Like commercial concerns, cooperatives are financed in a variety of ways. They may get their operating funds from membership fees, common or preferred stocks, bonds, by borrowing from banks, or from other sources. Many cooperatives also finance themselves to a considerable extent from members’ savings kept in the business in the form of reserves.

In addition to these standard ways of getting funds, cooperatives have developed a financing system particularly suited to their methods of operation. Known as the “revolving capital” method, it is widely used in both this country and in Canada. It originated in California about thirty years ago, and has been growing in importance ever since.

Under the revolving capital method of financing, members make contributions to capital in proportion to their patronage. After the co-op has had the use of this money for a certain period, it is returned to the members as new contributions flow in to replace it.

A simple example is that of an egg-marketing cooperative that makes a charge for capital of one cent a dozen on all eggs marketed by it. If one million dozen eggs are sold by the association each year, this would build up a fund of $10,000 in one year, or $50,000 in five years. Suppose that the capital needs of this cooperative are approximately $50,000. At the end of a five-year period it has the amount of capital required for normal operations. In the sixth year, therefore, the $10,000 arising from charges for capital can be used to pay off the deductions made for capital in the first year. In each succeeding year, the amount collected in capital charges can be used to pay off the amount of charges made five years earlier. In this simplified illustration, the capital of the association is revolved every five years. In the case of a purchasing association, deductions for capital can be withheld from savings and used until they are replaced by later savings.

Under the revolving capital plan, a member’s investment is kept roughly proportionate to the amount of business he transacts through his association since capital assessments based on current business are continuously used to pay back previous assessments. Responsibility for financing the association is thus placed on its current patrons, and outside financing is reduced or avoided altogether.

From EM 23: Why Co-ops? What Are They? How Do They Work? (1944)