Co-operatives, like any other business operation, need capital in order to acquire fixed assets, and working capital to continue to provide services to members. Financing can be obtained from three sources: - Profits and depreciation allowances generated from the business. - Creditors who provide money as lenders. - Members who finance the business as investors. Members who finance the business as investors can invest in Special Member Loans. Although these loans are not classified as equity in the company, they are important in helping to reduce the dependency on bank borrowing.
Short Term Demand Loans
The maximum amount to be borrowed from an individual member is $200,000. These loans are "unsecured". When these funds are borrowed from the members, a Short Term Demand Member Loan Receipt is completed and signed by the member and an authorized Co-operative officer. This receipt stipulates that the loan is repayable on demand. Interest is calculated monthly, taking into account daily all new loans and repayments during the month, at a rate determined monthly by the Board of Directors. Interest is paid monthly by credit to the Short Term Demand Member Loan balance. A monthly statement is mailed to the member showing previous monthly balance, plus additional funds loaned, plus interest added, less any amount of the loan repaid.
Annual Term Loans
At HDC, Long Term Member Loans are called "Special Member Loans". Special Member Loans are issued for two, three, four, five, seven or ten years and are "unsecured". They are not a requirement for membership. Interest rates are usually higher than Guaranteed Investment Certificate rates. Interest is paid or compounded on April 1st of each year. All Special Member Loans mature on March 31st in the year the term expires. Special Member Loans have certificates issued which are signed by the President and Secretary of the Board of Directors and authenticated with the Co-operative Corporate Seal.
Monthly Term Loans
For anyone desiring monthly interest income, you may wish to consider this new Member Loan from HDC. Minimum loan of $10,000.
a) Patronage Dividend Loans
Patronage Dividend Loans are created when the Co-op has had a successful year and the Board of Directors decides to declare Patronage on business transacted by the member/owner. When dividends are declared, they are not immediately paid out in cash. As a result the retained dividends become a source of equity for your Co-op. The Patronage Dividend Loan occurs from:
- Add - Patronage Dividend declared amount, less 15% federal tax withheld and remitted by the Co-op to the Federal Government on Patronage Dividends of over $100.
- Less - amounts transferred to the Mandatory Member Loan as required by the Board of Directors and
- Less - any repayment in cash of the Patronage Loan
Members must first have $500 in the Mandatory Member Loan before repayment of 10% of the declining Patronage Loan balance occurs. After the first $500 Mandatory Member Loan is satisfied, one half of the 10% Patronage Dividend repayment, in increments of $50, is transferred to the member's Mandatory Member Loan and the other half is paid in cash on each December 1st. The 10% repayment policy is in effect at the present time, but can be changed by resolution of the Board. No interest is paid on Patronage Dividend Loans that have not been repaid.
b) Mandatory Member Loans
Funds that have been transferred from Patronage Dividends. Mandatory loans are usually obtained from the transfer of patronage declared in increments of $50 in the manner described in the previous section. It may also be paid in cash voluntarily by the member. Annual interest rate is 5% and interest is paid yearly on December 1st. However, if the Co-op has a profitable year, directors can, at their discretion, pay a bonus over the 5% minimum interest rate. As an example, directors have authorized a 2.5% bonus over the 5% rate following the 1998 fiscal year.. These loans are "unsecured". No maturity date is given on the Mandatory Member Loan. Upon death, the member's estate can request repayment of this loan. Also, if the member sells his farm assets, or moves from the area, the member can request repayment of the loan.
No certificates are issued for these amounts; however, each year on December 1st, a detailed report is prepared for the member showing last year's balance of the Mandatory Loan, plus transfers of Patronage Loan or Voluntary Additions to the Mandatory Loan.