How does recognizing the member investment loss influence worker cooperative financing? The recent trend has been a push to finance worker cooperatives directly without personal loans or guarantees. But if we are to take worker ownership seriously with regard to both the profits and losses, a different approach is needed. The issue in not exclusively direct business financing, but also personal lending to founding members who can then invest in the cooperative they are starting. This obviously puts the members at financial risk. But if we are to argue with any integrity about worker ownership, we must be willing to treat the losses with equal consistency. In some cases this means members will bear responsibility for personal loans.
For a consistent implementation of worker ownership where the profits and losses are accounted for, the founding members must collectively invest enough to cover all the startup losses. In cases where the balance of the negative equity account or the (negative) collective reserve account exceeds the member investments, ownership has been transferred from the members as outside investors are bearing the losses.
There are two options available.
- Create credit at the personal level, ignoring moral hazard problem for people with no alternative income stream or assets.
- Allow outside investments to bear loses and have a claim on profits in proportion to the loss incurred. While this would concede worker ownership initially, the transitional democratic businesses would become full worker cooperatives after a finite period of time.
As far a financing individuals to invest in their worker cooperative startup, the practical issue becomes one of lending to people who possibly have poor credit, limited assets, and an uncertain income stream. These larger credit issues remain unresolved, as well as a moral hazard problem as far as lending risks are concerned. But the implication is that worker cooperatives face not only the traditional startup and small business lending problem, but a personal lending one as well.
Personal loans for a startup create a moral hazard in the case where the borrower has no other assets or income to cover loan payments. Essentially the lender takes the risk if things go badly, and the borrow reaps the rewards if thing go well through a higher net loss based return.
If personal loans to founding members are the method of financing then income inequality will prevent many people from demonstrating the personal income (cash flow) to make the payments. Proof of income is the primary criteria for getting a loan, and in a startup worker cooperative the net income of the founders is negative. In order to attain personal loans a secondary stream of income would be required. This would likely cause founding members in a startup to have a separate full time job, and to start the coop on the side. Such arrangements are common in the tech industry.
To the extent that the loan is only secured by the member investment in the cooperative (and is non-recourse to the borrower) the loan will be under collateralized going forward. This can be problematic for loans from regulated financial institutions like banks and credit unions. Financial institutions do routinely make consumer loans that become under collateralized immediately after financing. (Virtually all new auto loans face this problem.) Though it is likely that business loans with totally illiquid collateral in the form of the coop investment would be viewed differently. Full recourse loans are only useful to the extent the founding member has sufficient assets.
Part of the problem is the server wealth inequality. If founding members are expected to invest their own assets to start a worker cooperative about half the population does not have the liquid assets to do so. The other problem is that even if there were a perfectly equal distribution of wealth, the startup costs of most large businesses would exceed the assets of the founding members.
The issue of losses and recourse to the members can alternatively be be viewed in the context of the type of business entity. Should worker cooperatives be like most corporations and limited partnerships, and limit the members liability? Or should worker cooperatives resemble general partnerships, and make the members fully responsible any business losses? Opinion on these questions will likely guide the type of financing that is developed.