Thoughts and success stories

- Aasa Marshall

How to finance an Indigenous co-operative

A big part of starting a business is figuring out how to finance it. The amount of money you need to get a business up and running can feel intimidating – you might need to pay for a facility, supplies, inventory, technology, and staff. 

For Indigenous businesses, it may come as no surprise that there can be extra complications to getting funding, much like there are different laws for Indigenous businesses to contend with. 

Indigenous entrepreneurs rely most often on personal savings to finance start-ups and consider access to capital a significant obstacle to growing a business.

“On-reserve businesses are experiencing less growth than off-reserve businesses,” says the Canadian Council for Aboriginal Business, “and one key reason may be greater difficulties accessing financing.”

So if you’re an Indigenous group of people starting a co-op, here are a few pointers to help you find the best way to finance your new business.

Financing on First Nation

If you read our article about businesses on First Nation and legislation, you’ll remember our old friend the Indian Act.  Does it mess things up financially too? Oh yeah. 

Specifically, Section 89 of the Indian Act makes it hard to finance businesses on First Nation land. It states that “the real and personal property of an Indian or a band situated on a reserve is not subject to charge, pledge, mortgage, attachment, levy, seizure, distress or execution in favour or at the instance of any person other than an Indian or a band.” 

In other words, if a business on-Nation defaults on a loan, the bank can’t seize its assets or land to make up for that lost money. Why? Because First Nation land doesn’t belong to the First Nations people – ultimately, it belongs to the Government of Canada. And if a bank can’t ensure it will get its money back in one form or another, it’s not likely to lend it out.

According to the National Aboriginal Capital Corporations Association (NACCA), “the Indian Act was never designed to accommodate the economic aspirations of First Nations. Indian Act restrictions make it difficult to take and register conventional forms of security/collateral on loans… Conventional risk-measurement and value assessment instruments have limited applicability on-reserve, especially with regards to land and real-estate value.” 

So the government doesn’t like to lose land, and the bank doesn’t want to lose money. So who loses out? In short, it’s the Indigenous entrepreneurs struggling to get the financing they need. But that doesn’t mean your business can’t set itself up for success. Here’s what you can do.

A good plan

The best tool in your toolbelt when financing your business is a good business plan. If you’re going to borrow money or try to attract investors to support your co-op, they’ll want to see how it will work and how it will make money. A good business plan is essential for getting start-up cash. 

So what’s in a business plan? Some sections show you understand your market, industry, and competitors while offering a clear description of your co-op’s service or good and how it’ll make money. 

Co-operatives First has excellent resources that will help you build a business plan. The Your Way, Together guidebook offers a good starting point. To start a business plan, try our Business Plan Creator. This tool walks you through the steps and prompts you to research important aspects of your business idea. We also support groups who want to work with a consultant to create a solid business plan. If you’re interested in this, you can apply here.  

Options for financing

Start-up capital for a business can come from various sources. Some money can come from inside your group of owners and some from outside. The first step is to ask how your group can contribute in the early stages. 

Internal financing 

Co-ops can raise money by selling shares. To join a co-operative, you have to buy a membership share, which makes you an owner of the business. Often these shares are low cost, but if the co-op needs a lot of start-up capital and a membership will bring a lot of value to the members, the co-op can charge a more significant amount for a share. 

Co-ops can also sell investment shares, which are a way to bring in larger amounts of capital. The co-op signs an agreement with people who buy investment shares, stating the details of the return the co-op will give them on their investment. 

External financing 

Raising money for a business by selling shares is appealing because it doesn’t involve taking on debt. However, often businesses need some sort of loan or funding to get up and running. Here are a few options for Indigenous entrepreneurs: 

Local government funds

For a business on a First Nation, getting funds from the band government may be an option. Bands may have equity funds available for on-Nation entrepreneurs. If your band is willing to provide funding for a new business venture, that can be a significant advantage.

However, just because a band invests in a co-operative doesn’t mean it becomes the business owner. Providing funding to the business doesn’t give a band the ability to make decisions for the co-op. The co-op members own the co-operative and make decisions for the company.

Aboriginal Financial Institutions (AFIs)

As the name suggests, Aboriginal Financial Institutions (AFIs) are sources of financing specifically for Indigenous people starting businesses. The network of AFIs across western Canada has been around for 30 years. In that time, it has given out over 50,000 loans. The loans tend to be smaller with higher interest rates than other financial institutions, but given restrictive legislation for Indigenous entrepreneurs, they can be invaluable. 

According to Jason Smith, former Business Consultant at the Saskatchewan Indian Equity Foundation (SIEF), AFIs sometimes see their job as providing a bridge to gaining more traditional financing for Indigenous entrepreneurs. 

If you’re too much of a credit risk for a bank, you come to us,” said Smith of his role when he worked for an AFI. “Our job is to get your business going, to get you to a place financially where you’re not as big of a risk. Then we pass you off to a traditional bank.” 

Other financial institutions

Banks and credit unions are typical sources of loans for small businesses. As co-operatives themselves, credit unions might be more inclined to support a co-op because they understand the business model better.

Any lender’s concern is the business’s ability to pay a loan back, said Smith, which, for a new co-op often means checking people’s credit in the start-up phase and asking them to have some “skin in the game” as well. 

“Basically, it comes down to their credit score,” Smith said. “It comes down to are they able to handle their own finances? Will they be able to handle the bank’s money? That’s what the bank will look at — the risk…. I let them know, first of all, they’re going to have to come up with equity because a bank’s not going 100% finance a co-op.” 

Get the support you need to get started

Starting a co-operative is an exciting venture — and we can help. For more details on financing and approaching lenders to support Indigenous businesses, visit Your Way, Together. To explore your idea or find out more about how Co-operatives First can support you, contact us.  

People in a co-op