Equity Capital

Equity capital is money the cooperative 

obtains from its members without assuming a legal obligation to pay it back at a 

stated time. This is the opposite of debt 

capital, which always has a due date. Equity capital is the “risk” capital in an organization. All or part of it can be lost if 

operations are not profitable.

The way equity capital is obtained from 

the membership is important in measuring 

the cooperative’s adherence to cooperative 

principles. For example, authority over the 

cooperative’s activities should reside with 

the membership through voting control represented by equity ownership. Also, ownership and control should be held by the 

membership who are current users of the 

cooperative.

Equity capital is the ownership capital in a 

cooperative. It is provided by members in 

various forms. Debt capital is money that is 

borrowed, on either a short– or long–term 

basis. Having adequate equity and debt 

capital available to finance the business is 

essential if the cooperative is going to 

competitively serve its members.

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Understanding Cooperatives:

Financing Cooperatives

Cooperative Information Report 45, Section 7

All businesses, including cooperatives, 

need financing. A cooperative uses 

capital to finance its operations, to 

cover operating expenses, and to invest 

in fixed assets such as buildings and 

equipment. Capital comes in two 

forms: equity and debt.

United States

Department of

Agriculture

Rural Development

Rural Business

and Cooperative

Service

October 1994

Equity

Debt
Equity Capital Sources

Equity capital is categorized in two ways. It 

is either allocated or unallocated. Allocated 

equity is capital recorded on the cooperative’s books which is assigned –– or allocated –– on a proportional basis to each 

member. Unallocated equity is capital not 

assigned or designated to specific member 

accounts.

Cooperatives obtain equity capital from 

members in three basic ways –– through 

direct investment, by retaining a portion of 

net income, or by retaining a portion of proceeds from the sale of members’ farm 

products as per–unit capital retains.

Direct Investment of equity is usually 

obtained through purchase of common or 

preferred stock. Common stock is an 

important source of initial member investment and normally carries voting rights. 

Preferred stock is a second source of initial 

equity capital. It is called preferred stock 

because it has preference over common 

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stock during liquidation. It may be purchased by members or nonmembers, often 

pays a dividend, but is generally nonvoting. 

Equity acquired through direct investment 

is always allocated.

Other types of direct investment are 

membership fees, membership certificates, 

and capital certificates. These represent 

forms of direct investments by members in 

nonstock types of cooperatives.

Retained Net Income represents proceeds 

from net earnings (net margins) retained in 

the business to provide equity capital. Part 

of a cooperative’s net income, usually at 

least 20 percent, is customarily paid to 

members in cash, with the remainder held 

as retained patronage refunds. These 

refunds are accumulated until sufficient 

capital is available to finance facilities and 

operations. When that level is reached, the 

cooperative’s board of directors may 

decide to redeem or repay a portion of 

equity capital to members.

Some cooperatives retain a portion of 

their income as unallocated reserves to 

serve as a cushion for allocated equity if 

there is an operating loss. Unallocated 

equity is usually paid to members only in 

cases where the cooperative is being dissolved. 

Per–unit capital retains are used primarily 

by marketing cooperatives. They are 

obtained through deductions from sales 

proceeds. Deductions are calculated on a 

physical unit basis or as a percentage of 

sales value. As with retained patronage 

dividends, when sufficient equity capital 

has been accumulated, the board may 

consider returning a portion of allocated 

equity capital to members.

Revolving fund financing is what the return 

of capital is called in a cooperative. The 

oldest equity capital is repaid first to 

ensure that current users provide the 

Cooperatives obtain 

equity capital from 

members in three basic 

ways — through direct 

investment, by retaining a portion of net 

income, or by retaining 

a portion of proceeds 

from the sale of members’ farm products as 

per–unit capital 

retains. 

Members

Co-op
majority of needed equity financing. The 

cooperative’s board of directors is responsible for approving any return of member 

capital. Its fiduciary responsibility requires 

that the cooperative be adequately capitalized before any equity is paid or 

“redeemed” to members.

A modification of the revolving fund is 

the base capital plan method of equity 

financing. Annually, members are required 

to invest capital in proportion to their use of 

the cooperative over a “base” period of 

years. This is the most equitable way for 

members to provide equity capital, and it 

always maintains the investment in proportion to use. Cooperatives may use retained 

patronage refunds, per–unit capital retains, 

or a combination of both to obtain the 

required amount of investment from their 

members. Members who are overinvested 

in relation to their level of patronage would 

receive a refund of a portion of their investment. The board of directors determines 

the needed level of equity capitalization for 

the cooperative and must approve any 

return of equity to overinvested members.

Debt Capital

Cooperatives use two types of debt capital 

to finance operations. 

Short-term loans are obtained to finance 

day–to–day operating expenses. The lender expects that funds borrowed on a short–

term loan will be repaid in less than a year. 

These funds supplement the cooperative’s 

own working capital and may be used to 

pay for raw product delivered by members 

in a marketing cooperative, or to purchase 

goods for resale in a supply cooperative. 

These loans are usually repaid from sales 

proceeds.

Long-term debt is obtained to finance the 

purchase of fixed assets such as property, 

plant, and equipment. Long–term loans are 

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scheduled for repayment in annual installments over the useful life of the asset being 

acquired. Long-term loans are repaid from 

net income.

Sources of Borrowed Funds

Cooperatives may borrow from traditional 

and nontraditional financing sources. Commercial banks are the traditional source for 

short–term loans. Banks and insurance 

companies are typical sources of long–term 

loans. 

Cooperatives have the added advantage 

of obtaining loan funds from specialized 

banks and other lending institutions established to serve only cooperatives. These 

specialized or nontraditional sources 

include CoBank, public and private agencies that lend to rural electric and telephone 

utilities, and the National Cooperative Bank.

The cooperative’s board 

of directors may decide 

to redeem or repay a portion of equity capital to 

members.

Bank

Co-op
This circular is one of a continuing series that provides training information and presentations for education 

resource persons who may or may not be familiar with the cooperative form of business. This series provides the 

basic background material they need and in a form that can be readily adapted, with limited preparation time, to a 

lecture or other presentation.

The U.S. Department of Agriculture (USDA) prohibits discrimination in all of its programs and activities on the basis 

of race, color, national origin, age, disability, and where applicable, sex, marital status, familial status, parental 

status, religion, sexual orientation, political beliefs, genetic information, reprisal, or because all or part of an individual's income is derived from any public assistance program. (Not all prohibited bases apply to all programs.) 

Persons with disabilities who require alternative means for communication of program information (Braille, large 

print, audiotape, etc.) should contact USDA's TARGET Center at (202) 720-2600 (voice and TDD).

To file a complaint of discrimination, write to USDA, Assistant Secretary for Civil Rights, Office of the Assistant Secretary for Civil Rights, 1400 Independence Avenue, S.W., Stop 9410, Washington, DC 20250-9410, or call toll-free 

at (866) 632-9992 (English) or (800) 877-8339 (TDD) or (866) 377-8642 (English Federal-relay) or (800) 845-6136 

(Spanish Federal-relay). USDA is an equal opportunity provider and employer. 

Conclusion

Cooperatives finance themselves much like 

other businesses, through the use of equity 

and debt capital. The features of cooperative equity capital, however, make cooperative equity financing methods different from 

those used by noncooperatives. Cooperative users provide equity capital to finance 

the cooperative in proportion to their use of 

it. Most cooperatives also provide a way to 

return equity to members after a period of 

time. 

These characteristics of cooperative 

equity capital make it more complex to 

understand by those not familiar with how 

cooperatives operate. These features, however, are what make cooperatives the 

unique, self–help organizations they are, 

operating for the benefit of their member–

owners. n

Some large cooperatives may also use 

the services of brokerage firms to obtain 

borrowed capital through private debt 

placement or the sale of commercial paper 

and other financing instruments.

Leasing is another debt financing option 

available to cooperatives. This method 

allows a cooperative the use of an asset 

without tying up its own capital in the acquisition. In addition to leasing companies and 

commercial banks, cooperatives have 

access to companies and banks that provide leasing services to cooperatives. 

These include the Farm Credit Leasing Service Corporation and the National Cooperative Bank.

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Cooperatives may borrow from traditional 

and nontraditional 

financing sources. Nontraditional sources 

include CoBank and 

the National Cooperative Bank, who provide 

both short and longterm loans.

To see this and 

other USDA cooperative publications online, visit: 

http://www.rurdev.

usda.gov/rbs/pub/

cooprpts.htm 

To order hard copies, e-mail: 

coopinfo@wdc.

usda.gov

or telephone:

1-800-670-6553.