Strategies for Raising Capital in a Cooperative
Introduction
No matter the type of cooperative, raising capital is a key challenge. Both electric and telephone cooperatives in the United States have faced unique financial hurdles, often necessitating federal intervention and control. This article explores various strategies for raising capital in cooperatives, drawing from historical examples and contemporary practices.
Historical Context and Federal Involvement
The early and mid-1980s saw the Cajun Electric Cooperative in Baton Rouge, Louisiana, operate under federally directed guidelines. This direction led them to overextend in terms of generating capacity, including an interest in nuclear plants and coal contracts. The federal government took a hands-on role, refusing to allow the cooperative to declare bankruptcy, which ultimately led to the loss of customers and service territory.
Ronald Reagan famously noted, “The biggest lie of our time is ‘I’m from the federal government and I am here to help you.’” This quote encapsulates the complex relationship between cooperatives and federal entities, often involving control and intervention rather than simple support.
Raising Capital Through Equity and Membership
One of the most direct and common methods of raising capital is through equity membership buy-in fees. This involves members contributing a certain amount of capital to the cooperative either initially or through ongoing contributions. While this can provide a solid foundation for capital, it also requires careful management to ensure that member contributions are used efficiently and fairly.
Federal and Non-Federal Loans
Government entities like the Rural Electric Administration (REA) and the Cooperatives Finance Corporation (CFC) offer financial assistance to cooperatives. However, these loans often come with stringent conditions, potentially undermining the cooperative’s autonomy and control over its own operations.
For utility coops, particularly those with federal involvement, seeking federal loans can be a double-edged sword. While such loans can provide much-needed capital, they also come with the requirement of surrendering control to the federal government. This scenario highlights the importance of carefully weighing the pros and cons of federal financial support.
Alternative Capital Raising Strategies
Working cooperatives have explored other methods to raise capital, including:
Grants: Government and non-government grants can be an excellent source of funding, particularly for projects aligned with public policy objectives. Fee for Service: Cooperatives can offer services for a fee, either to existing customers or to non-members. This can include prepaid services or maintenance contracts, providing a steady stream of income. Partnerships: Forming partnerships with private companies or charities can provide additional resources and diversify funding sources. This approach can be particularly beneficial for worker cooperatives, which often struggle with poor management and infighting.Worker Cooperatives: A Different Path
While worker cooperatives can offer distinct advantages, such as ensuring fair and equitable distribution of benefits among members, they also face significant challenges. Worker cooperatives are prone to mismanagement and internal conflicts, which can undermine their effectiveness.
One alternative strategy is to form a partnership with investors who are looking for shared benefits rather than a guaranteed financial return. This approach can be more resilient and sustainable, as it leverages the combined resources and expertise of both parties.
Conclusion
Raising capital in a cooperative requires a strategic and thoughtful approach. While federal loans and equity membership buy-in fees can provide necessary funds, they often come with conditions that may limit the cooperative's autonomy. By exploring alternative strategies such as grants, fee for service, and partnerships, cooperatives can ensure a more sustainable and control-oriented approach to capital raising.
For more information, consider reaching out to the National Cooperative Business Association (NCBA) or the CLUSA International. These organizations can provide valuable insights and resources for cooperative capital raising.