Debt financing is one way for cooperatives to receive financing for their cooperative. Debt financing might be right for you if you don’t want the lender to have an ownership share.
What is debt financing?
Debt financing is borrowing money that the business will have to pay back. The lender, such as a bank, does not receive an ownership share in the business. In contrast, equity financing is s typically received in exchange for an ownership share in the business.
When lenders such as banks are determining the creditworthiness (in other words, the trustworthiness of a business to pay back the loan) the lender will look for how many members have invested their own money in the business first before seeking outside funding.
Lenders are also more comfortable giving loans if they feel that a business has its own resources to pay the loan back. Banks are not in business to lose money, so you need to convince them that lending to your cooperative is a worthwhile investment. Most of the time, the more membership shares and other capital contributions the cooperative has, the more deserving it is of the loan.
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