SBA Recognizes Worker Cooperatives as Small Businesses

Micha Josephy, Cooperative Fund of New England

 

Energia in Holyoke, MA is a multi-stakeholder cooperative

(Photo courtesy of Cooperative Fund of New England)

Cooperative Fund of New England Disburses First Ever SBA Funds to Worker Co-ops

 

Six worker cooperatives in New England have been the first to benefit from a new policy of the Small Business Administration to recognize worker cooperatives as small businesses.

The Cooperative Fund of New England (CFNE), which helped to lobby for the award, received part of a $1 million dollar award last fall to provide low cost loans to worker cooperatives.

“The SBA award allows us to reduce our cost of funds and pass along the savings to our borrowers,” says CFNE Executive Director Rebecca Dunn. “The more that co-ops can affordably borrow funds, the more they are able to take advantage of business opportunities. In the end, access to low-cost credit results in more co-ops, more worker-owner positions, and a larger and stronger co-op sector.”

CFNE has lent out over $320,000 of the $1 million SBA commitment. Cooperatives receiving low cost loans are:

While the other borrowers are traditional worker cooperatives, Energia is owned by multiple stake-holders, including its workers.

CFNE has made further commitments to the newly-formed Dedham Square Artists Guild, an artist-owned gallery in Dedham, MA, which incorporated under the Massachusetts worker co-op statute, and Deep Root Organic Cooperative, a producer co-op in Johnson, VT. Producer co-ops, like Deep Root, have been eligible for SBA funds before the recent expansion to include worker co-ops. Many of these loans are for working capital lines of credit or for debt restructuring, though Pelham Auto’s loan is to pay for solar panel installation from fellow worker co-op, and former CFNE borrower, Pioneer Valley PhotoVoltaics Cooperative.

"Worker-owned business like ours often have trouble accessing a line of credit at reasonable rates,” says Green Mountain Spinnery worker-owner Margaret Atkinson. “The SBA loan from CFNE gave us the support we need from a lender who understands our unique profile."

This groundbreaking activity represents the first time the SBA recognized worker co-ops as eligible small businesses for SBA resources. This decision by the SBA has the potential not only to open the door for worker co-ops to access low-cost financing and technical assistance, but also to engage the SBA and its lending partners in discussions on how co-ops benefit the economy and our communities, and how the SBA and its partners can help minimize the struggles of cooperative businesses.

Furthermore, the SBA’s expanded recognition of worker cooperatives is perfectly timed to coincide with the UN declared International Year of Cooperatives. IYC has three goals: 1) encourage governments to establish laws, policies, and regulations conducive to co-op formation and growth, 2) increase public awareness about co-ops, and 3) promote the formation and growth of co-ops. This regulation change beautifully hits on all three goals: it creates a more conducive field for co-ops to form and compete, and it provides an entry point for deeper conversations with government and community groups on the role of cooperatives in our economy.

 

What is the Intermediary Lending Pilot?

Worker-owners of Pelham Auto Parts, of Pelham, MA

(Photo courtesy of Cooperative Fund of New England)

Authorized under the Small Business Jobs Act of 2010, the new Intermediary Lending Pilot Program will provide direct loans up to $1 million in long-term, low-cost funds to 20 nonprofit Community Development Financial Institutions or intermediaries, in fiscal year 2011. The CDFIs in turn will use those funds to help finance small businesses, mostly in underserved markets. Awardees can use ILP funds to make loans of up to $200,000. Designed to expand access to capital for small businesses and drive economic growth and job creation, the program is scheduled to fund 20 additional community lenders in FY 2012.

CFNE received its $1 million award to finance startup and existing worker and producer-owned cooperatives across New England and eastern upstate New York. Because the SBA chose to restrict their intermediaries to only include CDFIs that are nonprofit tax-exempt organizations, some other cooperative lenders, such as the Northcountry Cooperative Development Foundation, were not eligible for the ILP.

 

Worker Co-ops and SBA

While this new program has generated excitement within the community development lending world, it is groundbreaking in the cooperative movement where worker co-ops can, for the first time, access SBA funds. The SBA funds are also unusual for CFNE as most of its lending capital comes from social investors, including cooperatives, individuals, and faith-based institutions.

A combination of longtime advocacy at the national level along with CFNE's specific application created the opening for the SBA to recognize worker co-ops. CFNE had met with the SBA multiple times to explore about how they could help fund cooperatives through CFNE. Additionally, the National Cooperative Business Association (NCBA) and the US Federation of Worker Cooperatives (USFWC) had several meetings with SBA contacts and legislators to advocate for recognizing worker co-ops in SBA programs. USFWC shared its members’ stories to illustrate the impact that SBA support would have in the worker co-op sector. Another key person in the regulation change was Grady Hedgespeth, director of the SBA's Office of Financial Assistance. He used to run the LEAF Fund, another national co-op lender, and had personally met both Dunn and USFWC Executive Director Melissa Hoover.

Through their funding of CFNE, the SBA can now better understand the economic impact of co-ops and the role the SBA can play in assisting co-op development. Recent discussions with SBA representatives indicate that worker co-ops are now eligible for other SBA resources, specifically those under its expansive 7(a) loan program.

 

Expanded Opportunities

With these new funds, CFNE is embarking on a new project of more pro-actively promoting co-op conversions. In a conversion, a traditionally owned business (often a sole-proprietorship) is sold to the business’ employees or customers, resulting in a worker or consumer co-op, respectively. Conversion can be attractive, as many of the start-up risks have been resolved: The staff has been hired, operating procedures implemented, capital equipment purchased, customer base developed, and supply-chain established. Conversion opportunities, though, can be difficult to identify, as most business owners do not plan far ahead for selling their business, and those that do are often unaware of cooperative business models.

CFNE is exploring a partnership with technical assistance providers and co-op networks in New England to promote co-op conversions to business owners and employees. These include the Cooperative Development Institute, the ICA Group, the Valley Alliance of Worker Co-operatives, and the Vermont Employee Ownership Center. While this partnership is in its infancy, CFNE hopes that it will create more opportunities to lend SBA funds and grow the number of co-op businesses in its region.

 

Next Steps

Tomatoes are one of the products of Deep Root Organic Cooperative , a producer co-op in Johnson, VT

(Photo courtesy of Cooperative Fund of New England)

There are at least three steps co-op supporters can take to help expand SBA resources available to co-ops: 1) Outreach to Other ILP lender, 2) Outreach to SBA’s Local Offices, and 3) Advocacy for Consumer Co-ops.

1) Outreach to Other ILP Lenders: While CFNE is the only current ILP intermediary focused on co-op lending, 19 other CDFIs around the country received ILP funds. As CFNE’s lending is restricted to New England and parts of eastern New York State, co-ops outside of CFNE’s region could benefit from contacting ILP lenders in their own regions. Co-ops and their supporters could inquire about loans and other available services, and discuss co-op credit needs and SBA eligibility. While these new SBA funds constitute a major breakthrough, worker co-ops need to demonstration and interest in borrowing them. To bolster these efforts, the USFWC, with CFNE’s support, has composed a letter to the other ILP lenders to let them know that worker co-ops are not only eligible, but good borrowers.

2) Outreach to SBA’s Local Offices: Many local SBA offices are likewise fairly unaware of worker co-ops. These offices support affiliated lenders and small businesses through many programs in addition to ILP. Co-ops and their supporters can use the SBA’s recent regulation change to discuss other opportunities for SBA collaboration with and promotion of cooperatives.

3) Advocacy for Consumer Co-ops: Finally, while worker co-ops are celebrating and strategizing around these newly accessible SBA resources, we should remember that consumer co-ops are still largely ineligible. This policy seems to be based in a perception that consumer co-ops exist solely to provide discounted food to its members, and do not function as a for-profit business. Across the co-op sectors, we see many other priorities to balance along with financial profit, including ecological health, workers rights, fair trade, and community economic development. By supporting consumer co-ops’ efforts for SBA recognition, worker co-ops are helping build a foundation for businesses that balance various community needs, not just the financial bottom line.

What this may come down to is jobs.

“That’s what everyone is talking about in Washington, cutting regulations to jump start job creation” says RL Condra, NCBA's Director of Public Policy. NCBA has been pushing the SBA to cut their ban on consumer cooperatives, but NCBA believes this change will require a more coordinated grassroots effort. The mutual benefits are clear for worker co-ops and consumer co-ops to coordinate advocacy directly with the SBA and indirectly with elected officials. The more the SBA understands the cooperative business model, the more they can support co-ops in building healthy economies. To get involved with grassroots advocacy on this issue, contact RL at RCondra@ncba.coop or (202) 383-5480.

CFNE is excited to have helped increase available resources for worker co-op development, and to be a conduit for some of these resources, and looks forward to working with others in the cooperative movement to taking leverage this victory in the International Year of Cooperatives towards bigger and better things.

Thanks to U.S. Federation of Worker Cooperatives Executive Director Melissa Hoover for her contributions to this article.

 

Notes

The Cooperative Fund of New England (CFNE) is a nonprofit 501(c)(3) certified Community Development Financial Institution (CDFI) that advances community-based, cooperative, and democratically owned or managed enterprises with preference for those that serve low income communities in the six New England states and parts of eastern New York State. Since its founding, in 1975, CFNE has lent over $26 million in the cooperative and nonprofit sectors (www.coopfund.coop).


 

About the author: 

Micha Josephy is CFNE's Program Manager, with varied responsibilities, including grant writing, communications and networking. He first joined the co-op movement as a member of the Oberlin Student Cooperative Association, in Oberlin, OH, and later coordinated the development of Boston Community Cooperative’s first housing development, Seed Pod Co-op, in Dorchester, MA.

Citations: 
When citing this article, please use the following format: Micha Josephy (2012). SBA Recognizes Worker Cooperatives as Small Businesses. Grassroots Economic Organizing (GEO) Newsletter, Volume 2, Issue 12. http://geo.coop/...
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