Member Loan Programs

Member loans and other investments

Food co-ops have had strong success in securing loans and other investments from their members (in addition to the investment required of each member), thereby achieving such advantages as lower costs for needed capital and reinforcing strong and trusting relations among co-op/members/community.  Here is an introduction, “Conducting Member Loan Campaigns,” by Bill Gessner: http://www.cooperativegrocer.coop/articles/2004-01-08/conducting-member-loan-campaigns.  This article covers the basics terms and parameters, getting organized, and preparing your documents.

In more recent years, cumulative experience in member loan drives has generated improved resources and many success stories.  The primary published guide is a 2009 booklet by Bill Gessner, Beret Griffith, and Ron Griffith:  “Member Loan Campaigns: A guide for retail food co-ops.”  It is available free as a download from Food Co-op Initiative: http://www.foodcoopinitiative.coop/resources/toolbox.  This very thorough manual provides a great deal of information that is essential for a lawful, effective, and reliable member investment program.  Startup co-ops as well as established co-ops that plan to conduct such a program will benefit from using this manual.

A 2012 report from Willy Street Co-op, by David Waisman and Lynn Olson, described an investment vehicle they chose to term “member bonds,” with all the characteristics of member loan programs:  http://www.cooperativegrocer.coop/node/2263.  The campaign, banking on the co-op's previous experience and strong community support for a second store, was a huge success, generating $1 million in just over one month.  Willy Street offered its members these terms on loans: 3-year bonds at 4.0 percent, 5-year bonds at 4.6 percent, 7-year bonds at 5.2 percent.

Preferred shares vs. member loans?  Some food co-ops are incorporatedf in state with statutes that allow nonvoting member (preferred) shares as an investment option for co-op members.  An example of raising capital through preferred shares was reported by Jerry McGeorge (2005) in "Small Town, New Building": http://www.cooperativegrocer.coop/articles/2009-01-21/small-town-new-building.

In a co-op listserve conversation (9/21/2012), Art Ames of Berkshire Co-op offered his perspective on raising capital through preferred shares vs. member loan campaigns:

"Essentially I'm a proponent of the K.I.S.S. philosophy, and loans are the most easily understood, marketed processed, tracked, and paid back, so there would need to be a compelling reason for me to recommend otherwise.  Of course, different state requirements and the variety of  ways we are all incorporated and deal with our equity requirements would perhaps alter this opinion if I were at another co-op."

Responding to this comment, Doug Walter of Davis Co-op said:  "I like Art's approach. However ... one huge difference that argues in favor of investment shares: they are equity, not debt. There is 'balance sheet magic' to increased equity, such that it may be possible to pay patronage dividends, or to decrease debt, if there is enough investment from shares."