IF BUSINESSES tried to borrow money from individuals for three years without offering to pay any interest, would they be able to raise any funds? Yes, but only when local is lekker.
A Seattle-based company, Community Sourced Capital, has developed a service whereby small businesses can finance their projects by seeking small, interest-free loans from the local community.
Since the first loan was raised in 2013, they have helped facilitate more than 50 campaigns for small businesses raising a total of more than $1 million (R12m) from 4 400 lenders. Money raised in a single campaign typically ranges between $15 000 and $20 000 and most lenders contribute about $100 each. Ninety percent of businesses achieve their funding goals – 50 percent higher than the industry average – and only 2 percent of projects have failed to pay the money back to their lenders.
The most successful projects are those that contribute to the community and this is where raising funds from local individuals is crucial. While lenders do not require a financial return on their investment, they do require that the future success of the business benefits them in some way.
The vast majority of projects using the service are food related: upgrades and expansions of bakeries, breweries, restaurants, coffee shops and speciality food production. Other examples include installations of solar panels on hotels, the development of web platforms or mobile applications for businesses already popular in the community, and a manufacturing plant for an innovative cycling product.
In all of these examples the lender could identify how the proposed project would improve their own lives through increased availability of products or services, or simply increase the proliferation of something aligned with their values.
In normal banking, the reason interest rates are charged on loans is to compensate the lender for the value lost due to inflation and for the risk of possibly never getting their money back. The higher the inflation and risk are, the higher the interest rate must be to attract lenders.
In the early days of their business, the founders of Community Sourced Capital were told that it would never work because people didn’t lend money unless compensated with interest earnings. What they have proven, however, is that while compensation is necessary it does not always need to be in the form of money.
In communities where individuals have a close connection to local businesses and where the products and services of those businesses have a positive impact on the community, interest-free loans are possible.
The best part about the system is that it is solely contained in the private sector – no government or NGO involvement is necessary. Community Sourced Capital is a sustainable, profit-making enterprise that earns revenue via a service fee for connecting businesses to lenders and facilitating payment. The impact on small businesses is decreased financing costs and fasterexpansion, and lenders receive improvements to their lives and communities in return for a temporary outlay of cash.
Could this work in South Africa?
The small businesses in Seattle who have successfully used the service are representative of businesses in the cosmopolita areas of South Africa. In this sector of the market, local success would be likely. The real success, however, would be to make this model work beyond luxury markets and have it play a role in developing entrepreneurship among South Africa’s poorer communities.
Pierre Heistein is the convener of UCT’s Applied Economics for Smart Decision Making course. Follow him on Twitter @PierreHeistein