One of the biggest barriers to starting or expanding a small or local business in this country is a symptom of the “Great Recession” — access to capital has significantly contracted in the past five years and small business owners have been hit the hardest. That’s where you come in. What if there was a mechanism where members of a community could help finance the businesses and organizations they want to see flourish in their city? What if a little bit of the power belonged to the people and not just the banks in choosing how the local business sector shapes up? In this edition of the Green Line Series, Casey Dilloway, co-founder and president of Community Sourced Capital, explains how the evolving democratization of finance offers a viable supplement to traditional sources of capital in a way that gives citizens direct access to funding the change we wish to see.
GoGreen Conference: What is the problem or challenge you are trying to solve via a crowdfunding mechanism and how do you specifically approach it at Community Sourced Capital?
Casey Dilloway: The problem within the financing world is that our system in general is not acting in the interest of every person. It’s acting in the interest of fewer than most. This is especially true at the local level, where people are starting to see how simply shifting habits has a huge impact on their local economy and it’s part of the greater sustainability movement.
The problem from the financial side of things is that we usually rely on banks to help support small businesses with financing and in the past few years bank loans to small businesses have been decreasing. Specifically very small loans — like those under $150,000. That’s the problem we are trying to solve — making small businesses stronger and giving them access to capital in the mean time.
When we started crafting our solution we looked at developing as much of a systems-based approach as we could. If we are going to get small businesses access to capital then we might as well get it from the very people supporting these small businesses as consumers. Our system sources capital from the people that also benefit from the business. And we are seeing really strong connections between our individual lenders and the businesses they are lending to in a way that I don’t think we’ve seen in a really long time in society.
Ultimately we’re trying to line up our money with our values. And we think that if people knew more about what their money was doing when they’re not spending or consciously investing it, they would be upset. That they would want to have more say over what their money is doing.
GG: How is your organization different from something like a co-op or Kiva.org?
CD: What we’re doing is not totally unlike what Kiva is doing, but our niche and our philosophy are different. At this point Kiva is focused on poverty alleviation. We are working on helping small businesses and local economies thrive. We’re not trying to position our borrowers as charity per se.
Co-ops are also in the same vein as what we are doing. But they’re focused on ownership, where we are focused on just debt financing. Though hopefully we might inspire businesses that use community capital for a loan on day one to end up looking at other ownership structures in the future.
GG: How are traditional banks in the area responding to this type of financing mechanism crowding into their territory?
CD: The problem banks have is that they are under such tight regulations when it comes to lending. So in some ways it isn’t their choice to leave this size of lending opportunity on the table. The other part of it is that banks have to be really secure with personal guarantees and so they have to ask small business owners to do things like put their house up as collateral for a loan and not all small business owners have that kind of collateral.
So I don’t think bankers are bitter or anything. They just know that their financial situation is shifting. We talk with bankers all the time and they are actually really excited to be able to point their clients in another direction when they can’t help. So far it feels really collaborative.
GG: Why doesn’t Community Sourced Capital have to do things like ask a small business owner to put up a large piece of collateral? Is it because you outline it explicitly to the lenders who are contributing?
CD: One piece of it is that we do outline to the lenders that there is a risk involved and that they can lose the value of their loan. In fact, when someone makes a loan they basically agree that: “I am content in the event that this doesn’t come back to me and I am not going to try and seek recourse and sue this business for my $50.” The way we’ve structured the system is really important.
The other reason is that we’re outsourcing the risk to lots of people, instead of one person. So that makes it a little easier to do. And at the end of the day, we are simply not a bank. We’re not holding onto funds to lend them out. We’re just being a vehicle to gather people around a business.
GG: Let’s say I’m a small business owner. What do I need to know about community based financing? How does it work for me? What questions should I ask? How do I become a good candidate for this type of funding? And are there limits to the types of things I can do or the scale of projects I can take on?
CD: To be honest, we are still figuring out some of this stuff. We find that the most successful projects are under businesses that have great communities around them already. The businesses that approach us and talk about borrowing from their community definitely understand that they need their customers to support them in order to make this work. They don’t expect that there is some anonymous crowd out there that is going to rush at their opportunity. That’s the most important thing that we talk about with these businesses. Are you a community business? Are you in a position where you think you have people who will support you in a lending relationship?
Above that, we limit the amount that any one lender can put into a business to $250. And when you do the math you can quickly see there is a ceiling for how much you can borrow. If you were a business that had an incredible community around you — you thought you could have 500 or 1000 people supporting you with $250 loans — then we are in a totally new bracket. But otherwise we see a ceiling of about $50,000 for our loans.
GG: How are things going in terms of your model’s success? Can you give us an example of a project you’re pushing that is in the works?
CD: We have a farm in queue that’s really exciting. One of the ways our potential clients are finding us is through other crowdfunding sites. This farm was running an Indiegogo campaign to help buy new equipment. They were asking for donations in exchange for goods and didn’t necessarily see the success they’d hoped for out of that, but found our model really interesting. They thought maybe their community would respond better to a lending relationship than a donations in exchange for a product relationship. We’re excited to find out what happens!
GG: Are you curating the types of projects that you engage on to ones that have some sort of sustainability component to them?
CD: That’s definitely ideal, though it’s tough to be the filter on that. It’s tough for us to say what is or isn’t “sustainable”. There isn’t a stamp of third-party certification we can think to ask for other than something like being a B-Corporation. I think we will grow with that over time and will look to how businesses identify themselves. Right now, just being a locally based, locally owned business is sustainable enough for us.
GG: What kind of future are you seeing for community based finance? What does main stream adoption look like from your perspective?
CD: There are two different tracks. One track is servicing businesses with financing and the other track is start-ups. Both are really high risk. Start-ups and new businesses involve investing mechanisms that almost everyone is familiar with — which can make them even more dangerous to buy in to because they are the easiest things to sell.
If someone you know says: “I’m going to open a coffee shop and it’s going to be great. We are going to have live music every Friday and serve a local roaster.” A lot of people would be stoked to get behind that. But there is no guarantee whatsoever they will be successful. And even when they are, it will be really difficult for them to generate a financial return to satisfy their investors.
We start from a place where we have no financial return offered to the lenders. The second they offer even a dollar in profit back to their lenders, we enter a totally new world of regulations and reporting that would likely break their business. It would be nearly impossible for them to afford it or keep up with it. We enter the market by saying these are zero interest loans. Lenders put in $50 and get out $50. The benefit is that you make small business financing possible today and support the businesses you want to see succeed in your community.
Casey Dilloway is the co-founder and President of Community Sourced Capital. As a featured speaker at GoGreen Seattle on April 24, he will join four additional pioneering leaders for a lively discussion on innovative financing models that create direct connections between our money, funding our values, and supporting local economies. Register to join us! Or get a look at the rest of our program and speaker line-up at the GoGreen website.