How Creative Finance Launched Worker-Owned Co-ops In Post-Sandy New York
Half of small businesses don’t make it past the first five years, and owners lose everything trying to pay off the loans. The Working World lets co-ops stabilize before repayment even begins.
In November of 2012, a month after Hurricane Sandy hit Far Rockaway, a neighborhood in Queens, New York, 10,000 residents were still living without power. The neighborhood, located on a peninsula less than a mile wide, with Jamaica Bay on one side and the Atlantic Ocean on the other, was devastated by the storm and more than half of its local businesses remained closed long after Sandy struck.
“It looked like a nuclear bomb had hit. I’d never seen that kind of destruction before,” said Henry Lezama, a construction worker and Far Rockaway resident of 14 years. He took his family to a local church where others had gathered for aid and shelter. That’s where he met organizers from Occupy Sandy and The Working World, an organization that provides low-interest loans and technical support to cooperatives. “They were talking about ways to restore the community,” said Lezama. “They said they could help us start a co-op.”
Lezama was hesitant about the idea at first. He had already attempted to start his own construction business once, but found the paperwork and bureaucratic process difficult and expensive to navigate, leaving him unlicensed and with a limited pool of customers.
A co-op, however, held the promise of job stability and better wages; he would get a say in how many hours the co-op took on and his co-owners would be people from his own community. The Working World gave him and four others the start-up money. They used it to start a construction cooperative called Roca Mia.
Traditional banks won’t loan to small businesses if there’s too much risk involved, said Working World co-founder and director Brendan Martin. If they do issue a loan, it comes with high interest rates—far greater than the business’s rate of return.
The result is that 50 percent of small businesses don’t make it past the first five years, and owners lose everything trying to pay off the loans. That’s why Working World-funded co-ops like Roca Mia don’t start repayment until they’ve become profitable, giving businesses a chance to stabilize before they begin repayment.
A different form of finance
Martin refers to traditional lending as “extractive finance”: a system where lenders benefit from projects they are financing without any responsibility to the borrowers. It’s a way for banks to protect themselves from risk; but for new businesses on shaky legs, it means putting everything on the line.
That’s what Martin saw in the early 2000s, when Argentina’s economy had taken a nosedive. A recession had driven out investment and closed the doors of many small businesses and factories. At the worst point, unemployment rose to 20.8 percent. Left without jobs, workers across the country decided to take matters into their own hands and reopen businesses as cooperatives.
While these workers had resurrected their businesses, some were still in need of cash for raw materials and growth. “Most banks weren’t even willing to talk to them,” Martin said. “If they had been, they would have said, ‘This is a lot of risk—the only way we do this is if you put the factory on the line and use that as collateral.’ Then, if the cooperative isn’t able to pay the loans, they lose control of the factory.”
That’s when Martin, along with filmmaker Avi Lewis (who collaborated with wife Naomi Klein on The Take, a documentary about the factories), created the investment firm, The Working World.
Over the years, they started practicing a different form of finance: investing solely in worker-owned co-ops and providing loans that didn’t require collateral or go into repayment until the co-op made a profit. They used funds from investors who wanted to support cooperatives. Despite giving what traditional banks might consider “risky” loans, today The Working World has a 98 percent rate of repayment and has expanded from Argentina to invest in cooperatives in Nicaragua and the United States.
“We know some small businesses [in Brooklyn] that have taken out loans with 30-35 percent of interest— businesses with very low rates of return,” said Steve Wong, a project officer for the New York branch of The Working World.
Comparatively, Roca Mia has an interest rate of just 4 percent (though most co-ops The Working World finances average around 7 percent).
Ten months after meeting at the church, Lezama and his co-owners are still learning how to work in the cooperative model. Group decision-making can be a challenge, he said, but there are also benefits: “This is the first time in my life I’ve had a salary.” With their $20,000 loan, they have used their construction business to help rebuild the damage from Sandy and are training two new apprentices to join their ranks.
Making room for people
While The Working World is funded by investors from around the world, the goal is to put locals in charge of businesses and eventually finance. The catch is that the businesses have to be co-ops, or willing to convert to a co-op structure, ensuring that more people hold power over the business—or “own the means of production,” as Martin says.
Alex Payne is one of The Working World’s “angel investors.” He says that his investment in cooperative businesses produces a “sustainable return”: “It keeps going by creating businesses that put more people in power.”
Payne was an early employee at Twitter and has since worked with nonprofits, contractors, and startups. He says he doesn’t consider the investment risky. In fact, he says he has more faith in the cooperative business structure—which is why he keeps reinvesting in The Working World after he is paid back. “I think there are a lot of problems with those kinds of models” said Payne. “Nonprofits end up on a donor dependency treadmill, and at the other end of the spectrum companies run the risk of selling out their customers.”
When Roca Mia repays its loans, the interest will go into a fund that will be reinvested in three more co-ops already in development in the Rockaways. The co-op will put its debt to work for the local community.
The hope is that the fund can be locally controlled by the people of the Rockaways, giving residents the ability to stay within their community if they need a loan to start a business.
While The Working World model is small, operating with a fund of only a few million dollars a year, Martin believes it’s a potential solution for the up-and-coming small businesses whose only other option would be to take on crippling debt. A large enough fund owned by communities could start to contend with big banks⸺at least, that’s what Martin hopes.
“Finance is one of the cornerstone issues in the way our economy doesn’t work for people,” he said. “It’s one of those threads that, if you tug at it, things start to come apart.”