A congressional hearing in February heard how federal programmes could be optimised to meet the lending needs of employee-owned businesses, including worker co-operatives.
The hearing included testimonies from apex body NCBA CLUSA, the National Cooperative Bank, worker co-op South Mountain Company and employee-owned Folience and Messer Construction.
They raised issues including the need for greater access to capital for employee-owned businesses, education around employee ownership, and technical assistance for retiring business owners and prospective employee owners.
In his testimony, R.L. Condra, vice president of advocacy and government programs at the National Cooperative Bank (NCB), said the “prohibitive policy requirement” by the Small Business Administration (SBA) was hindering the growth of the co-operative business sector.
He added: “NCB does not require a personal guarantee for consumer and worker-owned co-op loans due to the unique structure of our co-operative borrowers. In contrast, the SBA requires a personal guarantee from anyone who owns 20% or more of a business, and will not guarantee a loan under the programme if there is no such individual. This agency requirement makes it impossible for co-operative businesses to access the agency’s lending programmes.
“In 2018, Congress passed the Main Street Employee Ownership Act that directed the SBA to recommend and implement practical alternatives for co-operatives that will satisfy the agency’s loan guarantee requirements. We were greatly disappointed to learn the SBA did not provide practical alternatives as required by law. Instead, the agency relied on its existing requirements that continue to block co-operative businesses from much needed access to capital.”
In terms of existing businesses that are due to be sold and converted to an employee-owned co-operative, SBA recommends that a selling business owner provide a full, unlimited personal guarantee for the life of the loan.
In a written statement, NCBA chief executive Doug O’Brien said employee ownership was crucial to addressing the problem of retiring babyboomers who are looking for options to sell their businesses. He added that unlike the SBA, the US Department of Agriculture, which also provides loans, “requires collateral from the co-operative and, in some cases, requires the co-op to sign an agreement to withhold profit-sharing until the guaranteed loan is repaid”.
He added: “In recognising the strength of shared risk, USDA does not require a personal guarantee when a co-operative stake does not exceed 20 percent. That is, in co-ops of five or more, USDA does not require individuals to fulfill a personal guarantee requirement.
“Co-operatives are not seen as an exception at USDA, simply a different model to which USDA has outlined requirements so that cooperatives may equally participate in federal programmes.”
Addressing the committee, Rep. Velazquez, who drew up the Main Street Employee Ownership Act with Sen. Kirsten Gillibrand (D-NY) in 2018, accessing SBA lending programmes remained “nearly impossible” for employee-owned businesses.
John Abrams, founder, president and CEO of South Mountain Company, an architecture, engineering, building and renewable energy firm, said South Mountain’s decision to restructure as a worker co-op more than 30 years ago has been critical to their success.
“Worker ownership has been far more meaningful and valuable than I ever imagined,” Mr Abrams said. “Ownership is powerful. When employee-owners are making the decisions, it’s more likely that companies will stay rooted in place and be positive forces in the community.”
NCBA CLUSA says it intends to continue its advocacy efforts to ensure that SBA carries out the Main Street Employee Ownership Act as Congress intended to fully incorporate co-operative ownership into SBDC programs and ensure that co-operative businesses can access SBA financing tools like all other small businesses can.
