Local holding companies could help save small businesses and create a more equitable economy
As the Biden transition team develops its plan for economic recovery, it is considering an idea first proposed by The Democracy Collaborative (TDC): Local Economy Preservation Funds. Upon request, TDC and Council for Development Finance Agencies have submitted a concept paper to the transition team. CDFA is a national association of state, county, and municipal development finance agencies and authorities as well as nongovernmental entities involved in development finance.
Local Economy Preservation Funds could save local businesses at scale, while also creating a more equitable, sustainable, and democratic economy.
As COVID-19 surges all across the nation, over 3 million small businesses have closed, at least temporarily. In surveys, half of small businesses report they may be forced to close their doors permanently. These small businesses vitalize local communities and are the foundation for local taxes that support municipal services. If the federal government does not take action, the best of these businesses will be bought by private equity or large competitors, leading to increased concentrations of wealth, fewer jobs, and empty storefronts dotting main streets across the US.
Local Economy Preservation Funds (LEPFs) could “save local businesses at scale, while also creating a more equitable, sustainable, and democratic economy,” write the authors of the memo, Marjorie Kelly, executive vice president of TDC and cofounder of Fifty by Fifty, and Toby Rittner, president and CEO of CDFA. With federal government support, states and cities could establish LEPF holding companies to make equity investments in local businesses that were viable pre-COVID and will be viable again, when civic life is renewed. When these businesses are ready to exit the holding company, they would exit to some form of local ownership, with priority going to owners of color, employee ownership, and broad-based community ownership.
When businesses are ready to exit the holding company, they would exit to some form of local ownership, including employee ownership.
City and states could establish LEPFs to focus on saving businesses in a particular region or industry, or focus on minority- or woman-owned businesses. To keep businesses local, LEPFs would strictly prohibit “flipping businesses to absentee owners or corporate acquirers.”
The authors propose three potential funding mechanisms for LEPFs. These include direct federal appropriations, using the Federal Reserve’s municipal liquidity facility, and private capital, perhaps facilitated by the Small Business Administration loan guarantee program. They recommend $1 billion be allocated to the states for program implementation, education and monitoring, and a multibillion investment of capital. Also recommended is a $100 billion expansion of the SBA loan guarantee program, to be used for LEPFs.
The public is overwhelmingly supportive of government intervention to support small businesses. In an October poll, The Democracy Collaborative and YouGov found that 70 percent of respondents favored such action. LEPFs are similar in structure to the Reconstruction Finance Corporation, which was successfully used during the Great Depression to buy and hold faltering companies until they could be returned to private ownership.
Karen Kahn is a communications consultant and the editor of Employee Ownership News.