Do Interest-Free Loans Make Sense? No, But They Do Make a Difference

by Marcus Harrison Green

#business #systemanalysis #sharedvalues #finances #policy

“Photo” by Jorge Quinteros is licensed under CC BY-NC-ND 4.0

Conventional laws of business borrowing are typically as uncompromising as they are sacrosanct: Thou shalt most assuredly charge interest on any money lent.

However, thanks to two Pacific Northwest-based lending institutions, small-business owners like Kristi Wokoma are now able to disregard those rules while seeing their enterprises thrive.

“Starting a biz is challenging, especially when you don’t have start-up capital,” says Wokoma, owner of food manufacturer That Brown Girl Cooks, in Seattle.

Wokoma spent nearly two decades attempting to get her business off the ground. Initially she sold her food products at farmers’ markets and local independent grocery stores. However, neither allowed her to make a sufficient living without taking on additional jobs, like catering and cooking.

Like most entrepreneurs who find their growth stunted by precarious financial histories and meager credit scores, Wokoma stood at a crossroads, wondering how to expand her business. She had limited access to traditional small-business financing free of astronomical interest rates.

It was after visiting a Seattle library to hear a presentation on community financing given by Casey Dilloway, president of Seattle-based Community Sourced Capital (CSC), that Wokoma finally saw a viable opportunity. Dilloway spoke about business loans that were financed by members of the community, with principal-only payments. Wokoma, known by locals for her Black Eye Pea Hummus and other creations, was impressed.

After some time mulling it over, she plunged into the world of zero-percent finance. Last October, she received a no-interest loan of $12,500 from CSC and their lending partner, Craft 3, and has since expanded the distribution of her hummus into larger chain stores like PCC Natural Markets, the largest consumer-owned natural grocery co-op in the U.S.

Wokoma’s That Brown Girl Cooks fits the criteria for the type of business the financing partners have been targeting: It’s owned by a woman who is also a person of color, and located in an economically challenged area, Seattle’s District 2 (median income is less than $42,000).

As far as the loan itself, if you’ve asked for $1,000, you pay back $1,000—no more, no less.

While traditionally zero-percent interest has been scorned by the lending world, it’s a way of life for “social underwriting” firm CSC and community development financial institution Craft 3. The two recently partnered up to provide microfinancing loans between $5,000 and $50,000 primarily directed at businesses owned by women and people of color in low-income neighborhoods.

Craft 3 has been providing more conventional loans to underserved communities in Oregon and Washington state since 1994. They have built a reputation for enriching local communities by extending capital to community-based and ecologically sustainable businesses.

CSC’s model, on the other hand, concentrates on small investments, typically $50 to $150 from community members wanting to support local entrepreneurs, something that is often difficult for economically challenged communities to do, as they typically have less income to devote to such causes.

“We knew our model worked well for businesses that had a really established community around them … but we really didn’t see those people coming from low-income communities,” says Alex Mondau, CSC’s business development director.

“So rather than having a product that just doesn’t work for low-income communities, which is the status quo in the financial industry, it’s how can we do this better,” he continues.

Founded in 2012, CSC acts as a crowdfunding platform for small businesses that need modest amounts of cash to reach the next level of operations but may have been blocked from traditional channels of financing, like loans from banks or credit unions (both typically shy away from lending small amounts). While anyone can contribute, CSC primarily raises the capital from residents within a business’s surrounding area, allowing them to buy blocks of a loan, which they call squares.

Their investments directly strengthen their communities—building businesses, increasing jobs, and fulfilling the dreams of their neighbors.

The squares can be purchased in $50 increments capped at $1,000. The combined squares translate to the grand total a business owner is responsible for paying back, in monthly increments. While there is no interest attached, CSC does charge a $50 monthly service fee during the duration of a loan, which typically runs for 3 years. For a loan like Wokoma’s, this would equate to an interest rate of 9 percent—comparable to the industry average that can reach between 9 and 10 percent when administrative and other costs are taken into account—but higher amounts would have a lower effective cost (CSC and Craft 3’s borrower average is $25,400).

After months of discussion, CSC decided to partner with Craft 3 to offer a zero-percent interest loan where Craft 3 would match dollar-for-dollar any amount CSC raised. That $10,000 loan a business received from “squareholders,” as CSC refers to its loaners, now would be doubled to $20,000. All free of any interest.

A major benefit of the partnership for Craft 3 was that the vetting process normally involved with offering a business loan, which can be time-consuming and expensive, was outsourced to CSC. This freed up Craft 3’s resources to provide loans to more communities.

CSC and Craft 3 are loaning out amounts of money, expecting the exact amount back, no more no less (in addition to the monthly fee). All well and good, until you factor in that as time goes on the value of that money erodes. In 1965, $1,000 could buy you a lot more than it can today. You factor all that in and unfortunately and basically—outside of the few CSC charges—lenders are losing money on these loans.

If it sounds irrational, that’s the point, says Craft 3 CEO John Berdes.“Many, many normal people of modest means want to participate in a project/product that delivers intangible returns. People are irrational about what they’re passionate about, including community.”

Berdes says that local lenders agree to this bargain because their investments directly strengthen their communities—building businesses, increasing jobs, and fulfilling the dreams of their neighbors. This is especially true of communities of color, who are often denied the same level of access to financing as other communities; a recent survey of U.S. loan data revealed glaring disparities between the interest rate charged to minorities and other borrowers.

So far the partnership between CSC and Craft 3 has yielded more than $600,000 in financing for businesses in the region. Both Berdes and Mondau say the partnership is still in its embryonic stage, but they want to continue exploring how capital can help make the world a better place.

Here’s hoping mortgage lending isn’t far behind.

____________________

Marcus Harrison Green is the co-founder of the South Seattle Emerald. He regularly writes about social movements, juvenile justice and American society. This essay was originally published in the Seattle Star.

Do Interest-Free Loans Make Sense? No, But They Do Make a Difference by Marcus Harrison Green is licensed under a Creative Commons Attribution 4.0 International License.

How to Save the Middle Class When Jobs Don’t Pay

by Peter Barnes

#argument, #sharedvalues, #reportinginformation, #logos, #ethos, #pathos, #kairos, #currentevents, #causalargument, #proposal, #finances #advice

There’s long been a notion that, because money is a prerequisite for survival and security, everyone should be assured some income just for being alive. The notion has been advanced by liberals such as James Tobin, John Kenneth Galbraith, and George McGovern, and by conservatives like Friedrich Hayek, Milton Friedman, and Richard Nixon. It’s embedded in the board game Monopoly, in which all players get equal payments when they pass Go.

And yet, with one exception, Americans have been unable to agree on any plan that guarantees some income to everyone. The reasons lie mostly in the stories that surround such income. Is it welfare? Is it redistribution? Does it require higher taxes and bigger government? Americans think dimly of all these things.

But then, there’s the exception. Jay Hammond, the Republican governor of Alaska from 1974 to 1982, was an independent thinker who conceived of, and then persuaded Alaska’s legislators to adopt, the world’s first system for paying equal dividends to everyone. In Hammond’s model, the money comes not from taxes but from a common resource: North Slope oil. Using proceeds from that gift of nature, the Alaska Permanent Fund has paid equal yearly dividends to every resident, including children, ranging from about $1,000 to over $3,000. (Bear in mind that a family of four collects four same-sized dividends.) While this isn’t enough to live on, it nicely supplements Alaskans’ other earnings. And paying such dividends regularly for more than thirty years has bolstered the state’s economy, reduced poverty, and made Alaska one of the least unequal states in America.

The question Americans in the lower 48 should now ask is: Did Alaska find the right formula? If it can convert part of its common wealth into equal dividends for everyone, can the rest of America do the same?

There are many good reasons to ask this question. One is that America’s middle class is in steady decline. In the heyday of our middle class, jobs at IBM and General Motors were often jobs for life. Employers offered decent wages, health insurance, paid vacations and defined pensions. Nowadays, such jobs are rare.

It’s also unlikely that the jobs of the future will pay more (adjusted for inflation) than today’s. In unionized industries like autos and airlines, two-tier contracts are now the norm, with younger workers paid substantially less than older ones for doing the same work. Nor is the picture brighter in other industries. In the Labor Department’s latest list of occupations with the greatest projected job growth, only one out of six pays more than $60,000 a year. The implication is clear: without some form of supplementary non-labor income, we can kiss our middle class goodbye.

The second reason to ponder Alaska’s dividends is climate change. It might seem odd that dividends based on oil could presage a remedy for climate change, but such is the case. Imagine if we charged companies for using another common resource—our air—and distributed the revenue equally to all. If we did this, two things would follow. First, higher air pollution costs would lead to less fossil fuel burning and more investment in renewables. And second, households that used less dirty energy would gain (their dividends would exceed their higher costs) while households that used a lot of dirty energy would pay. This would spur both companies and households to do the right thing.

A third reason for considering Alaska’s model is our long-lasting economic stagnation. Not counting asset bubbles, our economy hasn’t sparkled for decades, and neither fiscal nor monetary policies have helped much. Tax cuts for the rich have benefited no one but the rich, and as Mark Blyth and Eric Lonergan recently wrote in Foreign Affairs, pumping trillions of dollars into banks hasn’t stimulated our economy either. What’s needed is a system that continually refreshes consumer demand from the middle out—something like periodic dividends to everyone that can be spent immediately.

One further reason for looking north to Alaska is the current stalemate in American politics. Solutions to all major problems are trapped in a tug-of-war between advocates of smaller and larger government. But dividends from common wealth bypass that bitter war. They require no new taxes or government programs; once set up, they’re purely market based. And because they send legitimate property income to everyone, they can’t be derided as welfare.

In this regard, it’s worth noting that Alaska’s dividends are immensely popular. Politicians in both parties sing their praises, as do the state’s voters. One attempt in 1999 to transfer money from the Permanent Fund to the state treasury was trounced in a referendum by 83 percent. Nationally, Alaska’s model has been lauded by Fox News commentators Bill O’Reilly and Lou Dobbs as well as liberals like Robert Reich.

The reasons for this popularity are pretty clear. Alaskans don’t see their dividends as welfare or redistribution. According to several surveys, most Alaskans consider their dividends to be their rightful share of their state’s natural wealth. There’s no stigma attached to them, and any attempt by politicians to reduce them is seen as an encroachment on legitimate property income.

Moreover, because the dividends are universal rather than means-tested, they unite, rather than divide, Alaskans. If only “losers” got them, “winners” would be resentful. Universality puts everyone in the same boat. No one is demonized and a broad constituency protects the dividends from political attack.