I could smell my final destination before seeing it. Cookies? Cake? Nope, bread—freshly baked!
Bookended by a used clothing store and a pizzeria on a semi-busy boulevard in West Seattle, Washington, Bread and Stuff had been open for a little over a year when I met with Dorothy, the business owner, manager, chef, and baker.1 When asked to describe her establishment in one sentence, she responded, pausing only long enough to swallow her sip of coffee, “Neighborhood café-bakery committed to the principle of sourcing from local organic farms.”
It almost never was.
Sitting there with Dorothy, at one of those cool vintage laminate tables trimmed with metal, you would have never guessed she’d been homeless seven years before. That is right, living in shelters and, for a couple weeks, living in her car. Homeless.
“D-I-V-O-R-C-E. It wiped me out.” Dorothy’s ex had lacked self-control in ways I can and cannot write about. In terms of the former, he managed to charge his way to a $40,000 credit card debt. Dorothy learned about his shopping proclivities—he had a particular penchant for guns—only after the damage had been done. A knock on the door from a repo man is a heck of a way to learn about your loved one’s problem and the fact that you’re penniless.
By her own admission, Dorothy was “poor, straight-up broke.” Even after finding her financial feet, at least enough to get out of her car and into a condo, which she still rents, Dorothy lacked perhaps the most important thing of all for any aspiring entrepreneur: C-R-E-D-I-T.
Even a perfect credit score would not have helped. She told of her sister, who at the time lived in another state, traveling to Seattle so they could both talk about her restaurant idea with a lending agent. “We were told that the bank was generally interested only in loans north of $60,000 or $70,000,” she said. The bank did have an option for her and her sister: a credit card with, in Dorothy’s words, “a crazy interest rate.”
Dorothy had long dreamed of opening a restaurant. After her stint living out of a suitcase, she returned to cooking for family and friends, which she had started doing in high school. (She’d been too embarrassed to tell these friends she was homeless, in case you’re wondering why they did not take her in during that difficult stretch.) “The idea was always there,” she told me. “There was a lot of support; everyone told me how much they enjoyed my food. ‘You should start a restaurant.’ I heard that a lot.”
Two friends and the sister helped bankroll her dream. She started small, making breads at home and selling them at local farmers’ markets. After a year of building her brand, she had developed a devoted customer base—whenever she arrived at the market, she was greeted by a line of people waiting for her. The time seemed right to take the next step. Hopeful, she set off to find space and open Bread and Stuff.
This is where the lending agent came in—and where the story takes an exceptional turn, which, one hopes, will one day become unexceptional. If this were a typical small-business story, Dorothy would have either taken out a high interest loan, an incredibly risky venture, to say the least, or given up on Bread and Stuff. What happened instead is that one of her bread loving customers connected her with someone from Community Sourced Capital, a Seattle-based company whose online crowdfunding platform enables interest free loans.
CSC first started making loans in 2013. It is similar in many ways to the more familiar Kickstarter and GoFundMe, with one important innovation. CSC focuses specifically on raising funds within the community where the business will be located, from people committed to supporting local entrepreneurs.
Businesses approved for the platform run a four-week campaign. Before it begins, CSC charges a onetime $250 launch fee to build a campaign page telling potential investors a compelling story. Projects range from $5,000 to $50,000. Interested individuals can then buy “squares,” each representing a $50 zero interest loan to the business. If the campaign is successful and all the money requested is earned, the business starts paying “squareholders” back immediately. Borrowers are typically allotted up to three years to make good on their loan. So far, 98 percent of CSC’s loans either have been repaid or are in good standing.
“I couldn’t believe my luck,” Dorothy confessed, giving me a huge grin. She went on to describe the nature of the loan, and the savings it resulted in, as compared with what would have happened had she gone the high interest route suggested by her personal banker. Her CSC monthly payment was less than what her interest only payment would have been. No wonder she was smiling. I was too by the end of our conversation.
One burden associated with ownership is debt. To expect that we can rid the world of debt is about like asking that we rid it of conflict: you can ask, but don’t hold your breath. Small steps. The amount of debt we choose to strap small businesses with is something we can and should control.
The Dorothys of the world want single-digit interest rates. Who doesn’t? Financial institutions don’t, for one. Wall Street has become quite content with double-digit—triple-digit, even—interest rates. Yet most bankers, and certainly those setting lending policy at the national level, do not call neighborhoods like the one where Bread and Stuff is located home.
If they did, things might be different.
Participants in peer-to-peer lending platforms generally understand that runaway interest rates are not only bad for these small businesses; they are also bad for communities. When you cannot pay off your principle because of interest rates, you do not have the time or resources to innovate, socially or otherwise, because all your energy is focused on generating revenue. How can we expect businesses to act responsibly, and do things like pay their workers a livable wage, if they are servicing their loan instead of their community? We cannot.
Dorothy put this point succinctly: “Those smaller monthly payments made all the difference for me, allowing me to reinvest in my community, making sure I do right to the people here. If I had gotten a loan through the bank, all my energy would have been in trying to make my mortgage. That’s no way to serve a community.”
And yet, national lending practices are heading in precisely the wrong direction.
The total volume of loans held by community banks peaked in 2008, only to drop rapidly with the Great Recession, bottoming out in 2011.2 To make sense of this, I reached out to Stephan, who had worked until recently for the Federal Reserve System as a research officer. We talked about how banks, in the period leading up to the crisis, had relaxed underwriting standards and accepted applicants who had little equity, or even no equity in many cases, but who had wildly optimistic property appraisals and income forecasts. “After the crisis, that all stopped,” Stephan explained. “It’s a totally different ball game today, especially if you’re looking for small-business financing. Most lenders, post-2008, are no longer community focused but are now Fed focused.”
That last comment about banks being “Fed focused” was a reference to regulators’ push to require banks to hold more capital against business loans than consumer loans, which has driven up the costs of small-business lending. “Small businesses are small because they don’t have the credit of a Sam Walton,” Stephan reminded me. Sam Walton, for those who do not recognize the name, founded Walmart and oversaw its expansion until his death in 1992.
The financial experts I talked with all mentioned how crises hit small businesses harder than they hit large firms, as small businesses are more dependent on bank capital to fund improvements, repairs, and lulls in revenue. Job data from the recession support this assertion. From the employment peak prior to the financial crisis until the numbers bottomed out, in March 2009, small firms shed 11 percent of their jobs. Among businesses with fewer than fifty employees, the decline was even greater: 14.1 percent. Payrolls at larger businesses declined by roughly 7 percent during the same period.3
These numbers are especially hard to stomach when you consider the importance of small businesses to regional economies and household well-being. Since 1995, small businesses have been responsible for creating approximately two of every three new jobs. Half of the 28 million small firms in the United States are home based, and 23 million are sole proprietorships. The remaining 5 million have employees and can be divided into mom-and-pop enterprises, small and medium sized suppliers, and high growth start-ups.
Each of these small businesses creates a multiplier effect or dollar turnover—the number of times a given dollar results in other local transactions. Locally owned companies tend to buy locally when it comes to the services of attorneys, accountants, graphic designers, carpet cleaners, window washers, and so on. In contrast, large chains handle many of these services internally—at “corporate”—to capture economies of scale. These corporate savings, however, come at the expense of local economies.
Among the thousands of small-scale food entrepreneurs with whom I have interacted over the years, I cannot think of one company that did not rely heavily on its local economy for its supplies and services. Like most of us—my household included—they used Amazon and other “distant” suppliers. But when it came to doing taxes, painting walls, and repairing equipment, they looked locally. That is not the same story I hear from most of the CEOs and managers of large national chains whom I know. As reliant as Main Street is on, well, Main Street, national chains find it more efficient to obtain services and products from other large national, sometimes transnational, firms.
A study from the Maine Center for Economic Policy calculated that every $100 spent at locally owned businesses within the state generated an additional $58 thanks to those store owners having turned their dollars over within the community. For comparison, $100 spent at national chains generated only $33 in local impact, mostly through employee wages and rents. Small businesses, in other words, were found to generate a 76 percent greater return to the local economy than when money was spent at big-box outlets.4
These findings mirror research that focused on Salt Lake City, Utah. In one study, locally owned retail establishments and restaurants returned 52 percent and 78.6 percent, respectively, of their revenue to the surrounding economy. By comparison, the national retail chains examined—Barnes & Noble, Home Depot, Office Max, and Target—recirculated an average of 13.6 percent of their revenue. The three restaurant chains examined—Darden, McDonald’s, and P.F. Chang’s—returned an average of 30.4 percent of revenue to the surrounding economy.5
And that is just their economic benefits. The social value of these enterprises, while perhaps harder to quantify, are no less significant.
David Brown at the University of Colorado has described how the presence of Walmart—arguably the antithesis of Main Street retail—in a community is correlated, at statistically significant levels, with decreases in voter turnout and participation in political activities, lower levels of philanthropy, and declines in social capital. This pattern was observed in four different data sets based on data at county and individual levels.6 “The results,” he wrote, “imply Wal-Mart has a measurable impact on communities in the United States that reaches beyond prices, income, and employment. Big box retail, it seems, comes at a cost. Lower prices and all that comes with them hold important consequences for political participation.”7
These findings parallel those reported in an article in the American Journal of Agricultural Economics, not an outlet known for its boat rocking publications. Authors Stephan Goetz and Anil Rupasingha concluded that the presence of a Walmart in a county is correlated with lower levels of social capital—fewer social networks and less trust, for example.8
Correlation, I know, is not causation. We need to ask why: why might the presence of national chains, such as Walmart, cost us as citizens? I can offer a couple of general observations in response to this question. First, national chains tend to foster car-munities, as they are often confined to a community’s outskirts—the only place that could accommodate their massive footprint and parking lot.9 Their car-centric business model becomes a type of self-fulfilling prophecy. This happens when locally owned mom-and-pop options, sited, literally, on Main Street and thus more easily accessed by bike and on foot, are shuttered thanks to Fed focused lending policies. The walkability of a community is one of the strongest predictors of it having high social capital levels.10
My second observation simply picks up where the first leaves off: as national chains extract more wealth than they generate and leave in these spaces, communities suffer as communities. Financial inequalities exacerbate social distance, resulting in people who feel they have less in common with their neighbors.11
It is a lot easier to do the right thing as a business when shareholders, community members, and customers are one and the same. It is a different beast entirely when the person signing your paycheck—or loan—does not give a crap about whether Main Street is littered with potholes or the high school’s ceiling leaks every time it rains.
To quote Craig, a Seattleite and owner of a small ice cream parlor who also happened to get his business off the ground with a peer-to-peer loan, “Small business owners generally follow the credo ‘You don’t shit where you eat.’”
His point, restated in child appropriate language: small businesses succeed by taking care of their communities, not by exploiting them.
Craig’s crass credo came to mind about a week later, while I was talking with Marcela.
In her mid-fifties, Marcela had auburn hair, large dark eyes, and fine high cheekbones that gave her solidly sculpted face a look of authority. And then she spoke. I doubt I am the first person to do a double take upon first hearing her high pitched voice.
I was drawn to Marcela because she was both a peer-to-peer borrower and a peer-to-peer lender. In the world of Fed focused lending, this dual identity would be considered positively schizophrenic. Conventional banks do not borrow from their borrowers.
Turns out there are a lot of people out there like Marcela. These individuals started at the receiving end of a community loan, enjoyed the experience, and decided to pay it forward by funding a peer-to-peer loan to help some aspiring entrepreneur.
Marcela lives in North Carolina and is the owner-operator of a bakery that specializes in eastern European pastries. At one point in our conversation, she shared with me how lenders and borrowers were matched up through the platform Slow Money NC. Loans can be made only between people in the same community, which I later learned includes people in the same or even adjacent counties. The purpose of this, Marcela told me, is so “borrower and lender, or lenders, as there’s usually more than one, stay connected.”
Not all peer-to-peer loans are interest free. Those made through Slow Food NC are interest bearing, though the rate is many points below that of a conventional small-business loan. I mention this to highlight that social dividends are not the only returns being sought through these arrangements.
While community based loans are far less restrictive than Fed focused loans, and therefore more “risky” in the eyes of conventional loan officers, their default rates remain remarkably low: between 1 percent and 4 percent among the lending platforms that I examined. Compare this with the failure rate of conventional small-business loans made prior to the financial crisis, back when banks were looser with their underwriting requirements: 12 percent.12
There’s a very simple reason why peer-to-peer loans have lower default rates: borrower and lender are socially connected. It is a lot harder to willfully default on a loan when it comes from a friend, which is precisely what lenders become in a lot of these instances. Meanwhile, at the other end of the loan, lenders do not want to see their friends (and investments) fail, so most do what they can to support them.
We are taught that the economy principally generates wealth. If those transactions happen to create social benefits, great, but the ultimate source of well-being is money. According to this outlook, social gains are usually incurred indirectly, through wealth. Peer-to-peer lending tells a different story, in which economic benefits occur because of social dividends—money isn’t the driver; it’s just a nice side effect.
It is a case of what’s old is new again, lest we forget that the word “economics” is derived from the ancient Greek word for management of the household: oikonomika. According to Aristotle, the economy is composed of two interrelated systems. One speaks to phenomena such as money and market transactions, what we tend to think of when calling the term to mind. Yet without the other component, the whole financial house of cards comes tumbling down. Think of all those non-market exchange relationships that make life not only worth living but also livable.
The futurist Alvin Toffler famously asked a room full of CEOs what it would cost their respective firms if all new employees had not been toilet trained and they had to pay for this preparation. Toffler’s point is much the same as Aristotle’s: markets would not exist without nonmarket actions. The world would be a shitty place were it not for all those nonmonetized activities.
Take Marcela’s experience with her peer lender, who had received a fairly sizable inheritance after her mother passed away. The lender, in Marcela’s words, wanted “to do something that gave back to her community while also generating some modest financial return.”
Marcela swiveled her chair, reached for a framed photo resting on a bookshelf, and handed it to me. I immediately recognized the face—those well defined cheekbones were a dead giveaway. I was looking at a picture of a very happy Marcela. She had one arm around someone I did not recognize. Both were giving the familiar thumbs-up sign. “That’s me and Josée,” the lender, “the day I got my loan.” That explained Marcela’s ear-to-ear smile.
Looking back, I realized that the very fact that she had that picture spoke volumes about the relationship. I mentioned this once to a loan officer at a conventional bank, asking if his picture adorns the offices of many small-business owners. He answered immediately, with a deep, chesty laugh: “Oh sure, I make lots of friends doing this; that’s why I never see any of them again.”
Back to Marcela: “Josée was always promoting my business among friends, on Facebook, at her work.” Marcela also admitted that knowing her lender “created extra incentive to not let her down.” I don’t think I’ve ever met a small-business owner who was concerned about defaulting for the sake of a Fed focused lender.
Marcela’s sentiments square with findings from the vast literature on microlending programs.13 This form of financing is usually put to work in low-income countries, where small amounts of money are loaned to poor entrepreneurs to encourage self-sufficiency and to alleviate economic hardship. These programs also focus on providing social support, mentoring, training, and the like.
“It’s a virtuous cycle.” Clearly excited, Marcela began to wave her arms in a motion that looked like a mix between practicing karate and conducting a band. Her voice took on an aggressive quality that masked the childlike qualities I had come to expect.
“Peer-to-peer lending creates an entirely new business model, from survival-of-the-fittest to we’re-all-in-this-together.”
Oikonomika.
Have you ever met someone who was sweet and kind and funny and had almost nothing in common with you? I’d place Arlene in that box—constantly asking if I would like anything to eat or drink, making dopey jokes that were often self-deprecating, and regularly using profanity to punctuate points. She also had an infectious “playground” laugh. Where we differed, and significantly, were in our respective pedigrees. She was the child of a once famous Hollywood actress, had dated a duke, and had once made out with an Oscar winner.
I met with Arlene at her house in California’s Central Valley. A three-time lender of zero interest peer-to-peer loans at the time of our interview, Arlene had been in finance before retiring. She admitted to wishing she had taken a different, albeit related, career path. “If crowdfunding would have been a thing twenty years ago, I would have gladly shifted jobs.”
Not long into the conversation, Arlene dropped the following comment: “Money doesn’t have to make you a prick.” Initially, I was not sure whether she was defending her well-to-do upbringing or commenting about something else. Turns out she was making a positive point about peer-to-peer lending.
Her point is well taken; money is correlated with unsociable outcomes. This is not a social commentary about people who have a lot of money. The mere presence of money, even the thought of it in some instances, can make you, well, a prick.
The first research I am aware of on this subject dates back to 2006, when Kathleen Vohs, at the University of Minnesota’s Carlson School of Management, and her colleagues published an article titled “The Psychological Consequences of Money” in the journal Science.14 In one study, participants were primed by the presence of a large pile of Monopoly money. Those exposed to the play money were less willing to help someone who “accidentally” spilled a box of pencils. In another scenario, participants were asked to fill out questionnaires while seated in front of a computer monitor with a screen saver that depicted either money floating or fish swimming. Exposure to the floating cash reduced participants’ willingness to work in a team and resulted in their seeing themselves as having less in common with the other participants. Vohs and her collaborators even tried having their subjects unscramble phrases that included words such as “salary” while a control group worked with nonmonetary terms. These seemingly mundane tasks reproduced similar outcomes. The nonmoney group spent an average of three minutes on a difficult puzzle before reaching out for help, while members of the money group plodded away for more than five minutes. Those who unscrambled nonmonetary phrases also spent, on average, roughly twice as much time helping a struggling peer with the puzzle than did those who had been primed to think about money. These findings have since been replicated through a number of other experimental designs.15
Arlene pretty much nailed it with the “prick” comment.
Unfortunately, the research does not consider whether people using sharing platforms respond differently when in the presence of money. Arlene would argue that they would act differently, or at least could; after all, not all sharing platforms are the same. I would tend to agree. I have talked with enough people experimenting with sharing to say some of these practices most definitely have that potential.
Arlene again: “It isn’t money per se that’s alienating but how it tends to be exchanged in today’s economy. Money has become a proxy, a substitute, for social relationships, whereas with peer-to-peer lending it is a vehicle that amplifies community engagement.” Arlene was speaking to points made earlier about the creation of an economy that takes care of its entire household—oikonomika. This stands in contrast to conventional markets, which turn you into … well, you know.
Arlene spent a lot of time talking about her experiences with peer-to-peer lending and why she would have “gladly” left her job as a financial planner for a career in crowdfunding small businesses. She also told me stories from her financial planning days—four, actually. While the characters differed, the story arc was always the same. An individual with high minded aspirations visits her office to plan for his or her retirement and expresses clear wishes about which sectors to avoid investing in. She mentioned one guy, for instance, who was “initially gung-ho about social justice” and gave her clear directions to avoid making investments in Big Food and Big Pharma companies. But after a year or two, the clients all started leaving those convictions at the door. “It doesn’t take long for someone to look at their statements and start seeing only money. Injustices aren’t exactly spelled out in annual investment reports.” Sounding incredulous, Arlene added, “I was helping people sell out.”
With that, she looked me squarely in the eyes. Shrugging her shoulders as if to say “I told you so,” she continued, “That’s what happens when people get close to money and not to the people behind it.”
This does not happen as easily when money is rooted in one’s community.
A few minutes later in the conversation, Arlene got up, walked over to a nearby closet, and disappeared for a few seconds. Emerging holding a purse, she returned to her seat and set it on her lap. Releasing the two clasps—click-click—she opened it and pulled out a bright red wallet from which she produced three pictures. No way, I remember thinking. Setting them down on the table between us, she pointed to one with a woman standing behind one of those old-timey cash registers. Pushing the photo toward me with her index finger, she added, “Lending that comes from a community never stops being part of that community, you see?”
I am not sure I really did see at the time. But I think I do now. Lenders rallying their Facebook friends to eat at the establishment their loan is helping to support; lenders and borrowers with pictures on their desks or in their wallets of peers at the other “end” of the exchange, all smiles, positioned next to school photos of their kids; people with annual incomes well south of the nation’s average (the average income in the United States in 2016 was $50,756) participating in these arrangements; businesses in search of social dividends and not just financial rewards: that’s community lending.
Lending that comes from a community never stops being part of that community, you see? I do now, Arlene.