Community-sourced capital: No-interest loans for local businesses

Written by Jim Cummings on September 30, 2015. Posted in Redefining Investing, Zone 7

Two recent MBA graduates in Seattle are pioneering an exciting new approach to funding local businesses. They call it Community Sourced Capital, and they’ve already funneled about $1.5 million to dozens of small companies around the country.  Their innovation is that the investments are zero-interest loans; lenders expect to get their money back, but the “returns” are explicitly in the form of social benefits, ie, enhancing their local economy by helping to grow small businesses.  These are mostly modest projects (funding targets range from $5000-50,000), and 98% of the loans they’ve made so far are being repaid on time.  In the words of CSC Co-Founder Rachel Maxwell: “Money does not have to be about creating more money—it is a tool we can use to create the world we want.” You can learn more in an interview with the two co-founders published on the Capital Institute’s Field Guide to Regenerative Investing (which we’ll cover soon).  There, the project is presented as a real-world example of their regenerative investing principle, “View Wealth Holistically.”  An excerpt:

Casey: Offering a financial incentive is not necessarily the key to making community finance work. What we are finding is that offering people a strong reciprocal relationship with a business gives them an emotional connection to their community.

Rachel: We wanted to create something accessible to everyone, not just accredited investors—that was a huge factor in the design of our lending mechanism. . . . When we formed the team in grad school, I had just read David Korten’s book Agenda for a New Economy and the central challenge I posed the team was, “How do we drive capital flows to real value?” What we were trying to do is create a financial system that is place-based and equitable and creates a lot of personal agency.

On the CSC website, you’ll find links to businesses currently seeking funding.  Most are still in the Pacific northwest, but they’ve ranged far afield, including Georgia, Virginia, Maine, and North Carolina. You don’t need to live near a business to make a loan, though most of the projects have generated the bulk of their capital from their own communities.  Loans are made in $50 increments, and are available to all investors.

We were, unsurprisingly, curious about how the project supports itself.  The loans are interest-free, but participating businesses pay a one-time $250 fee to CSC to set up the online offering, and then a $50 monthly fee during the repayment period, which typically lasts three years.  This is a modest ongoing expense, and likely still cheaper than bank loans for most businesses (e.g., on a $50K loan repaid in the full 3 years, it would amount to about 4% in total costs, in lieu of interest paid).  Of course, the businesses also benefit from the enthusiasm of their lending community; the photo at the top of the post shows a party for funders at a Seattle cafe.  Another loan recipient enthused:

Working with CSC brought us capital, new customers and stronger relationships with our community. It was more than a loan. It was more than a solar installation. It was an amazing collaboration with our local economy.

We love it!  Community Sourced Capital is actively looking to expand its model into other parts of the country; perhaps you know folks who would like to consider launching a CSC initiative in your area.

Tags: close to home strategy, community investing, crowdfunding, financial assets