When you’re at a pub with friends, and the waiter brings the cheque, what do you do? Do you split the bill evenly? Pay the whole tab? Put it on your credit card or pay cash? Most often you know beforehand who will do what and how. But sometimes one person can upset the plan by forgetting their wallet or making an unexpected offer to pay the whole bill.
Co-op start-ups face a similar situation. Starting a co-op, like any other business, costs money. Even before the co-op has any revenue, there are incorporation fees, licensing, building costs, and inventory to think about. Deciding when and how to gather the funds to cover these costs is challenging and can determine the success or failure of the start-up.
One advantage of forming a co-operative is the number of options to raise money. As an incorporated entity with limited liability, a co-op can raise funds from its members (i.e. owners), investors, member loans, traditional loans, fundraising, and grants or a combination of these options.
However, before a group can start this process they need to incorporate the co-operative so it can issue shares or take on debt — and that costs money. The group that incorporates the co-op needs to cover these early costs. As with an unwanted bar tab, there can be ambiguity about who pays for what and how.
Here are some financial tips for co-op start-ups to negotiate this process.
Be an owner
As a member of the co-op, you are one of its owners. As with any entrepreneurial endeavour, the owners are often the business’ first investors. This shows other investors, potential members, and lenders you’re serious about the business and believe in its purpose. If your business idea is solid, and you can show it, raising money from within the co-op’s membership or persuading potential members and investors to support the project will be easier.
As a steering committee, having a frank, open conversation about start-up expenses and how to split the costs will save the group headaches later. Our preliminary budget tool can help groups get a handle on start-up costs.
After listing all start-up expenses, identify a strategy and best tactics for raising the funds. Some governance planning and forward thinking is required at this stage. Our tool on financing your co-op describes in detail the options available to co-ops.
Once it’s incorporated, a co-op can open a bank account and use a variety of tools to raise money. But, as we mentioned, the co-op often has costs to cover before this happens.
Members of a steering committee that pay for expenses prior to incorporation should keep track of their spending and bank it against their member investment (i.e. equity investment). For example, a member who pays the $100 for the co-op’s incorporation could be given $100 worth of membership shares once the co-op is incorporated.
Tracking members, their investment, and how much they owe the co-op is good practice. This handy resource can help.
An incorporated co-op can raise money much more easily than a group of people. Consider incorporating sooner rather than later to take advantage of these options before incurring more costs.
Look for free money, but not too hard
“Free” money is the best kind of money, but finding grants that align with your project is rare and no money is ever truly free. Grants usually have lengthy, complicated, and competitive application processes with no guarantee of success. While grant funding may sound ideal, be sure to have a backup plan. This resource on grants for co-ops can help if you choose to go this direction.
Grants are not the only option for fundraising. A crowdfunding platform like Kickstarter or Indiegogo can create future customers and raise funds at the same time. This option works best if you have an exciting product or service available for pre-purchase, clever give-aways, sweet swag, or gift cards.
Donations are also an option. If your co-op provides an important community service (e.g. daycare or seniors services) you may be able to partner with local businesses or solicit donated goods from the public. Smoky Lake Daycare (aka the Pumpkin Patch) did a great job of collecting donated toys and games from supportive community members and got rent-free space from the local school. So, if you have a solid community connection, before making purchases or signing leases, consider putting out a call for support on social media that outlines what you need.
Try to reduce costs where possible
Obviously, reducing costs when possible is a good idea. Finding donated goods or volunteers is a great option for service-based organizations. Browsing Kijiji or Craigslist for second-hand equipment can lead to big savings. Working with organizations like Co-operatives First or Business Link also provides groups access to resources and information often at no cost to the co-op.
One of the biggest start-up costs for any co-op is a business plan. Hiring a third-party consultant can run anywhere from $5,000 to $50,000 depending on your business. To lower this cost, or avoid it entirely, try our Biz Plan Creator, an online tool designed to make business planning easier for co-ops. For more hands-on support, check out our business planning support resource page and send us a request for support.