Washington, D.C.— Today, House Small Business Committee Chairwoman Nydia M. Velázquez (D-NY) and Subcommittee on Oversight, Investigations, and Regulations Chairman Dean Phillips (D-MN) introduced bills to help ensure equitable access to Small Business Administration (SBA) lending programs for employee-owned small businesses.
“Employee-owned businesses have a proven track record of aligning the interests of workers and owners. Often, when a business embraces employee-ownership wages rise, the local economy gets a boost, and job security increases,” said Chairwoman Velázquez. “These businesses deliver a range of benefits to their workers and communities and they must have ample and equal access to SBA programs. The bills introduced today will help lower barriers to accessing capital and ensure that employee-owned businesses aren’t unfairly excluded from critical programs.”
“With each passing day, small business owners across the country are nearing retirement with limited options on what’s next for their firms. Rather than closing their doors or turning to options that hurt workers, local communities, and competition, owners can choose to leave their businesses in the hands of the people who know it best – their employees,” said Congressman Phillips. “Propelling employee ownership will help sustain an economy that protects local jobs and builds resilient small businesses.”
Over the years, the number of firms embracing employee-owned models like Employee Stock Ownership Plans (ESOP), cooperatives, and profit-sharing plans has increased steadily. Employee-owned companies harmonize the interests of workers and owners, allowing employees to benefit when revenue and profits grow. 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 reinvest more locally and are more resilient during recessions.
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.
Congress took steps to resolve this issue by passing Chairwoman Velázquez’s Main Street Ownership Act in 2018. The bill included provisions to ease burdensome guarantee restrictions and help retiring business owners convert to an employee-owned model. Unfortunately, in the years following 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 bills introduced today would build on the original Main Street Ownership Act, helping more employee-owned small businesses access vital capital, disaster assistance, and bolstering education and training opportunities to help businesses transition to employee -ownership.
The “Main Street Employee Ownership 2.0 Act of 2022”
Introduced by Chairwoman Velázquez and Rep. Phillips
The legislation prohibits SBA from requiring cooperatives to provide a personal or entity guarantee for a 7(a) loan, and from requiring the seller of a business being purchased with a 7(a) loan for conversion to employee ownership to provide a seller guarantee for the loan. The legislation also requires SBA to permit 7(a) lenders in the Preferred Lenders Program to process 7(a) loans to ESOPs using their delegated authority. Furthermore, the legislation eliminates the requirement that ESOPs provide any mandatory equity, submit an IRS determination letter, or provide a second valuation if a primary valuation was already obtained to get a 7(a) loan. Finally, it makes cooperatives explicitly eligible for SBA’s Disaster Assistance programs.
The “Improving SBA Engagement on Employee Ownership Act”
Introduced by Rep. Phillips and Chairwoman Velázquez
The legislation would improve SBA’s outreach and engagement on employee ownership and cooperative development by including SBIC limited partners and sponsors of SBIC funds in the outreach and education requirement of the Main Street Act. It also would require SBA to attend all working groups or other engagements hosted by other federal entities with respect to employee ownership or cooperatives.