Community Investment Corporation and Startup Tucson are tackling traditional lending for growing BIPOC small businesses.
In 2021, the median income for Tucson, Arizona was $10,000 below the national average. Of the city’s one million residents, 44.6% are Latino, and 4.4% are Black. While a tourist destination for a large part of the year, Tucson’s extremely hot summers generally mean that the city sees a boom and bust, which can be challenging for struggling businesses.
For BIPOC-owned businesses in the city, the landscape is even more challenging. According to the Federal Reserve, just 60% of all BIPOC business owners in the U.S. receive the full funding they apply for at a bank, compared to 80% of their white peers. Even when small business owners are successful in securing any bank financing, traditional loans come with fixed terms that must be repaid on a regular schedule—regardless of the business’s circumstances.
In a city like Tucson, it was clear that BIPOC small businesses needed access to flexible capital, making a perfect place to test Revenue-Based Financing (RBF). RBF is an investment that has a variable repayment schedule, which fluctuates based on revenue. For example, if a business has $100 in revenue and a 5% revenue-based payment per month, it will repay $5. If it has $0 revenue due to a global pandemic, it will repay $0. This strategy combines the best parts of equity—more flexible repayment, so cash isn’t taken out of a growing business—and debt, which doesn’t take ownership away from the business owner.
Versions of RBF already exist in other industries, and Founders First and 1863 Ventures – both Black-women led organizations—have pioneered the way for large, growing BIPOC businesses. We are inspired by their leadership and are eager to build on existing momentum so that RBF might be available to all BIPOC small businesses seeking flexible capital.
Last week, we announced our RBF pilot, and today, we are so excited to share that our Arizona partners for this two-city flexible capital strategy are Community Investment Corporation (CIC Tucson) and Startup Tucson.
Startup Tucson works to transform the region’s economy through entrepreneurship and innovation, and is the go-to business education organization in Tucson—providing a hub where thousands of business owners and aspiring entrepreneurs go for support. CIC Tucson works to enhance access to the full benefits of our economy for southern Arizonans, and has been the community’s innovator in finding alternatives to asset-based lending.
We sat down with Danny Knee, Executive Director of CIC Tucson to discuss the importance of tackling the traditional lending system now, defining success, and why their city is so uniquely suited to this form of flexible capital.
Common Future (CF): We’d love readers to get to know you better. Can you explain what both CIC Tucson and Startup Tucson do within the city?
Danny Knee (DK): CIC Tucson and Startup Tucson have been organizational BFFs for several years now, and are one another’s biggest fans and supporters. Our values, specifically around providing greater access to knowledge and financial resources to historically underserved populations and specifically entrepreneurs of color, are in perfect alignment.
RBF is a different kind of funding product, and we think education and business support are essential to the success of this pilot and our entrepreneurs which is what Startup Tucson does better than anyone in the state of Arizona. Meanwhile, CIC is a long-time alternative lender that brings the finance knowledge and background as well as decades of experience of “high-touch” lending to the collaboration.
CF: What drew you to working with Common Future?
DK: Common Future has vast experience implementing innovative community-driven and designed solutions in communities across the country, especially around the democratization of how capital flows in our economy. With the addition of Community Credit Lab and Sandhya Nakhasi—who is a pioneer and an absolute rockstar in this space—we knew we were partnering with the expertise and experience that could only better and bring more visibility to our work. When you have an opportunity to work with such hands-on and impactful organizations and people, you jump at that opportunity.
Keneshia Raymond, Startup Tucson Director of Programs & Access to Capital and Common Future Policy Entrepreneur chimed in as well: Upon our first meeting with Common Future we knew that we were excited to move forward. Working with a group that not only is the leader in advocating for equity, but does the work to change the inequities we all face, and with a group that puts social justice at the forefront, was a no brainer. Common Future understood that our organizations working together was an asset to this project, and how together they could work to change the way RBF has been working—and make it equitable and accessible to our community. Common Future’s experience and insights have been invaluable and their investment in Tucson is further affirmation that we are on the right track with our approach.
CF: What are the challenges of starting and running a small business in Tucson?
DK: While a tourist destination for a large part of the year, Tucson’s extremely hot summers generally means there is seasonal boom and bust that most businesses also have to endure. In Tucson, the initial investment into a business, managing cash flow, and access to affordable capital are the greatest barriers to starting and sustaining a business. Affordable forms of capital with variable monthly payments that track a business’s revenue trends have long been needed. Unfortunately, our financial sector is unsympathetic about these issues and the inequity that results from an over-reliance on asset-based underwriting and/or high interest rates to ensure profits.
CF: Can you talk about your BIPOC loan fund and how RBF builds off of those learnings?
DK: Our BIPOC Community Managed Loan fund puts decision making power in the hands of the people. Additionally, all of the mechanics of the loan—from eligibility and underwriting through final loan decisions—were created by our committee of BIPOC community members. However, during our nine months, we learned that a requirement for collateral and inconsistent cash flows during hot summers both provided significant issues for our businesses.
RBF specifically addresses both of these barriers. We believe that there needs to be more innovation and experimentation across the financial sector, with approaches that do not require collateral to access capital, and approaches where traditional decision-makers cede some power to the communities they are trying to support.
CF: Why is the local Tucson small business ecosystem uniquely poised to benefit from a flexible financing product like RBF? Why does providing alternatives to the traditional lending system matter right now, in 2023?
DK: Tucson’s culture and feel are driven in large part by two sets of people, our creatives—artists, musicians, and makers—and our small businesses. Our local small businesses, and their owners, hustle and trend set—and reflect our incredibly diverse heritage. Their work was recognized by Unesco’s designation of Tucson as a Unesco City of Gastronomy in 2014. Tucson is incredibly diverse with 58% of our population identifying as BIPOC, but is also known as a low-wage, low-wealth city.
Traditional lending approaches skew against our population and region as a whole. The capital ladder still has too many rungs missing, and most of those rungs are missing at the bottom of the ladder. Coming out of the pandemic, the K-shaped recovery is further exacerbating economic disparities between the haves and the have-nots. I’m a baseball fan and we can’t ask people to play a game of baseball and expect them to succeed if we aren’t allowing them to use a bat or glove. And that’s what a system that holds up asset-based lending as gospel does to people with less. We can and must do better.
CF: What does success look like for this project in two years? How are these metrics different from traditional metrics of success?
DK: In two years, we hope to have proven the viability of our RBF model and its value in reducing economic inequity in our community. We will see success in our community clamoring to invest in the fund, and in local entrepreneurs.
While profiting from loans can help our cause, prove our concept, and encourage more groups and communities to offer financial products that are both innovative and fair, profit can’t be the primary motivation. It has to be balanced with our goal of bringing an ROI to the community as well—which will come from reducing economic inequality, stimulating commerce, and generating jobs and tax revenues through non-extractive market-based approaches.
CF: What do you foresee to be a rewarding ideal future, if this becomes a new way to measure success? What are your dreams around that?
DK: Our belief is that access to capital through non-asset-based lending is relatively low-hanging fruit in activating the economic power of so many who have been sidelined to date by institutions that only care about their ROI and not the ROI to the community.
The type of lending and capital access we provide, admittedly does not maximize profits—but it is a very low-cost way of increasing participation in our economy and quality of life for individuals and communities, generating more tax revenues for jurisdictions, and reducing the economic inequities that cast doubt on the promise of the American Dream.
There is no racial justice without economic justice, and there is no economic justice without addressing how current capital access practices do not serve socially and economically disadvantaged entrepreneurs and specifically entrepreneurs of color.