An Introduction to Community Capital

Imagine a world where every business is a social enterprise that exists to provide for the common good of all—a world where each business prioritizes the impacts of its decisions on the environment and the people in society. Every day, change makers around the world contemplate and develop social, environmental, and economic innovations that motivate communities to build a sustainable and resilient world.

A sustainable social enterprise is often characterized by its concern for and understanding of the social, environmental and economic impacts of its business decisions—the triple bottom-line. Unfortunately, entrepreneurs who develop businesses intended to positively impact society and the environment are having trouble obtaining financing. The triple bottom-line business model is thought to be risky by traditional lenders and investors, contributing to the difficulty social entrepreneurs have in financing ventures. Therefore, a paradigm shift is necessary in the way we fund, invest in, and loan to mission-driven entrepreneurs.

One solution to help social entrepreneurs obtain capital and change the way we invest and lend is with the utilization of community capital models. Community capital is designed to meet the financing needs of a social entrepreneur better than traditional lending and investing because of mission alignment. Community capital organizations, often times, are committed to the missions of those they invest in, and lend to. Community capital is also a viable funding option because of distinct characteristics suited for the financing triple bottom-line ventures. These traits include technical assistance, flexible underwriting, and a need for subsidy.

What is community capital?
Community capital models come from different parts of the finance field, making it difficult to comparatively describe these models. Community capital organizations range from for-profit microfinance institutions and corporations to non-profit community development institutions and private foundations. The differences in organizational structure, along with legal regulations and the complexity of developing community capital models, have made these funds and organizations invisible to most Americans. Therefore, determining what constitutes a community capital model is necessary to advance this as a method for developing sustainable and resilient communities. I have developed a working definition that I believe defines the field in a specific, yet inclusive manner: Community capital is the exchange of money, through lending or investment, between members of a group of people who share a common mission to enhance the well-being of the whole community. Community capital works as a financing tool for members of a geographic town we typically think of as a community. Additionally, it can and should be utilized by members of psychographic groups that share similar values and attitudes and are often connected by the Internet.

Innovators such as Grameen Bank, Calvert Foundation, RSF Social Finance, and Shore Bank, along with other visionaries, have led the way in developing community capital models. Since the emergence of community capital in the 1970s, these organizations have evolved and advanced these models in what is commonly called the social finance field. Community capital models typically take the form of microfinance institutions, peer-to-peer lending companies, and community development finance institutions, which includes community development venture capital, community development banks and credit unions, and community loan funds. Community capital organizations provide financing for social entrepreneurs, and underserved individuals with equity, debt, grants and other finance methods such as revenue sharing.

Community capital organizations, such as The Carrot Project, and the Vermont Sustainable Jobs Fund have borrowed aspects of traditional investing and lending, and adopted them to achieve community capital needs. The Carrot Project uses a revolving microloan fund model and the Vermont Sustainable Jobs Fund uses a mezzanine funding model, which includes subordinated debt and royalty financing. Furthermore, there are innovative community capital models such as the CREW Fund, which uses a donation model to have a continuous flow of capital to social entrepreneurs.

The driving force behind developing community capital models is a gap in the availability of financing to low-income communities and locally owned businesses. Visionaries realized that communities were suffering because those who did not have access to traditional credit and investment could not develop businesses or purchase their own homes. The development and availability of community capital has provided those who were traditionally underserved the opportunity to improve their lives through credit and investment, consequently benefiting whole communities.

Common Characteristics
Community capital models are unique to the communities they serve, and are organized in a variety of ways. Even with these differences most community capital models possess similar characteristics that ensure its success as a method of finance. As mentioned previously, three characteristics common to community capital models are the use of technical assistance, flexible underwriting procedures, and the need for subsidy. These attributes set community capital apart from traditional credit and investing that is based on impersonal credit scores and high return on investments.

Technical Assistance
Technical assistance is vital to the success of community capital as a financing model. Technical assistance is used to reduce risk to the investor and help the borrower to repay the loan by providing entrepreneurs business training and mentorship. Successful community capital models offer critical training in business management, marketing, accounting, and access to professional services. Thus, educating borrowers is essential for a successful community capital transaction.

Flexible Underwriting
Underwriting is the process that financial services institutions follow to assess the eligibility of a customer to receive financing. Underwriting is flexible in the community capital field because it allows for the borrower to be assessed subjectively. In the due diligence process, community capital professionals take time to get to know the person or business they are financing. In addition to objective credit scores and financial information the character of the potential borrower or investee is taken into consideration when determining the viability of the financing.

Subsidy is a form of economic assistance provided to a business or business sector that enables financial success. Community capital organizations may be subsidized by investors’ willingness to take a reduced return on their investments or by hiring mission driven employees who are willing to accept less than market rate pay. However, it is noteworthy that community capital returns have historically been equal to or greater than stock market returns. For example, the New Hampshire Community Loan Fund has an impressive 95% return on their investments. Furthermore, community development financial institutions and microfinance institutions have been subsidized with low cost loans, grants, and donations.

In the past, community capital has relied heavily on subsidies. However, as we develop a new economy based on resilient and sustainable communities, it will be important to consider lower return on investments and equitable paychecks. Additionally, the reliance on subsidy is not sustainable for community capital models. Therefore, determining a model that relies minimally on subsidies is vital to the evolution of community capital.

Community lending and investing is the next evolution of finance that will stabilize local economies and enable locally owned mission-driven organizations to increase their social and environmental impacts. Localizing our financial system, with tools such as community capital models, will create a just, equitable, and sustainable society.


2 Responses to An Introduction to Community Capital

  1. In this piece, Joel Moyer wrote, “For example, the New Hampshire Community Loan Fund has an impressive 95% return rate on their loans.”

    As a staff member of the New Hampshire Community Loan Fund, allow me to clarify a bit, as I think this could have been expressed more clearly.

    1) In our 28-year history, we have a 100% repayment rate to our investors. On one who has invested with us has ever lost a nickel.

    2) We pay our investors between 0% and 5% simple annual interest, depending on the length of their loans and their preference. (Some choose to take less than the maximum rate we offer.)

    3) Over the course of our history, our borrowers have repaid us at the rate of 97.6%.

    Any further questions? Contact me at
    Alan Cantor
    Vice President, Philanthropy
    New Hampshire Community Loan Fund

  2. jmoyer7 says:

    Mr. Cantor, Thank you for your clarification. It is great to hear from you and to see more evidence of the great work that the New Hampshire Community Loan Fund does for the state of New Hampshire.

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