Democracy At Work Network and Kiva Zip

In 2012, the Democracy at Work Network (DAWN) was approached by Kiva Zip about being a pilot trustee for its direct micro-lending program. Kiva Microfinance began in 2005, a non-profit that collects funds online from individual lenders and offers loans to individual entrepreneurs abroad. Since inception, it has made more than 1,000,000 loans. These loans rely on in-country field partners to administer the funds. Kiva launched its newer Zip program in order to loan directly to individuals, asking only that a “trustee” vet applicants and vouch for their credibility. As of this past March, Kiva lenders may use their credits for loaning to Zip borrowers – a huge opportunity since Zip had only 2,000 lenders while Kiva’s main site has 900,000.

DAWN agreed to be a trustee in pilot phase for several reasons. “As an intermediary, we have both parties’ best interest in mind. We believe in Kiva’s mission and interest in worker co-ops, but we also want to be an ally to the co-op,” says Melissa Hoover, executive director of the U.S. Federation of Worker Cooperatives. DAWN is “in a position to have candor and strong relationships on both sides. It may seem like a conflict of interest, but it’s actually an alignment of interests.”

Adriana Sanchez and Alejandra Baltazar of Teamworks

To apply for the loan, TeamWorks, a cooperative of home cleaners based in San Jose, Ca., prepared a detailed financial plan including historical statements, projections, and description of their intended use of the funds. Two members, Adriana Sanchez and Alejandra Baltazar, each applied for a one-year, $5,000 loan, making the co-op’s total $10,000. DAWN assessed the plan and helped TeamWorks refine both the numbers and supporting assumptions. Once DAWN endorsed the loan, Kiva approved the applications and both loans appeared online by mid-January 2013.

TeamWorks brainstormed with DAWN about how to promote the loans, relying heavily on both organizations’ email networks and social media. TeamWorks members also wrote personalized letters to their clients. Sanchez and Baltazar were each highlighted with her own webpage on the Kiva Zip website. Within nine weeks, both loans were fully funded by individual lenders and Kiva Zip disbursed the $10,000 to TeamWorks via PayPal. TeamWorks began installment payments one month later - a quick turnaround, but at an interest rate of zero, very affordable. Kiva Zip loans are not advertised as “revolving,” but a borrower who successfully repays a $5,000 loan then becomes eligible to borrow $10,000.

For TeamWorks, the cash came just in time. “We used the loans as working capital,” explains Ingrid Hernandez, a manager at TeamWorks. The co-op had already invested in the management team in July 2012 by adding part-time assistant manager positions for certain cleaners to take on personnel, billing, and other administrative responsibilities. Until the Kiva Zip loan, they’d been using the interest-free period of a credit card to cover the increased expenses. “But we would not have been able to cover health insurance for the cleaners with the credit card,” says Hernandez. “Now all the cleaning teams are at full capacity. We will probably recruit another team in 1-2 months.” That additional team would create two new jobs and bring in more revenue.

Furthermore, TeamWorks is achieving something many worker cooperatives do not: intentional growth. Cleaners are learning skills applicable to other parts of their cooperative. Both efforts set an example. First, TeamWorks is demonstrating that a resource-constrained co-op with little access to capital can creatively fund expansion. Second, they are transitioning from a founder-led era to a phase during which members are gradually taking on more leadership and power.

As for the impact on DAWN as a cooperative development network, there are both short- and long-term effects. DAWN prepared for the pilot by arranging trainings on loan underwriting. About 10 Peer Advisors and staff participated in the webinars with The Working World’s (TWW) core staff and with Margaret Lund of Co-opera. The Kiva Zip pilot readies DAWN to perform credit analysis services for other lenders as well. TWW is exploring developing a funding platform and will need partners to vet borrowers – DAWN staffer Melissa Hoover has started conversations with TWW staff about collaborating on this. Other small business centers with local constituents have also inquired with DAWN about loan support. “We pointed out some of the risks that could happen, and we asked TeamWorks how they were planning for them,” describes Hoover. “We prompted them to think about their market and how they fit into it.”

The primary weakness of Kiva Zip’s particular structure is that it lends only to individuals, not to organizations. This presents both a philosophical and logistical dilemma. Ideally, Kiva Zip donors would understand that they are supporting a group of owners rather than a sole entrepreneur. While the webpage does include details about the cooperative, Kiva’s layout visually emphasizes the individual borrower. Logistically, each loan is linked to an individual Paypal account and email address. Both of these details ignore the unique group aspect of a cooperative.

A Kiva Zip loan would not be every co-op’s dream. It’s a fair bit of work for money that, while zero interest, requires the first repayment within one month of disbursement – essentially the opposite of patient capital. The application is extensive and requires that a cooperative be able to produce clean financial statements and projections. The application also required a heavy time investment from DAWN as trustee. “This amount of due diligence elsewhere could ask for $50,000,” explains Hoover. “It’s most appropriate for co-ops with limited access to capital sources” for reasons such as credit history, lack of assets, etc.

On the other hand, co-ops with a strong network would likely be able to reach out and fund a loan fairly quickly.

For Hernandez at TeamWorks, the loan seemed fast, obtained with little cash expense and no legal details. “It was easy to use once it was approved,” she says. “[Kiva staff] even gave us tips on utilizing the comments feature” to attract donors’ attention.

In addition, promoting a cooperative’s loan on a website like Kiva increases the visibility of the specific co-operative and also of worker co-ops generally. For TeamWorks, their outreach efforts built loyalty within their customer base. As Hernandez recounts about the letters that cleaners distributed, “Some customers emailed us letting us know how happy they were… Some were already Kiva donors, so they were glad to see someone they recognized.”

As a pilot underwriter, DAWN chose not to endorse any start-ups. This was primarily to reduce risk but also because current members of the U.S. Federation of Worker Cooperatives are a ready pool of potential borrowers. A Kiva Zip trustee like DAWN is not financially liable if a borrower pays late or defaults, but over time, Kiva Zip will no longer work with a trustee who has a history of endorsing borrowers who default.

In order to draw defensible conclusions about the Kiva Zip pilot, DAWN would need to recruit more cooperatives to borrow. Kiva Zip requires that a trustee in pilot status endorse three borrowers in order to graduate to their next tier. Once those three borrowers have made 10 monthly payments (collectively), DAWN could endorse up to 10 borrowers. The TeamWorks loans, perhaps the first of many to worker cooperatives, has served to teach DAWN the steps and potential snags in the processes of the underwriting, funding, and repayment.

The micro-lending strategy cuts across co-op sectors to try to bring co-ops into the sphere of socially responsible investing. The scale of opportunity far outweighs funding currently targeted to cooperatives – but co-ops also set a higher bar compared to what’s demanded of “socially responsible” companies. As Hoover puts it, “The challenge is that neither the lenders nor the individual donors really understand worker co-ops. But that is also an opportunity.” Based on the comments posted online by Kiva Zip donors, several lent to TeamWorks specifically because it is a cooperative.

The remaining questions about the potential of funding via online microfinance schemes are both philosophical and practical. Is it disingenuous to the movement to allow the loans to be made to individuals rather than the cooperative? Will more co-ops utilize it? Paying zero interest sounds great, but how many businesses can actually repay a loan immediately and within one year? And if more co-ops do start to use Kiva Zip, how much staff time would it take to do the underwriting and monitoring, and how could DAWN fund that? (Kiva Zip does not pay the trustees, and trustees may not charge a fee.)

After putting more co-ops through the Kiva Zip pilot, it would be fruitful as well to compare the experiences of these borrowers with those of worker co-ops that have used donation-based crowdfunding sites (e.g. Kickstarter, indigogo; gofundme). Did they obtain the requested funds? Were they able to comply with the rewards they promised? Regardless, hearing from both groups would make a great panel at a future conference.