State and local governments combined currently hold approximately $3.8 trillion in taxes, fees, and unspent bond proceeds, in addition to $5.1 trillion in employee retirement plans. All of these resources can be leveraged in support of equitable economic development,19 and CDFIs can be a critical partner in creating, managing, and disbursing these funds.

For example, in 2016 the City of Chicago created the Chicago Community Catalyst Fund to receive investments from the City Treasurer, but never capitalized it. The pandemic prompted the city to direct $50 million to seed funds that partner with local CDFIs to originate and process loans. The Catalyst Fund then created the Chicago Small Business Resiliency Fund to support emergency small business loans throughout COVID-19, which has the potential to continue supporting small business lending through the recovery.20 Similarly, New York created a statewide CDFI fund in 2008 to provide flexible funding to CDFIs and community development credit unions (CDCUs) to meet the credit needs of underserved communities and small businesses, but never allocated it any funding. Advocates are currently working with elected officials to finalize the details of a proposal to allocate $25 million to the fund, announced in 2020.

Cohort members emphasized that standard lending practices and risk assessments of creditworthiness are rooted in racially discriminatory practices and policies, and recommended alternative means of assessing risk and loan products that meet the credit needs of BIPOC entrepreneurs and small businesses. Black and Latinx borrowers are more likely to be denied access to home and small-business ownership, loans, and other wealth- and credit-building opportunities, which makes it more challenging to meet minimum credit score and collateral requirements imposed by lenders. In the absence of other options, BIPOC borrowers often rely on higher-cost or predatory loan products with steep interest rates and fees that extract wealth from communities of color.

One promising strategy to remove these barriers is non-extractive finance, which was pioneered by groups working to advance worker cooperatives and other forms of community and public ownership. Non-extractive finance means that the cost of capital to the borrower should not exceed the benefit to the borrower. Put another way, the returns to the lender (via interest) should not be greater than the profit the borrower is able to create as a result of using the loan.23

Worker cooperatives are companies that are owned and governed by their workers, who share in company profits and participate in key decision-making in various ways (e.g., sometimes directly, and sometimes through elected boards or committees). Although part of a larger cooperative economy that includes large and longstanding housing cooperatives, agricultural cooperatives, food cooperatives, credit unions, and rural electric cooperatives, most worker cooperatives are small, with an average of 10 employees, and the majority are made up of women and people of color.24 In addition to the systemic barriers in access to capital that BIPOC entrepreneurs and small businesses face, worker cooperatives face challenges in that the model is not widely understood by lenders, and conventional lending practices like personal guarantees cannot be easily applied to businesses in which many owners own a small share of the company.

A number of lenders have developed specialized expertise and practices in lending to worker cooperatives, such as Capital Impact Partners, the Common Wealth Cooperative Loan Fund, the Cooperative Fund of New England, the Local Enterprise Assistance Fund, the National Cooperative Bank, Shared Capital Cooperative, and The Working World. However, many emerging cooperatives were still unable to qualify for loans, particularly those located in areas of the country without a strong cooperative ecosystem. To address this challenge and facilitate greater access to equitable financing and technical assistance, The Working World partnered with the Baltimore Roundtable for Economic Democracy, the Southern Reparations Loan Fund and the L.A. Co-op Lab to launch the Seed Commons non-extractive financial cooperative in 2016.25

Seed Commons is a national loan fund network that pools capital and technical assistance funding for deployment through 26 locally rooted partner loan funds and cooperative developers. Like most other cooperative lenders, Seed Commons does not require personal guarantees, collateral, or credit scores for its loans, but takes the additional step of not requiring loan repayment until the business is profitable. This practice is part of the organization’s strong definition of non-extractive finance, which expands on the definition above to ensure that at least 50% of profits created through accessing a loan remains with the borrower.

To mitigate risk, Seed Commons builds close relationships with its borrowers and provides intensive evaluation of their business plan, along with technical assistance and capacity building. This has been a successful strategy: Seed Commons has a 98% repayment rate on its loans, and currently holds nearly $30 million in assets.26 Seed Commons’ approach is described in more detail below.

State and local governments could help scale non-extractive finance to support community ownership by allocating public funding to technical assistance and capacity building, increasing local and state government capacity to support cooperative ownership, adopting non-extractive financing practices in their own lending, and passing policies to support different forms of worker, public, and community ownership. For example, New York City’s Worker Cooperative Business Development Initiative, administered through the Department of Small Business Services, dedicates nearly $3 million annually to technical assistance providers and cooperative developers. The initiative is credited with increasing the number of worker cooperatives in the city nearly fivefold since 2014.27 The city also recently launched the Employee Ownership NYC and Owners to Owners initiatives to support transitions to employee ownership as part of an equitable recovery.

Additionally, state and local governments could direct a proportion of their procurement contracts to local worker-owned businesses, particularly those with majority-BIPOC ownership, through the creation of procurement preference programs similar to existing women- and minority-owned business preferences. State governments should also consider leveraging federal funds to establish dedicated employee ownership centers to help incubate and expand worker cooperatives and other forms of community ownership, like the statewide employee ownership centers in Colorado, Ohio, and Vermont. At the federal level, legislation to support worker cooperatives, employee ownership centers, and other forms of worker, community, and public ownership should be advanced. In one example, the House Small Business Committee recently passed a $500 million pilot program to allow worker and consumer cooperatives to access U.S. Small Business Administration (SBA) loans.

A government loan guarantee program can enable and encourage private lenders to make loans to small businesses that fall short of meeting conventional lending criteria. Rather than making loans directly, the government guarantees to private lenders enrolled in the loan program that the government will cover a portion of the debt obligation if the borrower defaults on the loan. A loan guarantee mitigates risk to the lender, making lenders more likely to make loans. An additional key benefit of a loan guarantee program is that with the risk of the participating lender mitigated, CDFIs are better positioned to attract additional capital from financial institutions, foundations, and donors to fund their loans. For example, with a loan guarantee in place, Mission Economic Development Agency (MEDA), a non-bank CDFI participating in the California program, was able to raise $5 million from banks and a local foundation.30

Loan guarantee programs at the state or local level can be particularly effective because they have the potential to offer BIPOC-owned small businesses a less onerous loan application process, as well as smaller and more adequately sized loans under more flexible terms, compared to federal loan guarantee programs or conventional financing.

For example, the California Infrastructure and Economic Development Bank’s Small Business Finance Center (SBFC) features a loan guarantee program designed to assist entrepreneurs, sole proprietors, micro-businesses, and small business owners that experience capital access barriers. The program helps businesses create and retain jobs, and encourages investment in low- to moderate-income communities.

Public banking has gained momentum as a tool for advancing an equitable recovery and economic democracy. This strategy consists of moving some or all public deposits out of large private commercial banks and into public banks that are created and owned by local, state, national, or tribal governments, and accountable to the public. Advocates see public banking as a powerful way to leverage public dollars for public benefit and invest in critical community needs like affordable housing, climate resilience, disaster recovery, and small business development, as well as divest from financial institutions that support harmful industries such as fossil fuels and speculative development that destabilizes BIPOC communities and devastates local economies.39 Public banks could directly invest in community projects as well as partner with existing CDFIs, including community development credit unions (CDCUs), and community banks to meet the credit needs of BIPOC and low-income business communities.

Coalitions and networks across the country are leading the push for public banking in connection with broader efforts to transform an inequitable financial system through developing new, accountable institutions responsive to community priorities. In response to these efforts, and propelled by the urgency of the pandemic, lawmakers in Philadelphia, New Mexico, New York City and New York State, Oregon, San Francisco, and Washington State have introduced bills authorizing public banks.40 In California, lawmakers built on legislation passed in 2019 that allows municipalities to apply for public bank charters by introducing a bill that would convert a statewide revolving loan fund into a statewide public bank to support economic recovery from the pandemic.41 Recently, the Los Angeles City Council voted unanimously to begin developing a business plan for a public bank, and other localities in California, including Oakland and San Francisco, are undertaking similar efforts.

Though there are successful international examples of public banks, the continental U.S. currently has only one operational public bank, which is the state-owned Bank of North Dakota. The Bank of North Dakota was founded in 1919, primarily to break the control railroad, grain, and other Wall Street-backed monopolies had over the state’s economy and to support lending to farmers and for economic development and local infrastructure. The State of North Dakota deposits all of its revenue from taxes and fees into the public bank, which conducts nearly all of its lending through loan participations with local banks and credit unions, reducing the risk. Because the Bank of North Dakota’s policy is to not compete with local banks, it does not have branches outside its Bismarck headquarters, and provides only limited consumer banking services.42 The Bank of North Dakota has been credited with numerous successes through major crises, including helping the state weather the Great Recession with no local bank failures and lower foreclosure rates,43 and better and more efficient delivery of federal Paycheck Protection Program funds during the pandemic.44