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November 14, 2019; Next City

A little over a year ago, in August 2018, Congress passed the Main Street Employee Ownership Act. The bipartisan bill, passed at a time when bipartisan legislative agreement has been exceedingly rare, made conversions of businesses to employee ownership eligible for US Small Business Administration (SBA) section 7(a) loans, which, as the SBA’s website explains, is the agency’s “primary program for providing financial assistance to small businesses.” As NPQ noted, “According to a US Comptroller of the Currency report, in 2013 alone the 7(a) program helped 46,399 businesses obtain about $17.9 billion in loans.”

Not surprisingly, philanthropic money has followed passage of this law. For instance, this past August, the Atlanta-based Kendeda Fund announced $24 million in grants to four nonprofits designed to take advantage of the new law, with the goal of supporting the conversion of 100 businesses nationwide to employee ownership by 2023.

But there has been a snag in implementation—collateral. With an individually owned business, a small business owner will often pledge his or her home as collateral to secure a loan. But what if you have 100 owners? Are they supposed to pledge 100 homes? And what if they aren’t all homeowners?

Enter a workaround from Berkeley, California, that may spawn many imitators. Berkeley is one of more than 520 communities with a revolving loan fund supported by the US Commerce Department’s Economic Development Administration (EDA). As Oscar Perry Abello writes in Next City, “Collectively, these loan funds represent more than $824 million in loans or cash available for loans.” Since 1975, such funds have made more than 37,500 loans to small businesses, totaling over $3 billion, which has helped leverage $16 billion in other funding sources.

Like SBA, EDA-funded revolving loan funds require personal guarantees. Berkeley wanted to use its revolving loan fund to support loans to worker cooperatives. But how could it do so? Adopting a proposal devised by a nearby Oakland-based nonprofit, the Sustainable Economy Law Center (SELC)—a nonprofit featured on an NPQ webinar this past spring—Berkeley’s new policy substitutes “a limited guarantee for worker cooperatives” in lieu of the standard personal guarantee.

How does this work? As Abello explains:

Instead of requiring a personal guarantee for the whole amount of the loan, a worker cooperative must decide on a panel of owners representing at least 50 percent of ownership in the cooperative, and that group of owners will then each be responsible for equal shares of the loan amount rather than the whole amount. If one of those workers leave the worker co-op for any reason, then the co-op must designate another member to replace them as part of the ownership panel.

“It’s an uphill battle, even here, but I see our work as proving that it’s possible and showing what things can look like elsewhere,” Yassi Eskandari, policy director at SELC, tells Abello. She adds that, “The more cities adopt something like this, the easier it becomes for other cities to do the same.”

Berkeley’s changes, Abello points out, “could serve as a precedent for all 520-plus EDA-funded revolving loan funds for small businesses.” Kieron Slaughter, who staffs the loan fund at the city’s economic development office, tells Abello that EDA had no objections to the city’s approach. Moreover, if technical assistance staff at the nation’s network of over 900 Small Business Development Centers are watching, a similar approach might help employee ownership conversions tap into the far larger pool of federal partially guaranteed private small business loans as well.—Steve Dubb