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An Introduction to Financing for Cooperatives, Social Enterprises, and Small Businesses

Executive Summary

While there is a growing interest and excitement in creating wealth-generating opportunities in low-income communities, there are still many issues to address. This paper was written to address one of the key challenges: how social enterprises and cooperative businesses can access the capital required to launch or grow their business. When discussing this challenge as part of a working group for the Community Wealth Building Network in Metro Denver, the idea arose for a paper that outlines existing finance options. Along with being a resource for a number of audiences involved in starting or financing social enterprises and cooperative businesses, the goal of this paper is to help identify where potential gaps may exist so that funders, socially-minded investors, and communities can work together to address those gaps. The authors hope that this paper can help accomplish both of those functions and encourage readers to use this paper as a tool and a conversation starter in their communities.

The paper was written with the following audiences in mind:

  • Individuals in low-income communities who are creating and building businesses either as soleentrepreneurs or in concert with others in a cooperative format;
  • Cooperative developers and community organizers;
  • Individual and institutional investors (e.g. socially responsible individual investors; private equity and venture capital funds; community and private foundations);
  • City, county, and municipal governments and government agencies focused on economic development and workforce development; and
  • The Community Wealth Building Network in Metro Denver, which is the convener of the working group that drafted this paper.

The authors recognize that this is a broad audience and that not every section in this paper will be applicable to every reader. When utilizing this paper as a resource, the reader is advised to refer to the sections that are most relevant to their work. The reader should also consult this paper as a general guide and seek out professional expertise when pursuing specific financing or investment opportunities.

Finance is a very specialized and highly regulated arena, which can be a barrier to business ownership. The authors hope that this paper will provide enough basic information to demystify the topic for people with no prior exposure, as well as provide a level of detail that will be useful for the more well-versed reader.

In general, there are two types of capital used to finance a business: debt and equity.

  • Debt financing provides capital in the form of a loan, which the business then repays, along with an extra amount of interest, over a set period of time. For example, a business might borrow $1,000 of capital from a community loan fund and then repay that money, plus a 3% interest rate, over a two year period.
  • The other type of financing, equity financing, provides capital in the form of stock ownership in the company, which often translates into a share of the profits of the company. For example, a business receives $1,000 in capital from an investor in exchange for the investor having a 3% ownership stake in the business. If the business makes profits, the investor receives an annual payout of 3% of those profits.

In both cases, the business got upfront capital of $1,000, but has different obligations to its debt financier (repaying the amount borrowed plus interest) than to its equity financier (sharing some of the profits of the company with the investor because the investor owns part of the company).

This paper deals with both types of financing through a number of different mechanisms. While the paper tries to make each mechanism as clear as possible, there is some overlap and there will be discussion of hybrid financing vehicles, which blend elements of both. The reader should be aware that the finance world is rarely clear-cut. It is governed by complex federal and state-level securities laws and regulations and may require the assistance of an attorney to successfully navigate the terrain. Fortunately, there are individuals and organizations whose focus is to help navigate this complex subject.

When describing the various financing options in this paper, the authors assumed the following to be true
about the businesses utilizing this paper:

  • They are owner-operated revenue-generating businesses with profits that are primarily financed and driven by operating income;
  • They are designed to benefit member-owners or underrepresented and disadvantaged entrepreneurs and communities;
  • They to some degree have an objective to address a social or environmental ill, particularly to provide quality, secure employment and ownership opportunities for disenfranchised populations.

This paper is divided into six sections:

Section 1 provides an overview of institutional lenders that provide debt financing, i.e. provide loans to small businesses, social enterprises, and cooperatives.

Section 2 provides a comprehensive overview of crowdfunding covering the platforms geared to grassroots investors as well as platforms for the “accredited” investor and explains the different types of financing mechanisms – equity, debt, royalty, and revenue share securities that are available through crowdfunding.

Section 3 focuses on financing specific to cooperatives, providing an overview that encompasses raising capital from cooperative members, as well as from outside investors. This section also covers the relevant regulatory mechanisms that govern these financing options – specifically cooperative exempt security offerings and private placement exemptions for securities.

Section 4 covers opportunities for investment that are specific to charitable foundations, covering Program Related Investments, Mission Related Investments, grants or investments in for-profit businesses, and some new hybrid models of giving that are in the experimental phase.

Section 5 provides a generalized survey of the literature and highlights additional resources.

Section 6 is a Glossary of Terms. If the reader is new to finance concepts, we recommended reading this section first.

The authors of this paper worked on a volunteer basis. If you have found this white paper informative and valuable, you may make a donation at www.communitywealthbuilding.org. All donations will go to support the Community Wealth Building Network of Metro Denver. If you have any questions, feel free to reach out to the authors directly. Our contact information is provided in the “About the Authors” section at the end. We, the authors, sincerely hope you find this white paper insightful and engaging.

Warm Regards,
R.P. Burrasca, Susan Grossberg, Anne Misak, and Jason Wiener

This paper is intended to provide a general overview and guide to the subject matter and is not intended to be comprehensive or exhaustive on any one topic. As with any writing on these subjects, readers are encouraged to consult with an attorney, or other professional, before making decisions informed by or based upon the information in this paper. Referrals to subject matter professionals and experts can be made upon request. The information contained in this white paper is not legal advice and should not be relied upon as such. While every effort has been made to ensure the accuracy of all information, errors or omissions may exist and any liability arising hereunder is therefore disclaimed.

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