Calvert Giving Fund
Continental In-Flight Magazine
August 2006
Think Big Invest Small
by Nancy Shepherdson
THERE IS A GOOD CHANCE YOU’VE seen the handiwork of Ink Big Corp. Companies like Chrysler, Adidas, Cold Stone Creamery, even the Rock & Roll Hall of Fame, to name just a few, have used its nanoparticle inks and coatings to create brilliant color saturations for oversized banners, posters, and bus wraps. Not bad for a company in suburban Cleveland that started from nothing four years ago.
With a formula for a new environmentally friendly digital printing ink, but little money to develop the business and even less interest from banks, the prospects didn’t look too brilliant for Ink Big. Then CEO Susanna Ross found out about Chicago-based ShoreBank, which is one of a growing number of lending institutions to offer individuals a low-risk way to invest in start-up companies like Ink Big. “ShoreBank believed in supporting our potential once we showed that we would ‘triple bottom line’ — be good for the environment, good for the community, and good at making profit,” Ross says. The bank loaned Ink Big the capital it needed — a sum well under half a million dollars.
What’s unusual about the loan is not that a small business found funding, but the source of the funding. For a minimum investment that can be as low as $500, financial institutions are offering individuals the chance to put their cash to work in their communities or in low-income areas as microloans to small businesses, such as Ink Big. Unlike a charitable donation, the cash that investors deposit in these vehicles may return to them after an agreed-upon term. It’s kind of like donating to charity and keeping the money too.“We think we are the best-kept secret in finance,” says Mark Pinsky, president and CEO of Opportunity Finance Network, a trade network of community development financial institutions (CDFIs). About 750 CDFIs across the country have been certified by the U.S. Department of the Treasury to make loans to finance small businesses with good ideas but limited access to capital. But Treasury Department certification is not required for funding. “We operate just outside the margins of conventional finance,” explains Pinsky, “so that people on the outside can join the mainstream and institutions can realize the opportunity inherent in those markets.” Apparently, CDFIs are filling a need: the industry has grown ninefold in the past 11 years, to more than $18 billion in assets, with no signs of slowing.
Small businesses are the prime drivers of job growth, in addition to being strong hirers of women and minorities, according to Tony Smith, executive vice president at ShoreBank. “You’ve got to grow small businesses in order to have a significant impact on life in America,” he says.
At ShoreBank, the investments are called mission-based deposits; at other institutions they go by names such as community investing and socially responsible investing. ShoreBank funds earn market rates and are FDIC insured. With some lenders, investors have some choice in the interest rate they earn, although rates are often below market.
“In the past, people thought you either made money or gave it away,” says Shari Berenbach, executive director of the Calvert Social Investment Foundation. “Your money goes out into the world, but can come back to you, perhaps with interest. And it has a lasting impact.”
The Calvert Foundation pioneered a slightly different concept of social investing called “community investment notes” — nonguaranteed loan funds that channel affordable capital to nonprofit institutions. Those groups give loans to entities not otherwise served by traditional financial institutions, including microloans to borrowers in developing countries.
Microfinance funds have helped people like Vahid Hujdur, who wanted to start a business in Sarajevo, Yugoslavia, repairing and reselling discarded industrial sewing machines. Hujdur couldn’t get a bank loan, but a local microfinance institution, funded by investors in the U.S. and Europe, loaned him the $1,500 he needed. Hudjur’s company now employs 10 people.
Community investing, Berenbach says, “challenges some basic assumptions about the way the world works. We’re showing that you can bring discipline and rigor to this market. Outcomes really can be measured not just in dollars returned but in lives transformed.”
With a minimum of $1,000, Calvert Foundation investors can choose from nine regions in which funds are invested, and also choose a rate and term. Berenbach emphasizes that while deposits are not federally insured, no investor has lost money in the 10 years the fund has operated. “Our on-time repayment rate is actually over 99 percent,” she says, noting that’s a higher rate than most banks have. Such successful lending is attributed to the care that community investment groups take in screening borrowers, and the business advice and support generally provided as part of the loan deal, as well as strict financial and reporting requirements.
Another type of community investment vehicle is the “revolving fund,” so called because funds are immediately reloaned to other worthy borrowers as soon as they are paid off. These funds also tend to be focused on local areas of need and may sometimes be open only to investors within a limited geographic area.
Cascadia Revolving Fund, based in Seattle, limits both its borrowers and investors to the states of Washington and Oregon. In 2005, the fund lent $2.6 million to 34 businesses. The focus is on low-income, minority, women-owned, rural, and immigrants’ businesses and those that will create jobs in low-income communities, according to Cascadia investor services manager Pam MacRae.
One of Cascadia’s success stories is Glass Alchemy Ltd., which developed a high-quality, low-expansion colored glass for bead-making and art that is now distributed worldwide. “Not only are we now the technological leader in our industry, we have helped artists set up cottage industries based on that technology,” says Susan Webb, co-owner and president of the company.
Webb has generated 16 jobs in her manufacturing facility, located in a lower-income area of Portland, Ore., as well as “many more” through small businesses that make jewelry and other products from Glass Alchemy glass. “We have probably affected tens of thousands of lives,” she notes with pride, “and we absolutely could not have done it without the support of Cascadia and the courage it gave us.”
A $500 minimum investment is required to invest in Cascadia’s Revolving Fund, which pays 0 percent to 1 percent annually. That’s hardly a great return, MacRae admits, but investors usually direct only a tiny fraction of their portfolios to these loans.
Investment adviser Robert Baird of Progressive Investment Management in Portland encourages clients to put a small percentage of their funds into community development banks, revolving loan funds, and the like, but no more than 10 percent of their portfolio.
“My investors like the idea of directing even a small amount of their portfolio into something that has an impact,” he says. “If you get a lot of people doing a little bit, it really adds up.”
http://magazine.continental.com/082006/content/advance/idea-moment.jsp
