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There’s no shortage of stories around the transformative impact of community finance, from supporting affordable housing to climate action to Indigenous economies and more.

Where mainstream financing has notorious barriers to access for underserved communities (such as requiring personal assets to leverage a loan against), community finance provides affordable loans and credit to support ventures otherwise deemed ‘too risky’ by traditional lenders.

But despite the many benefits of community financing, with local social enterprises often advancing issues like social equity, climate, and more, many community finance organizations face significant tensions when scaling sustainably. 

Why is it so hard for community finance organizations to expand?

Sally Miller is the project manager and executive director of the Ontario-based Fair Finance Fund, providing loans to local food and farm enterprises. Miller said that social finance is still in a “pretty early development stage,” with some investors not wanting to take a great deal more risk than they would through traditional investment firms.

“I think we have to start to engage everybody in the social finance ecosystem if we want change,” she said. 

In the case of the Fair Finance Fund, “it shouldn’t just be BIPOC farmers taking all the risk, right?” Miller added. “We’ve got to share it around.” 

For investors, Miller said, there is a need to “update our understanding of what constitutes financial risk in the face of climate and social crises,” shifting investments away from “businesses that damage the climate and towards climate-resilient businesses.”

Justin Sweeney, former Social Finance Manager of New Brunswick-based Kaleidoscope Social Impact and now Principal at Justin Sweeney – Community Social Finance Consulting and Management, said that community finance organizations must balance the high cost of operations with lower levels of surplus revenue. 

“I think what you see a lot of times is maybe a little bit of mission drift to access the capital needed to maintain operations,” Sweeney said. 

“Trying to actually get a return at the end of the day and to become sustainable — I know that’s been one of our biggest challenges so far.”

To make matters even trickier, in the U.S., like Canada, there are limits on who can invest in a small business, meaning individuals often have to reach a certain wealth threshold to become accredited investors before they can invest in small businesses or impact funds. 

“To take in unaccredited investment, someone has to do a ton of legal disclosure, [and] it doesn’t make sense to do at [every] cost level — it really only makes sense to do that kind of disclosure for public investments,” said Zack Neville Young, director of integrated capital solutions at US-based Boston Impact Initiative. “This creates a barrier that prevents regular community members from investing in their neighbourhood.”

With community financing investments generally only available to accredited investors, the market for social investments is reduced, cutting down on the cash influx to community leaders and entrepreneurs who need it the most.

What can be done to help community finance flourish?

Lesson 1: Ensure everyone can invest, no matter their income level

By incorporating as a charitable loan fund, Boston Impact Initiative opened itself up to all levels of investors, creating an exemption in the U.S. securities law. “Unaccredited investors can invest in [Boston Impactive Initiative] and use us as an intermediary to then invest in the businesses in their community,” Young said. 

Meredith Storton, senior manager of investments at US-based Village Capital, said that in the U.S. and even globally, more companies can fundraise from anyone, regardless of the investor’s income level. “Through equity-crowdfunding platforms, companies, particularly those with customer-facing products [can] allow their supporters to contribute to their businesses financially,” she said. “You no longer need to be an accredited person of high net worth to invest in startups.”

An equivalent in Canada would be models like FrontFundr. For those interested in early-stage impact investing, donor-advised funds (DAF) can help individuals make direct investments in social enterprises in Canada and the U.S. “DAF holders have the potential to mobilize a lot of philanthropic capital,” Storton said. “With a DAF, a donor can make an investment in really important for-profit initiatives that otherwise [have a harder time getting] access to that capital.” 

Storton adds that DAF holders in the U.S. are criticized for not mobilizing enough of the philanthropic capital — hundreds of billions of dollars — sitting in DAFs. While DAFs provide tax advantages, she said, there’s no timeline for disbursing those dollars through grants.

“There’s an ongoing discussion to increase the distributions DAFs have to make on an annual basis,” Storton said. “There are a couple of DAF providers like ImpactAssets that allow their DAF holders to make investments aligned with the individual’s charitable mission.” 

Lesson 2: Bigger is not always better

When it comes to operational funding, Miller said that, in her 30-year career, she’s found that smaller organizations can be more agile and better respond to local needs. While we should aim to grow social finance models, Miller said, it’s essential to question whether a prominent national organization would have more impact “or we would have more impact by just helping finance funds across other regions get started, succeed and thrive.” 

It’s a situation Miller sees play out in Canada’s food and agriculture industry; she said that farmers are being pushed to scale under the assumption that mid-scale farmers fail. However, Miller said that not only are the smaller farms successful, but “they’re having so much more impact on the local economy than [a farm that’s] so big that they really need to focus on export.” 

Lesson 3: Diversify income streams

How can a smaller, local community organization remain financially viable? Sweeney said that Kaleidoscope Social Impact stays afloat by being entrepreneurial, investing in real estate for their community hubs, and purchasing affordable housing units. 

“Affordable housing ownership and housing project ownership is really such a great revenue driver for non-profits and charitable organizations, because typically, the affordable housing still serves the social mission,” Sweeney said. 

This supplemental income allows Kaleidoscope Social Impact to offer free programs such as personal financial literacy and accelerator programs. It also recently launched an online partnership with a Quebec organization, offering energy auditing career opportunities for women. 

“At the end of the day, for us, it’s been purely scrappy entrepreneurship,” Sweeney said. “How do we find that next opportunity?” 

And it’s been paying off; Sweeney said that the organization’s capital pool has been increasing exponentially yearly. “It’s just been [a] pure willingness to get out there, to believe wholeheartedly in the work, even when you get a whack of no’s.” 

Lesson 4: Leverage philanthropic dollars 

Over at Boston Impact Initiative, Young said that, typically, an investor can expect a 15-to-20 per cent annual return for average or above-average performance for a venture capital investment. 

As Boston Impact Initiative’s purpose is to build wealth for communities of colour, Young said, the organization would be hurting its mission by trying to hit market rate returns. 

“We try to earn four to seven per cent on our debt investments and a little more on the equity investments to compensate for the extra risk,” Young said. “That’s not enough margin to pay for our team, especially not at a $20 million fund size.”

To compensate for salaries and other costs, Boston Impact Initiative philanthropically subsidizes its operations to raise money at a lower rate and gives investors a percentage return based on their wealth level. 

For example, Young said an investor might want to invest $5 million in a business that Boston Impact Initiative supports. However, the company is still in its start-up stage without the capacity to manage an investment of that size. 

The investor can grant the business a smaller amount, allowing the business to go to scale, and then invest in Boston Impact Initiative to help “unlock a lot of capital across your ecosystem,” Young said – while keeping Boston Impact Initiative running to support other businesses doing good.

The future of community financing 

While we’re seeing an uptick of people buying shares in companies that score highly for social purpose metrics, such as climate, “there are real limits to what you can achieve in the public market in terms of impact,” Young said.

In corporations of a particular scale, Young explains, “you’re not going to be able to generate new impact in many respects” — and as income inequality continues to rocket forward, “it’s just not really viable to make investments based only on financial return.” 

Young feels hopeful that, as wealth is passed down through generations, we’ll see a more significant shift towards impact investing. “The world of dumping financial information into a formula and having it lineup ‘yes’ or ‘no’ — it’s just not going to be how we resource things in the future,” he said. 

Sweeney said we need more community finance practitioners to get to that future.

“It’s imperfect right now; it can be challenging,” he said. “But if there are entrepreneurial folks who are really solutions-oriented — there’s really amazingly interesting activity that’s happening in community financing.”

Storton said that if less capital is directed to those traditionally holding power and instead towards those creating change on the community level, “we’ll be better able to tackle the challenges that we’re seeing globally, locally.” 

Like Sweeney, she added, “In order to do that, we need to unlock a spectrum of capital to support better these impact entrepreneurs, especially those who’ve been overlooked,” Storton said. “It’s not going to be a quick [or a] linear path, I’m sure.”