Berkeley City Council adopts creative personal guarantee mechanism for loans to cooperatives

By Sara Stephens, Law Center Staff Attorney


Last Tuesday, the Berkeley City Council unanimously approved amendments to its Revolving Loan Fund (“RLF”) Administrative Plan, recommended by the Sustainable Economies Law Center (“Law Center”). Perhaps most critical was a set of changes to the personal guarantee requirement. Cooperatives are often unable to access loan funding due to the requirement that a single member, or all members, provide a personal guarantee for the full amount of the loan, for the life of the loan. Such a requirement is not compatible with a collective ownership structure, where no single member owns a majority of the assets, where members may come and go more frequently than conventional business owners, and where members often come from disadvantaged backgrounds.

Sara Stephens at the Law Center worked with Loan Administration Board (“LAB”) to develop a creative solution. The RLF Admin Plan previously required all principals who own over 20% of the company to provide an unlimited personal guarantee. Now, in a cooperative where no member has a 20% interest, the cooperative shall designate an “ownership panel” of members who collectively own 50% or more of the cooperative. This panel of members will be the only individuals required provide credit checks during the initial loan application process, and will each provide a limited (several) guarantee. When members leave the cooperative, the Loan Administration Board (“LAB”) will release the member from liability for the loan, as long as the cooperative replaces the departing member on the ownership panel. The cooperative will notify the LAB of such a replacement, but no additional credit checks or Loan Agreement amendment will be required.

This new “ownership panel” personal guarantee mechanism will not only make crucial financing more accessible to local cooperatives, but may serve as a model for other cities around the country, and other federally-funded loan programs. The Berkeley RLF is one of many similar funds around the country, created by a grant from the federal Economic Development Administration (“EDA”). Assuming the EDA accepts Berkeley’s amended Admin Plan, other cities could use it is a template for taking tangible steps to give the cooperative sector in their city a boost.

Likewise, the U.S. Small Business Administration (“SBA”) could potentially look to this mechanism as a way to make its funding available to cooperatives. In response to the Main Street Employee Ownership Act, the SBA held two listening sessions in 2019 to review its personal guarantee requirement for SBA loans, which requires one person, or one entity, to guarantee the entire loan for the life of the loan. A number of key cooperative organizations and technical assistance providers attended and proposed several solutions. The SBA issued a report in September that rejected all the proposals. In early September, over 90 organizations requested that the U.S. Senate and House Small Business Committees hold a hearing in response to that report. If an ownership panel mechanism is approved by the EDA, itself a federal agency, perhaps the SBA will be willing to use that as precedent for a change to their own lending policies. 

Other key accomplishments of the Admin Plan edits include the following:

The RLF can now facilitate the purchase of businesses by their workers, converting them to democratic worker-ownership and preserving local businesses at risk of closure;

Creation of worker-owned jobs are included in the loan selection criteria, potentially giving worker cooperative applicants priority in loan application processing;

A cooperative will not be considered a startup, even if the cooperative is a newly formed enterprise. This will allow more newly created cooperatives to access funding since the RLF is otherwise limited to lending only 25% of its portfolio to startups;

The LAB committed to expanding its lending to cooperatives by including a goal of allocating 10% of the RLF portfolio to worker cooperatives or businesses converting to cooperative ownership.

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