Are Cooperatives Really So Difficult to Finance?


Cooperative Fund of New England Is Meeting the Challenge

Low-water landscape, A Yard and A Half Landscaping

by Micha Josephy

Cooperative Fund of New England (CFNE) is a community development financial institution (CDFI), founded in 1975 to provide financing and development support to New England’s cooperatives. CFNE aggregates loan capital largely from individual and family trust investors, as well as co-ops, government agencies, foundations and others. It has disbursed almost $57 million, mostly to food, housing, and worker co-ops, and has a repayment rate of over 98 percent. Recognizing their decades of experience in financing cooperatives, we asked CFNE to share their experience identifying and resolving some of the obstacles to co-op financing.

The employee ownership field is gaining visibility and setting more ambitious goals, particularly in the area of co-op conversions (the transfer of ownership in privately held firms to employees through democratically controlled cooperatives). To meet these goals, however, the field will need larger, more diverse but still values-aligned capital to finance these conversions.

Since 2012, CFNE has financed 15 co-op conversions including providing nine loans for business acquisitions and twelve working capital lines of credit to recently converted businesses. Some of our borrowers include: A Yard & A Half Landscaping Co-op, a largely immigrant co-op serving residences throughout the greater Boston area; Island Employee Co-op, a remote coastal Maine grocery and hardware retailer; and Ewing Controls, a specialized manufacturer of steam turbine controls in Greenfield, MA.

To ensure the success of these businesses, CFNE’s partners with co-op developers, including the Cooperative Development Institute, the ICA Group, Vermont Employee Ownership Center and others, to promote employee ownership, assess project feasibility, and train worker-owners. While we have financed some projects independently of technical assistance partners, they are uncommon.

What Makes Coop Financing Challenging?
While the social benefits of democratically owned businesses are well documented, conventional lenders remain skeptical about financing businesses that have multiple owners and don’t typically provide voting shares to outside capital.

For cooperatives, conventional equity sources are too costly, both in terms of dividends and board seats, to preserve democracy and financial feasibility.

Co-ops sell worker-owner voting shares on a one-member, one-share, one-vote basis, creating the basis for democratic governance. But these shares generally provide less than 10 percent of needed capital at the time of acquisition as workers often have little wealth to invest. Sometimes the seller provides all of the remaining financing, limiting the need for additional financing to working capital. In CFNE’s deals, though, sellers generally limit their financing to 25 percent, as a subordinated (higher risk) loan. To complete these deals, CFNE or other lenders provide senior debt to finance the acquisition and working capital. These loans are generally limited to the amount of collateral available, which usually results in a financing gap.

How this gap is filled depends on the particular conversion. We have seen customers, subsets of workers, and vendors each make loans to different projects. Recently, we have also seen more co-ops raise non-voting equity, including preferred shares or direct public offerings, inspired by Namasté Solar, Real Pickles, and others. For cooperatives, conventional equity sources are too costly, both in terms of dividends and board seats, to preserve democracy and financial feasibility.

How Has CFNE Addressed the Financing Challenge?
For CFNE, underwriting co-ops — assessing their suitability for a loan — isn’t that different from underwriting other small businesses, with tweaks needed to account for co-ops’ shared ownership structure. Specifically, CFNE rarely uses personal guarantees and never uses credit scores in underwriting. We aim to assess collateral through co-op assets alone. We fill gaps with our grant-funded Collateral Support Fund, a project-specific loan loss reserve (financial assets set aside to cover losses) for otherwise strong projects. We help co-ops consider subordinate financing sources to limit their request from us, which results in needing less collateral. In lieu of credit scores, CFNE’s local loan officers build relationships with the co-op’s leadership to assess their communication skills and responsiveness, essential characteristics for financing relationships.

CFNE’s conversions have very high debt-to-equity ratios, which dissuade conventional lenders. While we prefer co-ops raise more equity, the limited financial assets of most worker-owners and the lack of a streamlined equity vehicle make this unrealistic. In practice, worker-owners demonstrate their investment in the co-op conversion through their sweat equity — time spent in trainings, planning meetings, and more. As long as their projections show cash to make loan payments, we proceed.

Looking to the Future: Needed Innovations

While CFNE has had success financing conversions, our field needs new, values-aligned, financing tools to keep up with anticipated demand. Insufficient worker equity, collateral, and subordinated debt, common challenges in co-op conversions, are the crux of the financing struggle. CFNE has solved these problems to meet existing demand within its regional market. But if our field succeeds in growing the national conversion pipeline, we will likely encounter financing barriers.

In lieu of the SBA changing its regulations, our field could look at developing a national loan guarantee pool for conversions.

Currently, co-ops struggle to raise outside equity. With debt, CFNE and others aggregate individual lenders to streamline access to capital, but for equity, there are few aggregators or streamlined processes. This is also the case regarding member-share financing. One model is CFNE’s partnership with MaineStream Finance to provide financing for member equity in the Rock City Coffee conversion. In this case, the longstanding relationship with Rock City allowed MaineStream to tolerate greater risk. Our field needs to bring these sources of capital into the conversion field at scale.

The Main Street Employee Ownership Act could help make existing Small Business Administration (SBA) loan guarantees available to co-ops, but that is far from assured. In lieu of the SBA changing its regulations, our field could look at developing a national loan guarantee pool for conversions. While CFNE and other co-op focused lenders succeed without guarantees, loan guarantees would help conversions access more conventional lenders.

As we innovate and build stronger partnerships with lenders outside of the co-op sector, we need to maintain mission alignment. We have seen conventional capital providers happily lend to co-ops, only to undermine their financial viability with unnecessary covenants. While these providers may help our field’s growth, we need to find values-aligned capital providers that will stick around in tough times. Increasing investment in, and participation with, existing employee ownership lenders — including CFNE, Shared Capital Cooperative, LEAF Fund, Capital Impact Partners, and The Working World — may not solve all of our capital needs, but is a critical first step toward building the capital access ecosystem that we need.

Micha Josephy joined the CFNE staff in 2010 bringing diverse experience in community organizing, affordable housing finance administration, and small-scale grocery management. He was introduced to cooperatives as a member of the Oberlin Student Cooperative Association, and later helped develop Boston Community Cooperatives and its first property acquisition. His work with CFNE focuses on program management, investor relations, grant applications, and government compliance reporting. He can be reached at

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