How Hyperlocal Finance Can Change the World

Rachel Zurer September 6, 2016

Start by telling us the story of Community Sourced Capital and where the idea came from.

Rachel Maxwell: Community Sourced Capital (CSC) was born at Bainbridge Graduate Institute (BGI), which became Pinchot University. I went to BGI because I wanted to deeply understand finance. I came out of the international climate policy world and I recognized that in the US particularly, finance was the roadblock to the uptake of clean energy. After taking a deep dive into sustainable finance my first year, I came to the conclusion that just like we need a distributed grid in order to have a strong and resilient energy system, we need a distributed financial system in order to have a strong and resilient global financial system.

I called a team together around the idea of building resilient local economies. That team ultimately came up with the idea of Community Sourced Capital, which is a system of making loans to small businesses using money that comes directly from the people who know, love, and use those small businesses. You’re creating a positive financial loop where people support the businesses that support them by making small, zero-interest loans to those businesses. It’s a reciprocal, generous relationship.

What are some of the challenges with funding small businesses?

RM: When we entered the world of small-business finance in 2012, small businesses were really struggling to get financing from traditional sources; banks were not lending to them. Small businesses are, in a certain way, inherently risky. Most of them do not have a lot of assets they can use as collateral — they have used their personal assets already to build their business — and therefore bank lending doesn’t work well for them. So there were many, many small businesses shut out of the traditional financial system, particularly after the 2008 crash, when people lost so much value in their personal assets and their homes.

Even with loosening up of capital for all sorts of things, small businesses continue to struggle. That’s in part because often they need smaller loans while lenders want to make big loans, because it’s just as much trouble to make a small loan but they make way less money.

Small businesses can access small amounts of money now through systems like merchant cash advances that seem to behave an awful lot like Payday Monday , where they are paying a tremendous amount of money for the capital they’re getting.

 What are some of the lessons that you discovered in starting and running this business?

RM: We started with the idea that we need a financial system that builds community and builds on community — a full system that is a positive systemic loop. In order to do that, we need to stop thinking about value only in terms of dollars.

We’ve made almost 100 loans and involved 6,000 people at CSC, and we’ve found that community members seem to intuitively understand that value isn’t only measured in dollars. They’ve made these zero-interest loans to the small businesses they know in a spirit of generosity. There’s not been a perk or a special thing that they get for doing this, but people are really, really excited to be part of it.

We ask them why they did it and they say, “Because I love this business,” “Because I love this business owner,” “Because I want more businesses like this in my community,” “Because I think these people do really good things and they have a lot of integrity.” That’s exciting for me because it demonstrates the possibilities around unleashing the capital that’s available amongst the people who live in communities.

Some of the real difficulties are that small businesses are in many ways inherently risky, from a financial point of view. Small-business owners basically need to do everything and understand everything — from how to build the business to how to cope with their physical spaces to how to get customers to how to do their own finances to how to market and advertise. Every single small-business owner that we have served seems to work basically non-stop. While they’re excited to do all that stuff, it’s also therefore riskier because not every business owner really does understand everything about finance or has the time to remember to do all the pieces of the puzzle that they need to do.

We’ve had several businesses that have gone under for one reason or another. The people who made the loans to them don’t get upset. They’re like, “We knew this was a risk. We hope you’ll do well in whatever next thing you do.” It’s fascinating to me that that generosity exists out there, that understanding. The community members seem to recognize that inherent value of having those businesses in their communities, and they’re willing to put their dollars to work for their community without thinking about what traditional investors think about, which is “how many dollars am I going to make?”

Were you surprised to find that?

RM: Yes. It makes a person really happy to see that there is this generosity and positive feeling out there in the world. Too often we hear about all the negative, about people suing people and getting upset over all sorts of things. This shows me that communities really can care for each other, even in financial relationships.

The concept of trust seems to weigh heavily into what’s missing from a lot of modern banking transactions.

RM: I believe that we are wired to need and want to trust each other. Community Sourced Capital provides people with an opportunity to do so. One thing that happens in our system that is really different is communication based on integrity rather than on painting a picture so people will be happy.

We call everybody who participates in the loan “Squareholders.” They are not shareholders. They are not equity holders. Nothing about this is like a traditional investment. Basically, it’s not an investment, but it’s not a donation either. It’s an investment in a much more abstract sense, or a more solid sense, actually, which is that you’re saying, “I care.” It’s like investing your time. You’re saying, “I want this to happen,” and you’re saying it with your money.

Integrity on the part of the business owners is essentially what builds the trust. Also, all their people know whether or not they’re repaying their loan. In a bank loan situation, no one knows except the bankers.

What are some of the attributes of a community that make it more or less conducive to a CSC model?

RM: What’s best suited for CSC are communities — meaning groups of people who have something they care about in common. The community can be geographic, but it can also be a community that is much broader depending on how that business or those business owners touch the world.

One community that I think is a really beautiful example is a small town: Long Beach, Washington. In that community we’ve made a number of loans — I think six, maybe seven — to a handful of different businesses. The population is like 1,500 and the average income is quite low, but the people love to help the businesses and owners that they know, and then they can reuse the same money for another loan.

We had one Squareholder write to us when she was rolling the money that she had invested or lent for the third time. She was like, “Oh my gosh. I lent $250 and it got repaid, so that’s one business. Then I lent it again for this project, and now they’ve repaid also, and now I’m lending it for the third time. Wow! That’s a return on investment. I basically tripled the impact of my money over the course of two or three years, in my community!” Sort of an interesting way to think about money.

For a different kind of example, the owners of a particular solar installation company were very involved in the regulatory and political world around solar. Their Squareholders included their competitors, because people felt that that business owner had a lot of integrity and they appreciated the work they had done. That’s amazing, and that’s because those business owners were deeply connected to their competitors. They provide value in the community and they reached out to their community.

“Just like we need a distributed grid in order to have a strong and resilient energy system, we need a distributed financial system in order to have a strong and resilient global financial system.”

How do you take the work you’re doing and get it into as many communities as possible?

RM: CSC is looking into making a transition from for-profit to non-profit. In order for the revenue model to work well as a for-profit, we would have needed to take less time with each business owner than really is required. Small-business owners tend to need help both understanding what CSC does and how we can help. To be as effective as we want to be, we need to spend time and personal focus on each small business we work with.

It’s like a combination of community and economic development. We benefit communities in a way that nonprofits or foundations and government would like to have happen in their communities. And we were not able to grow in a streamlined, lean, rapid way to satisfy those who make equity investments.

We’re going to focus on the Pacific Northwest with our current system, and then we haven’t quite figured out what our model for expanding will be, but it will be akin to a white label or a type of franchise or something. We’ll be able to deploy the platform so that other people in other communities can use it themselves. That’s what we’re working on.

How do you think the larger banks and other financial lending institutions feel about this?

RM: Well, my conversations with banks and other lending institutions, Community Development Financial Institutions (CDFIs), credit unions, is that they love it. The reality is that bankers get very frustrated that they can’t lend to these businesses, and even CDFIs have more constraints around capital and risk than we do. They adore that these wonderful businesses will have a way to access capital to grow and thrive.

We have a CDFI in the Pacific Northwest, Craft3, that has deployed $500,000 on our platform, matching communities dollar for dollar. They love the model so much and it’s so beneficial to the communities that they work in that they agreed to do this, and it’s been tremendously helpful to small-business owners. They did it exactly the same way that community members did: They deployed it at zero interest, and they get repaid at the same time as other Squareholders. That kind of matching capital is something we’ve been negotiating with various other kinds of funders.

What does success for the CSC model look like in a low-income community that has strong social capital and connections but not necessarily the financial capital that we traditionally think is necessary to catapult small businesses to success?

RM: I’d say there’s a combination answer to that. Partly, it can work because it involves small amounts of money collected together to make larger loans. CSC has been in conversation with different funding entities to leverage that matching capital. So, maybe Squares to community members could be as small as $10, and then the match would be four times that. We haven’t cracked that code completely. I’ve had business owners talk to me and say, “Look, my people might be able to scrape $50 together to buy a Square. They also could run into a time when they desperately needed that $50 back right away. How do I seek that in a safe way from community members?”

Frankly, I don’t have all the answers, but I’m working on it. The community itself really has to be the driver, the piece that says, “Yes, I want to fund this business owner.” It has to be the community rather than well-funded, well-heeled outsiders coming in and saying, “We have the capital so we’re going to pick and choose which things get the money.” That’s going to be the most effective way, I believe, to build generative, resilient communities.

What are your hopes and dreams for the future?

RM: I believe that resilient local economies will create a resilient, beautiful global economy, and that the way we create resilience in local economies is that we involve all the people who live in those places and we build on the connections people have with each other. We’re creating a system that builds community, and with CSC, my piece of my puzzle is around finance.


Social Entrepreneurship / Stakeholder Capitalism
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