"Phillips Works to Increase Access to SBA Programs for Employee-Owned Businesses"

Summary

A release dated December 6, 2022 reporting that the House Small Business Committee Subcommittee on Oversight, Investigations, and Regulations, chaired by Rep. Dean Phillips (D-MN), examined employee-owned businesses' access to SBA lending programs at a hearing that day. It quotes Phillips that Minnesota is home to 265 employee-owned businesses, and cites surveys finding that low-wage workers and workers of color who are employee-owners have 17% greater median household net worth and 22% higher median income from wages. It states that the 7(a) program's personal guarantee from anyone owning a 20% share or greater is often unworkable for these firms, and that SBA failed to follow congressional intent in implementing a bill Congress passed in 2018. The release quotes three witnesses, including the Policy Director of the United States Federation of Worker Cooperatives.

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Phillips Works to Increase Access to SBA Programs for Employee-Owned Businesses

December 6, 2022

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Oversight, Investigations, and Regulations

Washington, D.C.— Today, the House Small Business Committee Subcommittee on Oversight, Investigations, and Regulations, chaired by Rep. Dean Phillips (D-MN), held a hearing examining the challenges employee-owned businesses face accessing Small Business Administration (SBA) lending programs. The hearing gathered lenders and employee ownership experts to testify on employee-owned businesses’ obstacles when trying to obtain affordable capital.

“I’ve seen the countless benefits of this model back home. Minnesota is home to 265 employee-owned businesses, the most per capita of any state. In many cases, workers at these businesses boast higher pay, greater job security, and better benefits, such as higher retirement savings,” said Chairman Phillips. “Given the long list of benefits associated with this model, it’s vital we ensure these businesses have access to the federal initiatives meant to support all small firms.”

Employee ownership refers to any arrangement in which employees share in the profit and losses of a company, often owning shares of stock in the company. Over the years, the number of firms embracing employee-owned models like Employee Stock Ownership Plans (ESOP) and cooperatives has increased steadily. Surveys of these firms show that on average low-wage workers and workers of color who are employee-owners have 17% greater median household net worth and 22% higher median income from wages than their non-owner peers. In addition to their workers’ increased benefits, employee-owned businesses also provide an exit strategy for business owners, including the nearly 2.5 million baby boomer business owners expected to retire in the coming years.

Unfortunately, worker-owned businesses often struggle to access financing through SBA programs. For example, SBA’s flagship 7(a) loan program requires a personal guarantee from any individual or entity owning a 20% share or greater of a business, which is often unworkable for employee-owned firms, given their unique ownership structure.

In 2018, Congress passed Chairwoman Nydia M. Velázquez’s (D-NY) Mainstreet Ownership Act, which included provisions to ease burdensome guarantee restrictions and help retiring business owners convert to an employee-owned model. Unfortunately, in the years following the passage of the bill, SBA failed to follow congressional intent when implementing the bill, leaving many of the challenges faced by employee-owned small businesses unaddressed. The hearing gave members the opportunity to discuss potential congressional action, including bills recently introduced by Chairwoman Velázquez and Rep. Phillips, to build on the Mainstreet Ownership act and reduce barriers to employee ownership.

Worker cooperatives need access to the full range of the SBA’s tools to foster and create stable, high-retention jobs that empower workers and provide workplace flexibility. Programs like the 7(a) loan program are a vital piece of accelerating the already rapid growth of worker co-ops,” said Mo Manklang, Policy Director of the United States Federation of Worker Cooperatives. “While we have been disappointed in the SBA’s report on cooperative options and its lack of action regarding the Main Street Employee Ownership Act, we also know that the SBA has the programs and assets to spark significant growth of the worker co-op movement.”

“Given the demonstrated track record of ESOPs to significantly improve retirement security, strengthen companies and communities, and impose extremely low default risks on lenders, it is not surprising that ESOPs have an unbroken record of virtually unanimous Congressional support,” said Corey Rosen, Founder of the National Center for Employee Ownership. “What perhaps is surprising is that the SBA has made it so difficult to use a program Congress created to help ESOPs become more common, a program that would be very low cost and very low risk.”

“The SBA has a genuine opportunity to influence the massive succession of Baby Boomer businesses. The capital provided by SBA to these businesses could be used to encourage businesses to transition to employee ownership,” said Keith D. Butcher, Partner at Mosaic Capital in Saint Louis, MO. “By transitioning to employee ownership, those companies continue to reside in their communities, provide quality jobs and local stability.”

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Original: democrats-smallbusiness.house.gov