External Cooperative Financing
Worker cooperatives must rely on external financing in the absence of capital surpluses. Established worker cooperatives can generally find external financial to meet their needs, but worker cooperative startups face significant obstacles. The traditional sources of startup financing such as venture capital are unavailable because cooperatives are worker owned and can not sell standard equity.
In practice cooperatives are financed with various types of debt and preferred equity. Preferred equity or preferred stock is ideally a non-voting, fixed value share, that pays a constant rate of interest. In this limit it looks like an infinite maturity bond. Preferred equity preserves worker ownership because the stock owner has no rights to the profits of the cooperative aside from interest payments. Since the shared are non voting the preferred stock owners have no operational control and cooperative remains self managed.
The main advantage of preferred equity for the cooperative is that it does not show up as debt on its balance sheet as it does not have to be repaid. Having excessive debt, which can happen without preferred equity, can make it difficult to get further financing.
Cooperatives typically get external financing from grants, National Cooperative Bank, and unregulated funds. Funding from traditional banks is also available for established cooperatives, either through direct loans or creative methods like the Equal Exchange CD at Wainwright bank. However, traditional banks generally do not fund cooperative start ups and tend to give cooperatives an overall lower lending priority as they are less well understood.
The suitability of credit unions, cooperative banks, and unregulated loan funds for cooperative financing is described below.
Credit Unions
Credit unions are designed primarily for consumer lending and are not good entities for business lending due to tight regulations on commercial loans. Specifically there is a two year probationary period after a credit union starts where it is prohibited from commercial lending and there is a limit of 12.25% of assets that can be used for business lending. The limit on business lending leads to an inefficient use of assets. In addition the regulatory agency (NCUA) is not well suited to oversee cooperative startup loans and will likely not allow them.
Credit union lending for cooperative development might also consist of small personal loans that are then used by members to fund their internal capital accounts. Another way of financing cooperative development is through credit union contributions to existing loan funds like the Worker Ownership Fund or the Cooperative Capital Fund of New England, which have significantly more leeway in cooperative funding. This could perhaps be done directly by the credit union (as an accredited institutional investor) or through contributions to a membership controlled foundation whose assets were fully invested in the funds. In these ways the credit union could contribute to financially to cooperative development in ways that would be difficult for individuals. Often one must be either a sophisticated investor or an accredited investor (with over $1 million of net worth or $200k income) to invest in various parts of these funds.
The advantage of credit unions is that they are that they are relatively easy to start. Pre-chartering capital requirements are $50k-$400k, depending on the type of credit union being set up. Organizing a credit union is also relatively easy compared to a bank.
Credit unions require a field of membership or common bond. The common bond is usually a place of employment, city or county of residence, or an association. Multiple common bonds are also possible. For example the common bond for this credit union might be worker cooperatives and associations of worker cooperatives and support organizations. The main problem with this is that the worker cooperative community is quite small. Significant membership would need to be attained from outside the worker cooperative community to build a reasonable level of assets. This would require many people to first join an association that was part of the credit union common bond.
The Northcountry Cooperative Federal Credit Union is the only credit union currently providing cooperative business loans. It operates regionally in the upper Midwest with a low income designation which allows it to accept outside deposits. It currently offers savings accounts and CD’s and to my knowledge does not intend to expand its offerings as there is a preference for deposits in the unregulated Northcountry Cooperative Development Fund.
Banks
Bank are significantly better than credit unions for business lending. However, banks require $5-10 million of capital to start, and an experienced team of bankers. This level of funding would be extremely difficult if not impossible to find for a worker cooperative bank. As with credit unions, higher risk business lending by banks is limited by regulations though it is significantly more permissive than for credit unions. The business lending risk is generally offset by a larger volume of lending to relatively lower risk consumers.
There are three main cooperative banks in the United States. National Cooperative Bank (NCB) serves the broad cooperative community, CoBank primarily serves agricultural and utility cooperatives, and National Rural Utilities Cooperative Finance Corporation finances rural utilities. Of these only NCB provides consumer financial services. NCB is by far the largest source of financing worker cooperatives with billions of dollars in assets. The NCB loan portfolio is most heavily in real estate and housing cooperatives and it provides support for purchasing and producer cooperatives as well. NCB was founded by a special congressional charter in 1978 which it has fought to keep renewed.
There are no standard FDIC chartered banks organized as worker cooperatives to my knowledge. However, the Common Good Bank has a significantly developed plan to start a democratically operated, non profit bank in Ashfield, MA. The model is very promising and may be an interesting basis for a worker cooperative bank.
Note: To clarify the terminology there are different types of cooperative banks. For example, there are many cooperative banks in Massachusetts that are cooperative in the sense that they are part of a Share Insurance Fund. This does not mean that they are worker cooperatives.
Unregulated Funds
Unregulated funds are pools of money that are collected and used to finance cooperatives. The main funds financing worker cooperatives are the Northcountry Cooperative Development Fund, the Cooperative Fund of New England, and the Local Enterprise Assistance Fund. The capital is usually provided by socially conscious individuals and organizations. The main advantage of unregulated funds is the money can be fully utilized without restrictions. These funds are an efficient means of financing cooperatives and they have a very successful track records of lending money. The funds have substantial loss reserves even though a high percentage of their loans have historically been repaid and to date no investors have lost money. They are typically run with small staffs and minimal overhead expenses.
The investments in these funds are not insured by the FDIC or NCUA the way bank and credit union deposits are insured because the funds are unregulated. The absence of insurance makes these funds inappropriate for many people.
