Pathways to Patient Capital: Circular Lending

This guide is part of the Urban Manufacturing Alliance’s Pathways to Patient Capital initiative. Black, Indigenous, and People of Color makers and manufacturers face barriers to effectively financing their business’ growth.

These guides provide actionable steps that community-based lenders and individuals can take to provide non-extractive capital to makers and manufacturers of color.

The Urban Manufacturing Alliance is a national coalition of organizations and individuals that are building manufacturing economies fit for the 21st century. Our collective goal is to create pathways to middle-class jobs, spark homegrown innovation, and ensure that cities and towns continue to be the places where we make things.

UMA’s Pathways to Patient Capital initiative uplifts how policy change and the deployment of innovative financial tools and products can deliver needed funding to makers and manufacturers of color. Dismantling racial and sectoral barriers to quality capital is essential to unlock the promise of entrepreneurship and manufacturing as a catalyst for community wealth-building, racial equity, and inclusive innovation. 

This Action Guide is specifically for individuals (versus community-based lenders, at whom our other Action Guides are targeted) who want to support American makers and manufacturers beyond buying their products. This guide is also for local makers and manufacturers who want to create a lending community to financially supports one another. This Action Guide will show how anyone can be a lender, and how it takes an ecosystem to support BIPOC makers to fill the gaps of traditional capital.

"We can by consumers and producers co-operation, . . . establish a progressively self-supporting economy that will weld the majority of our people into an impregnable, economic phalanx."

- W. E. B. Du Bois, Scholar

What is it?

Circular lending, or a lending circle, is a group of people who agree to contribute a specific amount of money to be lent to one member of the group with the understanding that this loan will be paid back and typically re-lent to another member.

The particulars of membership, contribution amounts, lending decisions, repayment terms, and more all differ depending on the circle – and are typically determined by the members in a democratic fashion. This is the beauty of lending circles: there is social incentive to repay the loan because those who lent the funds are people the borrower knows and trusts – and vice versa.

Lending circles are typically and traditionally closed, meaning only the members can be borrowers. However, lending circles can also be open, meaning that the borrower can be outside of the circles. Open circles have less accountability as there is not a personal relationship between the borrower and the lenders, but there is still a social incentive to repay the loan.

These peer-to-peer lending organizations are more than a financial tool. Lending circles are also social networks that advance empowerment and resilience in the face of structural exclusion. Today, lending circles remain powerful strategies for wealth-and community-building where mainstream banking and financial systems exclude and extract from communities of color and immigrant communities.

Why is this Important?

Circular lending is an underestimated financial and social tool for small businesses. Lending circles can be culturally-centered and adaptive in form: from a hyper-local group of community members meeting in a living room, to neighborhood assemblies facilitating discussion and voting with members, to online platforms where anyone can lend to a borrower that aligns with their values and priorities.

Lending circles are also powerful wealth-building and community-building strategies in the face of systemic exclusion from the financial system and society at large. An estimated 70 million people in the United States and 1.7 billion people worldwide are unbanked and risk falling into deeper financial hardship from predatory “fringe lenders” (Baradaran in Monye, 2021; World Bank, 2017). In the U.S., structural racism shapes deep disparities in access to quality financial services. Compared to white households, Black and Hispanic households are about 5.6 and 4.6 times more likely to be underbanked, respectively (FDIC, 2017). BIPOC (Black, Indigenous, and People of Color) and immigrant communities build on the legacy of lending circles to provide quality financial services that community members need to invest in their businesses and their lives.

While lending circles are inspired by diverse cultural traditions and take on different organizational forms, they share a common grounding in participatory and place-based lending to advance community development. Members of a community — whether belonging is defined by a common place, identity, culture, religion, or values — pool resources and collectively decide how to extend financial and social support to members. While typically used to help members with personal financial crises, lending circles can support local businesses, small batch manufacturers in particular, grow in a more sustainable way.

When the investment yields social benefits, monetary and otherwise, the returns are re-circulated through the community. Investing in a bake shop seeking to expand into a commercial kitchen, for example, generates financial returns for local investors alongside a host of other community impacts – from creating quality jobs for residents to strengthening interdependencies between the bake shop, local farms, and suppliers.

Who is doing this well?

How Circles are Linked

How Manufacturing and Lending Circles are Linked

• Creating quality jobs: Living-income wages, low barriers to entry, and training that nurtures technical skill sets are common parts of many manufacturing careers. That means quality jobs are within reach for residents across the economic and education spectrum in a city.
• Environmental sustainability: Producing goods locally cuts down the carbon footprint of consumption by significantly cutting down externalities from transportation. Local producers can source their raw materials from their community and their region to further cut down on transportation externalities and support other local producers up the supply chain.
• Supply chain resilience: Investing in community capacity to produce goods strengthens local supply chain resiliency. Cities with strong manufacturing bases can draw on their relationships with local production networks during times of emergency. Made in NYC, a Local Brand Initiative with a longstanding relationship with the city council, became the locus of PPE production by streamlining prototypes and public health approval from local agencies (Urban Manufacturing Alliance and Local Progress, 2020).
• Strengthen and grow the local economy: When a lending circle invests in a local maker, the investment strengthens interdependencies between other local businesses and residents. Manufacturing has the highest value-added multiplier because cross-sector links with production-based businesses are so dense (MAPI Foundation, 2016). Investing in a local entrepreneur aspiring to open a brewery, for example, has dispersed effects throughout the local economy by generating economic activity with suppliers, buyers, and consumers up and down the supply chain.
• Creativity and innovation: Learning by doing is a powerful source of creativity and innovation that can transform communities and local economic activity (Meyer, 2021). Research from the National Institute of Standards and Technology (NIST) shows that co-locating production and adjacent industries inspires new ideas through collaboration and learning by doing (President’s Council, 2012).

Boston Ujima Project

Ujima Fund: Democratic Neighborhood Assemblies Ground Local Production in Community Values

Founded in 2016, the Boston Ujima Project is writing a new chapter in Boston’s legacy of innovative community-based organizing and development. Ujima is Swahili for “collective work and responsibility.” The Ujima Fund is a $4.5 million democratic loan fund resourced by Boston’s working class communities of color, aligned solidarity members, and philanthropic partners (Boston Ujima Project, 2022). The fund’s community governance framework mediates relationships between member-investors and locally-owned businesses to connect democratic decision-making and community values with place-based investment. Ujima Fund hosts citywide and neighborhood community assemblies to facilitate community dialogue and decision-making in awarding loans to prospective small businesses and community projects.

One community member explained how the Ujima Fund builds social and economic power: “I think there’s a qualitative impact as well, in terms of agency,” he says. “Hopefully an Ujima investor who’s a resident of these neighborhoods, after investing and visiting one of the businesses, leaves feeling like they directly controlled the direction of that institution, [and] therefore could have a similar impact at a hospital, or a bank, or at a university.” (Perry Abello, 2018)

In addition to sharing financial resources, the Ujima Good Business Alliance (UGBA) provides multifaceted support to local businesses. UGBA is a network of local businesses and community organizations that provides mentorship, technical assistance, and membership in co-operative business services such as bookkeeping. The Ujima Community Standards Committee, an elected body of eight local leaders, certifies prospective UGBA members by evaluating their alignment with Good Business Standards. The membership collectively shapes these standards, which include community ownership, good local jobs, environmental responsibility, and community power, among other values.

Since Ujima Fund’s launch, members have voted to invest in two local businesses. Ujima Fund provides a range of loans that meet the growth stage of the business, from startup loans to businesses seeding their vision but without revenue, to growth loans for businesses in operation for at least two years (Boston Ujima Project, 2022). Ujima Fund also envisions larger real estate and infrastructure investments in partnership with other investors. Two manufacturing related examples that Ujima has funded are CERO and the Dorchester Food Cooperative.