Putting Non-Extractive Finance into Practice
When investors hear the word “cooperative” it should immediately convey the idea of working together toward a common goal. Headquartered in New York City and working in communities across the country, Seed Commons is a cooperative, or democratically run financial organization, that is reimagining finance and lending. It uses non-extractive finance vehicles to support communities to repair their local economies by building businesses that meet community needs.
Natural Investments started recommending Seed Commons to clients in 2020, which was a turning point year for all of us globally. Seed Commons wrote in its 2020 Impact Report: “2020 pointed to a future that is, and must be, different than our past.” To meet the change that is needed to create sustainable economies, the organization set out to grow its network and capacity by raising additional capital.
Over the last two years Seed Commons successfully tripled the size of its capital fund to $40 million from a variety of mission-aligned investors who were interested in supporting its work throughout the country. This investor support helped the organization actively deploy an additional $7.8 million in worker-owned or community-owned enterprises and cooperatives since March 2020, adding to the more than $15 million of actively deployed or committed loans made to cooperatives across the country since Seed Commons started lending in 2012.
One of the core principles of Seed Commons is prioritizing lending and vital technical assistance to communities that have been historically excluded from economic stability. More than 92% of the businesses Seed Commons assists are Black, People of Color-owned, or women-owned, and 92% of its portfolio is invested in communities of color on a dollar-for-dollar basis. 100% of Seed Commons portfolio is invested in low-income communities.
Seed Commons is proving that it is possible to put non-extractive finance into practice. Non-extraction is defined simply as the returns to the lender not ever exceeding the wealth created by the borrower using the capital. Seed Commons never wants borrowers to be worse off than before working with the cooperative. When a borrowing business makes a profit, wealth can be shared, but at least 50% of the profit stays with that borrowing business. Seed Commons uses profit sharing to cover losses from other loans, to pay its staff, and to help the capital pool be a self-sustaining vehicle that will be around for a long period of time.
Seed Commons can place capital with a borrower in a number of different ways. Some of the loans are for working capital; others may be for a line of credit, or a preferred equity share agreement, or a mortgage loan to help a business buy a building in which it has been operating for many years. Currently, a typical loan size is around $200,000, but small loans of $5,000-$50,000 are available to a diverse array of worker-owned retail and service businesses.
In every case, Seed Commons customizes the terms of the loan to match the needs and capacities of each borrower. Borrowers are not required to make interest or principal repayments until they are able to cover operating costs, including market-rate salaries. Moreover, borrowers don’t need to personally guarantee the loans with any external property outside of the project in which they are invested, and rather than using credit scores, reliability is based on close relationships between local loan officers and the loan recipients.
The Seed Commons network has proven to be incredibly resilient and strong. While many businesses owned by people of color were forced to shut their doors due to the pressures of COVID-19, as of the date of this article not a single business in Seeds’ network has closed since the pandemic began. Seed Commons worked very closely with its network to help borrowers apply for paycheck protection loans and Economic Injury Disaster Loan Program (EIDL) loans. The cooperative has also been able to help many of these businesses have these loans forgiven. The team helped some members launch new lines of businesses during the pandemic, such as Taharka Brothers Ice Cream in Baltimore, which successfully launched a home delivery program of pints of ice cream.
Looking at the present and toward the future, the team at Seed Commons is excited to continue its delivery of loans with equitable terms to people and cooperatives. The growth of the capital pool has allowed the cooperative to start participating in more community-based real estate projects, helping long-time members bring more real estate assets under community control. For example, Seed Commons’ network helped PODER Emma finance the community purchase of several mobile home parks in Asheville, N.C.
Seed Commons also launched a new “Thrive Fund” to raise grant money that supports experimental ideas and higher risk investments for cooperative members. On top of that, there are more opportunities for Seed Commons to participate in the financing of worker-cooperative conversions, as the older owners of many existing, profitable small businesses become tired of dealing with the challenges of operating their businesses and are ready to retire. These conversions would encourage older owners to consider selling their businesses to their employees, in addition to teaching those employees how to run the businesses.
Accredited investors who are interested in Seed Commons’ style of non-extractive lending can continue to invest in Seed Commons’ capital pool, the organization’s flagship fund, and anyone can also make philanthropic grants to its Thrive Fund.
This publication is distributed to clients and friends of Natural Investments, LLC (NI). NI is an investment adviser registered with the SEC. It is for educational purposes only and is not intended to contain recommendations or solicit sales of any specific investment. Authors, representatives, or related persons of NI may own securities mentioned in here.
Photo credit: Members of the Southern Reparations Loan Fund, a regional network within Seed Commons