in Scotland, Co­operative Venture Capital (Scotland).

The aim of the Scottish fund is to help individual members of Scottish co-operatives who have difficulty in raising equity capi­tal and it has been a long-term objective of the Scottish Co-op­eratives Development Committee, which provides the fund’s secretariat.

Clearing banks in general are not particularly enthusiastic about co-operatives as, on conventional banking criteria, co-op­eratives are highly geared, being funded almost entirely by loans with only nominal equity, but they all say they will re­spond to a viable, well-presented proposition for a co-operative enterprise.

In practice, a great deal depends on the attitudes of individ­ual managers, a hazard that is faced equally by the conventional private business. Even so, a substantial proportion of the co-operatives formed in recent years have undoubtedly received their funding through the clearing banks.


One clearer which should provide a sympathetic hearing is the Co-operative Bank, part of the consumer co-operative movement. It provides funds for industrial and service co-operatives, matching pound for pound the finance raised as personal stakes by co-operative members. The Co-operative Bank also operates a number of special loan guarantee schemes with local authorities in various parts of the country, authorities which have strong interests in encouraging the development of co-operatives.

These loan guarantee schemes are separate from the govern­ment scheme, though co-operatives qualify for loans under that scheme as well if there is a prospect of commercial viability and a properly prepared business plan is presented.

One potential source of finance for new co-operatives which should not be forgotten is the Enterprise Allowance Scheme. This provides £40 a week per person for 52 weeks, but each individual who wants the allowance must meet the eligibility conditions. If the proposed co-operative has more than 10 members it is possible that the allowance may not be paid.

Information about the situation in particular areas can be obtained from local information or economic development of­ficers, who should know whether there is a local co-operative development agency or loan fund. The national CDA can also provide a signposting service.

Filed Under: General How To's


About the Author: Marie Mayle is a contributor to the MegaHowTo team, writer, and entrepreneur based in California USA. She holds a degree in Business Administration. She loves to write about business and finance issues and how to tackle them.

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