Limited guarantee replaces the personal guarantee for loans
to worker co-ops
by Karen Kahn
For worker cooperatives, one of the barriers to growth is access to capital. Small business loans usually require the business owner to offer what is known as a “personal guarantee”—i.e., if the business fails to pay off a loan, the owner is on the hook to pay it back. Without a lone owner to guarantee the loan, lenders have been wary of lending to cooperatives, where multiple people own the business. To help grow local cooperatives, Berkeley, CA, is changing the rules.
Berkeley established a small business loan fund with a $500,000 grant from the U.S. Department of Commerce Economic Development Administration in 1987, writes Oscar Perry Abello in Next City. The fund has been used to support minority-owned and women-owned businesses denied traditional loans, but because of the personal loan guarantee, loans to cooperatives have been exceedingly rare.
Working with the Sustainable Economies Law Center (SELC), the Berkeley Loan Administration Board agreed to adopt a “limited guarantee” for worker cooperatives.
Now the city is working hard to grow employee-owned businesses as part of its business retention strategy, and as part of that effort, the City Council, in September, approved a new loan guarantee policy, more friendly to worker cooperatives.
Working with the Sustainable Economies Law Center (SELC), the Berkeley Loan Administration Board agreed to adopt a “limited guarantee” for worker cooperatives. The way this works is that the cooperative applying for a loan decides on a panel of owners who represent at least 50 percent ownership of the business to guarantee the loan. Each member of the panel is responsible for an equal share of the loan amount. If one of the cooperative owners who is part of the loan guarantee panel leaves the co-op, then another member must join the panel and accept responsibility for that share of the loan guarantee.
The loan fund will now also be able to finance the acquisition of a business by its employees.
In a second tweak to the loan fund policies, the loan fund will now be able to finance the acquisition of a business by its employees. This aligns with efforts by the city to encourage retiring business owners to sell to their employees.
Sara Stephens, housing and cooperatives attorney at SELC explained to Next City that SELC recommended making changes to current loan fund policies, rather than creating a new fund for cooperatives, because “it’s just so hard to ask cities for money. If there’s already a pot of money here, [we asked], how can we make this work better for cooperatives?”
With 520-plus revolving loan funds across the country that are funded by the federal Economic Development Administration (EDA), the hope is that the new model may be adopted by more of these funds. Kieron Slaughter, the staff person at the Berkeley Office of Economic Development who supports the loan fund, told Next City that “his office ran these changes by the EDA before submitting them for final approval from city council.” EDA did not consider the changes significant enough to require a federal approval process, so the model is fully exportable.
The new loan fund policy is among several actions the Berkeley City Council approved in a February 2019 ordinance to strengthen the city’s cooperative businesses. Additionally, the ordinance directs city agencies to establish a preference for worker cooperatives in securing city contracts. SELC and the city are still working out the details on the public procurement process.
Note: This story is based on November 14, 2019 story by Oscar Perry Abello at Next City.
Karen Kahn provides communications consulting and editorial support for Fifty by Fifty.
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