Equity represents ownership or risk capital invested by the members into the cooperative. In the case of a start-up, equity will likely consist of the direct cash investment of the members in shares of the cooperative. For an established cooperative, equity will include the members' initial investment plus retained patronage refunds, or unit retains.

Equity is perhaps the most important ingredient for successful cooperative financing, and a successful operating entity. This investment demonstrates the members' commitment to the project, and provides the cushion which allows the cooperative to establish itself in the marketplace. Equity commitment and management play a very important role in attracting necessary financing to a project. A weakness in either area may make it very difficult for a new, or existing cooperative to put together a well structured financial package.

This portion of the financial package is typically provided by conventional lending sources such as a local financial institution, the Bank of North Dakota, or perhaps a cooperative bank such as the St. Paul Bank for Cooperatives.

Farm Credit Services has begun to take an interest in senior debt financing for cooperative projects as well. The senior lender will generally take a first equity or mortgage interest in the assets of the cooperative. The lender will determine the structure and amount of financing which may be available, and will establish the rate of interest charged on the debt based upon the lender's costs of funds and the perceived risk in the cooperative venture.

Debt structure is usually based upon the financing needs of the cooperative borrower and the ability of the cooperative to generate cash to service the debt. The credit facility may include fixed asset or term debt financing, and working capital financing which may be further broken down into permanent working capital financing, and an operating line of credit.

Fixed asset or term financing is advanced in order to finance the purchase of hard assets such as land, buildings, or equipment. The debt will usually carry a repayment term based upon the useful life of the assets acquired. The amount of financing available may be a function of the resale value of the asset in the event that the lender is forced to liquidate the security as a result of loan default. The overall strength of the borrowing entity and its historic ability to service its debt will also play an important part in determining the loan amount and repayment structure.

Working capital is sometimes overlooked, and is oftentimes underestimated by cooperative developers in the project planning process. Working capital must cover costs ranging from initial development and start-up expenses to funds invested in the operating cycle (inventory and receivables) of the business.

Permanent or core working capital relates to the permanent investment the cooperative will have in development and start-up costs (operating losses), and in other current assets such as cash receivables and inventory. In the case of a start-up, the lender may look to the cooperative members to provide the equity necessary to finance a large portion of these core working capital needs. As the business establishes itself, the lender may be willing to provide term debt to help support and finance the core portion of the current assets.

An operating or seasonal line of credit is typically structured as a revolving note. The line is intended to provide funding to smooth out timing differences between the event of a sale and the actual collection of the account receivable generated by the sale. The line allows for the purchase of inventory in anticipation of future sales as well. Current assets such as cash, accounts, and inventory are typically taken as primary collateral for this credit facility, and also provide the basis for the availability of advances on the line. For example, the line may allow for advances based upon 50% of the finished inventory and 70% of the accounts receivable of the cooperative The balance of the line will flow up and down based upon the collateral base, and the need for cash to support its working assets.

Subordinated debt may be available from a number of different sources such as local economic development groups, State Agencies such as the ND Development Fund, the Regional Development Councils, and other Federal Agencies. The ND Department of Economic Development and Finance, or the Bank of North Dakota may be able to assist in identifying potential sources of this type of debt.

Subordinated debt can come into a project in a number of different forms or structures. In general, these dollars provide financing for activities which may represent more risk then a conventional lender is able to accept. Repayment terms may be more flexible as well. The subordinated lender will require a secured position on the assets of the cooperative, however, that interest will be behind the position of the primary lender. This serves to give the primary lender some additional comfort in providing senior debt, and also makes up for a shortfall in the equity available from the cooperative members. Subordinated debt can play an especially important role for a start-up cooperative which lacks a track record.

The various development groups referenced above may also have funds available which can be invested in a project in the form of an equity placement. These funds may be needed if the members' equity falls short of the underwriting standards of the senior lender. The equity funds may take the form of a second class of common stock, or possibly preferred stock. While this type of investment may be seen as equivalent to members' equity by the Lender, the structure of the investment may be such that these dollars will hold a position superior to the members in the event that the cooperative is liquidated. Under either scenario, the investment is unsecured, and retirement (repayment) of the investment will likely require the approval of the senior lender.

Enhancements and incentives can come from numerous sources as well. Local sources may be able to provide assistance ranging from grant funds to offset development costs to tax relief to reduce initial operating costs. In some cases, local groups may be able to provide the land needed for site development at very attractive rates. Cooperative developers should be certain to work closely with local officials in order to take advantage of the incentives available.

Cooperative entities involved in manufacturing, processing, or data processing may be able to access an interest subsidy through the ND PACE Fund. The program is accessed through the Bank of North Dakota. BND's PACE Fund works in cooperation with local development groups in providing a subsidy which can reduce the cooperative's interest rate by as much 5%, subject to program qualifications.

For those projects which are classified as start-ups, or simply have a high degree of risk, loan guarantees can play a critical role in project financing. Federal programs available through the Small Business Administration, and Rural Economic and Community Development (formerly Farmers Home Administration) may be able to provide a guaranty of the senior debt associated with a cooperative project. Through the security offered by such a guaranty, the senior lender may be more willing and able to accept the risk identified in the cooperative's venture.

These agencies must be accessed through a senior lender. However, direct contact with both SBA and RECD may help to lay a basis for their future participation in a project.