The New Way for Small Businesses to Raise Money

Source: Community Sourced Capital

Source: Community Sourced Capital

Small business owners can’t always turn to banks or investors for capital. So why not employ their communities? Or even the customers themselves?

That’s the idea behind an unconventional new way to finance small businesses being championed by a small organization from Seattle called Community Sourced Capital.

Put yourself in an entrepreneur’s shoes and imagine you’re having trouble finding a small loan. For example, say your sandwich shop needs a new glass display case to house and refrigerate a variety of meats and cheeses. Prices for many small business assets — like display cases — are often too high for many entrepreneurs to be able to fit into their budget. Yet, they’re often inexpensive enough that banks cannot issue loans for them, due to regulatory measures and legal red tape.

Thus, we come to a rift in business financing. The fact of the matter is that it is very difficult for small businesses to find loans. In order to help finance business expansion, Community Sourced Capital has found a way to step in and facilitate financing directly from the community.

“It feels like being an investor, even though it’s not an investor in a traditional sense at all,” says Rachel Maxwell, Community Sourced Capital’s CEO. And she’s right: The approach CSC takes to finance is more of a partnership with community members than anything, and those taking part actually get little more out of the experience than seeing their local small businesses grow and thrive.

Here’s how it works: businesses in need of capital run campaigns through CSC’s platform, which invites their customers, family, friends, and other members of the community to become “squareholders,” which means that they are able to buy individual “squares” for $50. Those individual increments of $50 eventually add up to a targeted total amount — and thus the business has secured its financing. For businesses, it’s a rather revolutionary new way to secure funding, and for community members willing to put their money to work, it’s an opportunity to have real, tangible impact in their local economy.

Source: Community Sourced Capital

Source: Community Sourced Capital

But what about squreholders, do they get a return on their investment? Not in a traditional sense. The only return investors get is the confidence that their money is helping local businesses, and improving their communities. Squareholders do, however, receive a portfolio that includes schedules for repayment, and updates on the projects their money is funding.

Unorthodox? You bet. But it seems to be working quite well in some communities. In fact, though most of CSC’s campaigns have been run in Seattle and other cities in the Pacific Northwest, the organization’s reach is quickly spreading across the country to places like North Carolina, Virginia, and Massachusetts. By and large, the campaigns have been successful — 90% of business that have enrolled in the system have been able to secure the money they need so far, all while bucking the traditional financial system.

CSC’s approach actually turns customers into stakeholders as well, as they can actively visit the businesses they have lent money to to see their investment in action. And that’s the key — keeping local economies connected. Suddenly, squareholders have a vested interest in seeing the local coffee shop or restaurant succeed, and can increase their own patronage and recruit others as well.

“The business owners are basically deploying their social capital,” Maxwell said, discussing how business owners can approach potential squareholders. “Think of it like a wedding. Who would you invite to your wedding?”

“I feel like we’re giving people a different experience of what your relationship with your money and the economy can look like,” she said. “We’re saying, ‘hey, here’s something that is happening, and you can be a part of it.’ And you don’t have to give your money away, you’re not doing something philanthropic. You’re being generous, but you’re in a reciprocal relationship with those business owners.”

So far, the radical approach to business financing is finding success. Several small companies have turned one successful campaign with CSC’s system into several, by simply asking squreholders to ‘roll over’ their investment into the next project. That doesn’t require investors to put any additional money forward, but to simply defer repayment so that the same company can continue to put that capital to work.

What’s truly important about CSC’s work is that they are actively inventing new ways to attack economic issues on a small-scale. If this strategy for business financing were to go viral across the country, the ramifications could be enormous for struggling small business owners, as well as community members eager to lend out a helping hand, but unsure how to do so.

The only hurdle is getting those individuals to buy into the system. So far, thousands of individuals have been willing to do just that.

CSC’s work hasn’t gone unnoticed, either. Local Seattle ABC affiliate KOMO covered the organization last year (video can be seen above), and has even garnered national attention after being featured on an NPR segment.

In addition to the creeping attention, the success stories are beginning to pile up as well. Hotels and coffee shops, delicatessens and bars have all been able to use CSC’s platform to successfully expand their operations. The question is, how far can this approach expand? And outside of small, tight-knit communities, will people be willing to part with their money and earn no interest on it at the same time?

Maxwell and her team feel confident that they will, and each successful campaign provides a sense of reassurance. The plan that CSC is pursuing is foreign, but it is having an impact. Giving community members a stake in the economic success of their own communities has clearly struck a nerve with many individuals, and now it’s just a matter of replicating that success nationwide.

Follow Sam on Twitter @Sliceofginger

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