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RESEARCH: Equitable Capital, Experiments in Building a Finance System for All

By Sean Campbell

The current financial system rewards the well-resourced and fails most BIPOC and low-income Americans. It simultaneously throws billions of dollars at unprofitable Silicon Valley companies while making capital inaccessible for small businesses and Main Street entrepreneurs. It has also done nothing to close our shameful racial wealth gap–indeed, it has made it worse. People across the country are yearning for a new system that promotes equity and provides capital to individuals, businesses and community-based organizations that are not well-served by large financial institutions. The good news is that many people, companies, and organizations are working hard to build the foundations of this different financial system. Capital For Communities is a consulting firm that helps mission-driven organizations conceptualize, develop, and implement programs to raise and deploy capital to achieve their goals. Along with The Sankofa Group, we partnered with SPARCC to research these emerging capital products and approaches, focusing on real estate capital, and found common threads across the work. 

>>Read the field scan and research report here.

There are many creative capital providers who are experimenting with new ways to move capital that prioritize equity and building a healthy economy—and, by and large, those experiments are working. A broad array of institutions and capital sources are finding ways to get capital to businesses, entrepreneurs, and community-driven real estate projects that can’t access it through our traditional system.  These non-traditional loans and investments are being repaid and the projects and companies they finance are thriving. Here’s a small sample of some of those capital providers and the work they’ve been doing: 

  • The African Development Center and Denkyem Co-op have built community-driven practices to provide capital and business training to small businesses in historically undercapitalized communities in Seattle and Minnesota.  
  • Seed Commons and the Cooperative Fund of the Northeast have developed creative ways to finance workers seeking to buy the businesses they work at, supporting wealth-building through worker ownership.  
  • Co-op Capital is giving small community-based nonprofits in the Southwest the opportunity to directly make personal and small business loans to people in their communities with minimal gatekeeping.  
  • Invest Detroit is using real estate capital to help grow community-based real estate developers in urban Detroit, and put control over real estate development in the hands of people in affected communities.  
  • SPARCC has focused on using capital to help community leaders have a seat at the table in the real estate development process. 

While these endeavors are all small relative to the size of the global financial market, they are extremely promising—and have started to deliver solid evidence that creative capital products can perform as intended. Often, efforts to broaden access to capital are opposed on the grounds that they are “too risky”, but the capital providers we spoke to generally reported repayment rates in line with traditional bank lending. This suggests that, as some of peers have argued, credit provision structures based on dominant ways of thinking about risk are deeply connected with structures of economic exploitation and racism that restrict access to resources and thereby perpetuate inequality. 

We think that there are exciting opportunities for capital providers to make community real estate development more community-driven and ultimately more equitable through a variety of approaches, including flexible pre-development debt (or, for non-profit capital providers, recoverable grant capital), revenue-based pre-development and development financing, and entity-level capital for developers. These approaches, along with others, can help bridge the gap between the creative approaches that community developers are adopting and what traditional finance expects.  

However, we think that focusing on the details of specific financial products risks missing the point. In our research, we saw a broad diversity of product types, tailored to a diverse array of communities and situations—but we saw some clear commonalities of approach among the most promising experimental programs: 

  1. They are being implemented by organizations that Have a Holistic Commitment to Equity: The entire organization is focused on the goal of equity in capital provision, with accountable leadership that embodies these values and is willing to accept risks and support innovative approaches to achieve this goal; 
  1. They are Focused on Building Trust: Mistrust of capital providers, based on a history of exploitative lending practices, is very high in communities that have been shut out of capital access; successful innovative lenders know this and work affirmatively to build trust; 
  1. They Provide Capital as Part of a Broader Relationship: Their investments are accompanied by business advice, connections to clients and prospective partners, and other resources, so that capital is one part of a comprehensive effort to help borrowers and investees succeed; and  
  1. They Structure Capital Based on Community Needs: The way that they provide capital (loans vs equity vs other structures, term, rates, and other provisions) is designed based on close relationships with capital users, not abstract approaches. SPARCC described this as a “toolkit” approach

Therefore, we recommend that equity-focused capital providers focus on their approach and make sure it fits these four criteria, rather than focusing on finding the perfect capital product to advance equity—and be willing to follow this approach wherever it leads. This may be difficult, as it requires openness to experimentation, humility, and willingness to truly listen to communities. However, what we found in our research makes us confident that if capital providers commit to them, they will advance racial equity, gain critical insights into their lending practices, and maintain strong financial health along the way. 

>>Read the field scan and research report here.