How does a cooperative society obtain its capital?
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The greater the amount of capital held by the cooperative, the greater its ability to purchase more efficient technology, invest in staff training and education and make other improvements to the running of the business.
Capital for the operation and improvement of the cooperative business can come from three main sources:
a directly from members themselves
b from retained surpluses generated by the cooperative business
c from outsiders.
A. Directly from members
Members help finance the operations and growth of the cooperative through:
· one-time or annual membership fees
· member contributions with no individual ownership attached, such as service fees.
· member share capital
· individual member deposits with the cooperative which may be used for business
· deferred payment to members for part or all of their produce delivered to the cooperative
Member share capital represents individual member commitment to the cooperative form of business. It also identifies the individual member’s financial stake. It is withdrawn only when the member leaves the cooperative. Some other forms of member contributions, usually related to patronage, are more variable but once given cannot be withdrawn and hence are a particularly useful form of cooperative capital.
B. From cooperative business surpluses
Funds created through the retention of cooperative business surpluses that are not directly allocated to members are another important source of cooperative capital. This is a long term source of funds since most cooperatives’ rules allow these funds to be distributed only when a cooperative is liquidated. Unlike loans, or individual member deposits, the cooperative does not have to pay interest to use these funds. Of course, retaining such funds by the cooperative also represents a cost to the individual members who otherwise would have had that portion of the surplus allocated to them. Members willingly accept this cost when the benefits it creates for them are clear and worthwhile.
This source of funds from retained surpluses is often called “institutional capital” and represents the collectively-owned wealth of the cooperative.
C. From outsiders
In addition to institutional capital and member capital, cooperatives often make use of external sources of funds to run their operations or to finance investments. These non-member sources of funds may include cooperative or commercial banks, suppliers, government or donor agencies. External funding may be provided in different ways:
· as a grant
· as a short-term loan
· as a long-term loan
· as trade credit offered by a supplier.
Commercial providers of funds, such as banks, generally provide credit or loans that are legally secured by collateral (pledged assets of the cooperative). They are motivated by profit and seek to minimise risk. Non-commercial providers, such as governments or donors, generally provide credit on more generous terms at below market rates of interest or provide grants. Their motivations may be social, political or economic - often a mixture of all three.
The gearing ratio
The more assets the cooperative owns and has fully paid for - buildings, equipment, stock and financial reserves - the more others are willing to lend additional funds. Also, the greater the amount of the cooperative’s institutional plus member capital, the higher the amount that can safely be borrowed from outside sources. Financial leverage, or gearing, is expressed by a percentage ratio which gives an indication of the amount of risk involved in borrowing funds. The higher the gearing ratio, the higher the risk the cooperative runs in losing their assets in the event of inability to repay a loan.
The gearing ratio relates the amount of externally borrowed capital to the total capital employed by the cooperative (institutional and member capital plus funds borrowed).
Gearing
=
funds borrowed ÷ (institutional and member capital plus funds borrowed) × 100
For example, a cooperative might have $900 of a
Capital for the operation and improvement of the cooperative business can come from three main sources:
a directly from members themselves
b from retained surpluses generated by the cooperative business
c from outsiders.
A. Directly from members
Members help finance the operations and growth of the cooperative through:
· one-time or annual membership fees
· member contributions with no individual ownership attached, such as service fees.
· member share capital
· individual member deposits with the cooperative which may be used for business
· deferred payment to members for part or all of their produce delivered to the cooperative
Member share capital represents individual member commitment to the cooperative form of business. It also identifies the individual member’s financial stake. It is withdrawn only when the member leaves the cooperative. Some other forms of member contributions, usually related to patronage, are more variable but once given cannot be withdrawn and hence are a particularly useful form of cooperative capital.
B. From cooperative business surpluses
Funds created through the retention of cooperative business surpluses that are not directly allocated to members are another important source of cooperative capital. This is a long term source of funds since most cooperatives’ rules allow these funds to be distributed only when a cooperative is liquidated. Unlike loans, or individual member deposits, the cooperative does not have to pay interest to use these funds. Of course, retaining such funds by the cooperative also represents a cost to the individual members who otherwise would have had that portion of the surplus allocated to them. Members willingly accept this cost when the benefits it creates for them are clear and worthwhile.
This source of funds from retained surpluses is often called “institutional capital” and represents the collectively-owned wealth of the cooperative.
C. From outsiders
In addition to institutional capital and member capital, cooperatives often make use of external sources of funds to run their operations or to finance investments. These non-member sources of funds may include cooperative or commercial banks, suppliers, government or donor agencies. External funding may be provided in different ways:
· as a grant
· as a short-term loan
· as a long-term loan
· as trade credit offered by a supplier.
Commercial providers of funds, such as banks, generally provide credit or loans that are legally secured by collateral (pledged assets of the cooperative). They are motivated by profit and seek to minimise risk. Non-commercial providers, such as governments or donors, generally provide credit on more generous terms at below market rates of interest or provide grants. Their motivations may be social, political or economic - often a mixture of all three.
The gearing ratio
The more assets the cooperative owns and has fully paid for - buildings, equipment, stock and financial reserves - the more others are willing to lend additional funds. Also, the greater the amount of the cooperative’s institutional plus member capital, the higher the amount that can safely be borrowed from outside sources. Financial leverage, or gearing, is expressed by a percentage ratio which gives an indication of the amount of risk involved in borrowing funds. The higher the gearing ratio, the higher the risk the cooperative runs in losing their assets in the event of inability to repay a loan.
The gearing ratio relates the amount of externally borrowed capital to the total capital employed by the cooperative (institutional and member capital plus funds borrowed).
Gearing
=
funds borrowed ÷ (institutional and member capital plus funds borrowed) × 100
For example, a cooperative might have $900 of a
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