How Character-Based Loans Nurture Community Relationships – Next City
EDITOR’S NOTE: This sponsored content is paid for by the Cultural innovation center (CCI), as part of its Ambitiowe initiative. This series explores how alternative business models can empower artists and culture carriers, with a view to financial freedom and long-term sustainability.
How do you create the conditions for healthy and resilient communities to thrive? This is the question that first catapulted Deborah Frieze, co-founder and president of Boston Impact Initiative (BII), in action.
Before founding BII, she had worked at Berkana Institute, studying complex adaptive systems and system changes. She had noted the inequality in the American economic system – a system she was making “generating inequalities by design” – and the peculiar racial nature of how inequality manifested itself. When it came to tackling this inequality, the hometown of Frieze was a critical starting point.
Boston is one of the most unequal cities in the country when measured by income. When measured by wealth – home ownership, control over assets, and other tools that empower people to overcome economic hardship – this disparity becomes surprisingly clear. A 2015 study showed that in the greater Boston area, the median net worth of a white household (that is, the value of all household assets minus liabilities) was well above the national median, at approximately $ 247,500; the median net worth of a black household was $ 8.
A common solution suggested to correct this inequality is to focus on economic development through access to jobs – creation or increase of income. But to break the cycle of economic hardship, families must have access to wealth; not only the emphasis on careers or education, but on improving long-term economic outcomes. And the way the Boston Impact Initiative is approaching this problem through impact investing.
Most small business entrepreneurs require “some degree of bootstrap,” says Frieze. In the start-up phase, they rely heavily on personal savings as well as family and community support and sales. But in communities with extremely small assets, such as predominantly black neighborhoods in Boston, this financial support is less readily available. And that, in turn, means that many entrepreneurs of color are hampered before they even start.
Banks, which require credit scores and personal guarantees for most loan agreements, make these agreements inaccessible to many people in difficult economic times. CDFIs may not provide capital to companies that do not match their traditional target markets for funding. Often the only recourse left for these small business owners are predatory online loan programs, payday loans, and other forms of high interest, deeply extractive loans.
And that’s where BII comes in.
Frieze explains that instead of evaluating applicants through the prism of traditional loan eligibility criteria such as credit scores or guarantees, BII forges a relationship with the potential borrower to determine eligibility, a process commonly referred to as loan based. on the character.
“If you go back to the old days, when community banks and community bankers knew their neighborhood, an entrepreneur would walk into the office and the banker would know them, know their character, recognize them from the community and make a loan,” she says. “Now everything is so anonymous that we don’t know our community – so character-based loans mean I’m in a relationship with this entrepreneur, I’m building trust, we’ve got a line of communication, I understand their business, they understand that I am not here to do [money] out of them… that’s what I would call a relationship economy.
It is this relationship economy that BII strives to prioritize, rather than an extractive credit economy driven by financial performance. The relationship-centered approach requires more time and effort to maintain these community relationships; it also means overturning certain rules of conventional investing.
“In traditional investing, you wouldn’t want to invest in your portfolio company’s supplier / client – people would be worried about conflicts of interest,” says Frieze. “[Instead] we are looking for a “confluence of interests”… the more connected and interdependent our portfolio, the stronger the ties between them, the healthier and more resilient they will be. “
By prioritizing these interdependent systems, BII encourages the creation of local communities and integrated capital in what it calls “closed-loop investment”: the more each company in its portfolio is interdependent, the closer BII is to the world. whole business and more business belongs to others. This is directly from online lender opposition to traditional finance, which separates companies from each other to avoid conflicts of interest and thus discourages connections.
“Finance is like a machine – it seeks the measure of financial risk and return,” adds Frieze. “Really, they’re trying to say, ‘How much money am I going to make and how much risk is it in losing it?’ And it’s just a different calculation than that [asking], “Who are these entrepreneurs? Who are they in contact with? How can their customers make them stronger and more efficient? ”
Currently, BII is expanding this work through a fund-building training program that connects 30 cohort members in 11 different locations across the country, each working in different ways to close the racial wealth gap. by providing capital to their local communities. Like BII, cohort members focus on integrated or blended equity funds that depend on grassroots relationships. The program was originally launched in April 2020, shortly after the COVID-19 pandemic forced home prescriptions across the country. It was scheduled to run until October 2021, but in the wake of what has turned into an ongoing economic disaster, it quickly became clear that this work was not only necessary, but urgent.
“In June, we started our first round of funding… but that’s also when a lot of riots happened and the COVID effect had really devastated many small businesses,” says Olivia Watkins, member of the BII cohort and president of the Black Farmers Fund. “For many of our applicants, their funding needs have increased dramatically.”
This meant that the Black Farmer Fund, along with several other members of the cohort, struggled to meet growing demand. Rather than sticking to the program, Boston Impact Initiative adapted a new program based on member needs and feedback.
Watkins, who is currently completing his MBA with a concentration in finance, says the concurrent experience studying conventional business frameworks as well as BII courses in community impact investing has been invaluable. “What’s really great about the BII experience is that we learn alongside other people who are doing similar things,” she adds. “What I have found most useful in my MBA program is the [case studies], and at BII, it’s like we’re in a big simulation case with 11 other communities across the country. We learn from them, exchanging resources and knowledge. “
As the year and the pandemic progressed and tumultuous events unfolded, members sometimes struggled to be fully present and engaged in cohort meetings. But the circumstances also gave a deeper critical urgency to the work that Frieze, Watkins, and the others were doing. As members of the Twin Cities Cohort responded to George Floyd’s protests, Watkins and his team in New York City organized resources for black farmers in the wake of the protests.
“I would say there is a range of different obstacles for each group,” says Frieze. “You are trying to manage a [finance] industry that has broken trust with a population, and so if you want to offer them another financial opportunity, it must come [the community]. That’s why in BII’s funding cohort, most – if not all – members have already established relationships with the communities their funds aim to serve.
One cohort member put it this way: Members don’t just write checks to people who have been denied access to capital. As local fund managers, they wear many hats. One of its roles is to protect, to protect their communities against financial damage; another is the connector, to build relationship-based funds; yet another is the community leader, to provide increased access and meet local needs.
“[In] how insane this pandemic has been, we are learning what the tools are as we go, ”says Watkins. With that in mind, what better time to rebuild communities – and build them better, healthier and more connected than before?