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INSIGHT: The C2B Initiative—A Lifeline for Struggling Local Businesses

July 8, 2020, 8:00 AM

Clare & Don’s Beach Shack in Falls Church, Va., is a perfect destination for area families. It has a kid-friendly menu and abundant outdoor seating, providing room for young children to stretch their legs as their parents enjoy a meal and listen to local bands. It even allows well-behaved dogs on the patio and many Falls Church families cannot imagine their community without it.

Thankfully Clare & Don’s is surviving, with outside dining and take-out, but what will our local business communities look like when the Covid-19 pandemic finally subsides? They may be unrecognizable.

Countless local businesses in communities across the country are in a precarious position. Even for restaurants with take-out service and a limited reopening plan, the pandemic has severely reduced revenues, leaving some owners no choice but to lay off long-time employees or face the even more heartbreaking decision to close.

52% of Local Businesses Anticipated to Fail

Well-intentioned but complex government initiatives, such as the Paycheck Protection Program, have provided some short-term support to local businesses, but more funding will be needed to weather the pandemic’s lingering economic fallout. By one estimate, 52% of local businesses—those that employ fewer than 100 people but comprise more than 50% of the U.S. private sector—will fail in the absence of additional support.

A solution to this problem: Peer-to-peer funding that brings elements of impact investing to communities. For the past decade, peer-to-peer lending platforms have filled the consumer credit void created by the withdrawal of traditional banks from consumer lending. Entities like Prosper and Lending Club connect borrowers with individuals who provide funds for loans. Together, these platforms have expanded access to credit for many consumers who lack access to traditional funding sources.

With this model in mind, we propose a Community Business Capital, or C2B, program to fund local businesses fighting to emerge from the pandemic related downturn. The C2B program relies on peer-to-peer lending and crowdfunding to draw small-dollar investments from individual investors looking to save struggling local businesses and receive an investment return.

The program would dis-intermediate capital formation by using established peer-to-peer lending models to aggregate investments from local investors for a common purpose. Community-minded investors would be able to direct capital to a particular business participating in the program, or to categories of local businesses, such as restaurants or hardware stores.

Just like ride-sharing services, such as Uber or Lyft, match riders and drivers, the C2B program matches investors with eligible local businesses seeking capital.

We named our initiative the C2B program to capture its inherently local nature. The “C” stands for the community of customers that is supporting local businesses. This adds a community-based twist to the peer-to-peer lending model by enabling individuals who patronize and appreciate local businesses to do more to help ensure the survival of community businesses. It is social impact investing at the most local level.

Upside and Downside Opportunities

The C2B program is designed to provide both “upside” opportunities and “downside” protection to local investors. Participating local businesses and investors would enter into small dollar promissory notes up to $100,000 in principal, with five-year terms. The principal amount of each note would accrue interest at a rate up to 4% per annum. The note could be redeemed in full by the local business at any time, subject to a modest prepayment fee.

Investors would have the right at various times during the note’s term to convert a portion of the outstanding principal amount, and any unpaid but accrued interest, into a profits interest of the local business. This feature provides another method of repayment of the note, plus a supplemental payment or “upside reward” for the investor.

A critical component of the proposed C2B program is government support, which would be available to backstop a portion of the investments. The types of projects that would benefit from government support under this program could change over time, depending on imbalances between capital needs and available capital.

And significantly, government support would mitigate the investment risk. The C2B Program could be a flexible tool to support local businesses during any economic downturn, whether arising as a result of Covid-19, natural disasters or otherwise.

The C2B program would be sponsored and operated by the Small Business Administration or another agency of the federal government designated by the U.S. Treasury. Alternatively, a state or local government could readily implement the program. The applicable government agency could delegate administration of the program to non-governmental entities, such as community development financial institutions or experienced non-profits working in community development.

While the C2B program exists only in theory, the blueprint already exists in the consumer lending sector. What makes this initiative even more compelling is that it offers more than just a financial return; it allows investors to contribute directly to supporting local businesses that are the fabric of their communities.

And for local businesses like Clare & Don’s, it could offer an invaluable lifeline to help ride out the economic fallout from Covid-19.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Lauren Pryor is a Financial Services Regulatory & Enforcement partner at Mayer Brown and co-lead of the Financial Institutions M&A group. She focuses on M&A in the financial services industry, including complex stock and asset-based transactions, full equity deals, PE investments, JV arrangements and transfers of assets including residential mortgage loans, consumer loans, business purpose loans, mortgage servicing rights and credit card receivables.

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