Cooperation Buffalo follows the Shared Principles of Seed Commons, and one of these shared principles is non-extraction. Non-extraction dictates the terms for all of our loans and investments. Non-extraction is defined simply as the returns to the lender not ever exceeding the wealth created by the borrower using the capital. This is often colloquially said as “a borrower will never be worse off than before working with us.”
While Seed Commons makes a number of different types of capital placements (e.g. secured asset purchase loans, working capital loans, line of credit loans, real estate mortgages, etc.), each deal reflects both non-extractive terms and the needs and capacities of the borrower. Our non-extractive terms include:
No repayments greater than profits: Borrowers are not required to make interest or principal repayments until they are able to cover operating costs, including market-rate salaries
No personal guarantees: Financing agreements never use assets for security unless the asset has been purchased with the financing agreement proceeds
No credit scores: Instead of credit scores, Seed Commons uses close relationships between local loan officers and potential loan recipients to establish a borrower’s reliability
Simple interest: Simple, non-compounding interest rates are fixed at 8% for most business loans and 5% for most real estate loans, providing predictable costs that maintain the sustainability of the Seed Commons fund
How Risk is Mitigated in a Non-Extractive Loan
These terms of non-extraction impact how Seed Commons mitigates risk. Like an investment, a non-extractive loan has an absence of outside collateral to securitize financing, and so, like business investors, Seed Commons mitigates risk by:
Rigorously assessing the business plans of prospective borrowing enterprises
Improving business plans in conjunction with the prospective borrower
Working with the borrower after the financing is extended to ensure that the borrower receives the technical assistance they require to succeed
This approach puts the borrower and the lender on the same side of the table, as both are deeply incentivized to do all they can to help the enterprise succeed, and this partnership creates a strong mitigant to risk. This means that Seed Commons learns early and clearly what business issues a borrower faces, rather than learning about business problems only after it is too late as happens at times to passive lenders. Focusing on the business prospects rather than securitization also puts Seed Commons in a much better position to diagnose and help solve problems that do emerge. It is these risk mitigants that Seed Commons credits with its low write-off rate and history of successes and that have made the lack of collateral not a source of losses.
For more information on the terms and approach of Seed Commons lending, visit their website.
Isn't All Finance Extractive?
At times, we are asked if interest is inherently extractive—or even if repayment of any kind is extractive. Non-extractive finance is defined as no more repayment going to the provider of the finance than the surplus that is created by the borrower’s use of the loan. If no surplus is created, nothing is returned to the lender. If wealth is created, it can be shared, and this, we believe, should be the basis of all finance relationships.
Imagine if "debt" was no longer something that those who don't have owe to those who have, but rather if "debt" was something owed to the commons by those who have surplus so that it can be borrowed by those who are in need. When successful cooperatives share their surplus for the productive use of other cooperatives, democratically created and controlled wealth can be used to generate more democratically created and controlled wealth. This is the conceptual framework for our non-extractive lending.