EDITOR’S NOTE: The following is an excerpt from “The Food Sharing Revolution,” by Dr. Michael S. Carolan, published by Island Press. In it, the author details the many ways in which the sharing economy can benefit producers and consumers of food, from farmers who share land, equipment and seeds, to chefs opening their homes and introducing diners to their native cuisines through meal sharing. Here, Carolan gives examples of how peer-to-peer lending can jump start small-scale food businesses and strengthen community bonds.

Dorothy had long dreamed of opening a restaurant. After a divorce left her “poor, straight-up broke” and she experienced a period of homelessness, she resumed cooking for family and friends, which she had started doing in high school.

“The idea was always there,” she told me. “There was a lot of support; everyone told me how much they enjoyed my food. ‘You should start a restaurant.’ I heard that a lot.”

But Dorothy lacked perhaps the most important thing of all for any aspiring entrepreneur: C-R-E-D-I-T. Even a perfect credit score would not have helped. She told of her sister, who at the time lived in another state, traveling to Seattle so they could both talk about her restaurant idea with a lending agent. “We were told that the bank was generally interested only in loans north of $60,000 or $70,000,” she said. The bank did have an option for her and her sister: a credit card with, in Dorothy’s words, “a crazy interest rate.”

Still, two friends and the sister helped bankroll her dream. She started small, making breads at home and selling them at local farmers markets. After a year of building her brand, she had developed a devoted customer base — whenever she arrived at the market, she was greeted by a line of people waiting for her. The time seemed right to take the next step. Hopeful, she set off to find space.

This is where the lending agent came in — and where the story takes an exceptional turn, which, one hopes, will one day become unexceptional.

If this were a typical small-business story, Dorothy would have either taken out a high-interest loan, an incredibly risky venture, to say the least, or given up on the dream. What happened instead was that one of her bread-loving customers connected her with someone from Community Sourced Capital, a Seattle-based company whose online crowdfunding platform enabled interest-free loans. (EDITOR’S NOTE: CSC is no longer active and has set an April 2021 target date for completion of all loans. Co-founder Rachel Maxwell offered a post-mortem on the benefits and challenges of the zero-interest community finance model.)

CSC first started making loans in 2013. Similar in many ways to the more familiar Kickstarter and GoFundMe, with one important innovation. CSC focused specifically on raising funds within the community where the business will be located, from people committed to supporting local entrepreneurs.

Businesses approved for the platform ran a four-week campaign. Before the campaign began, CSC charged a onetime $250 launch fee to build a campaign page telling potential investors a compelling story. Projects ranged from $5,000 to $50,000. Interested individuals could buy “squares,” each representing a $50 zero-interest loan to the business. If the campaign was successful and all the money requested was earned, the business started paying “squareholders” back immediately. Borrowers were typically allotted up to three years to make good on their loan.

“I couldn’t believe my luck,” Dorothy confessed, giving me a huge grin. She went on to describe the nature of the loan, and the savings it resulted in, as compared with what would have happened had she gone the high-interest route suggested by her personal banker. Her CSC monthly payment was less than what her interest-only payment would have been. No wonder she was smiling. I was too by the end of our conversation.

One burden associated with ownership is debt. To expect that we can rid the world of debt is about like asking that we rid it of conflict: you can ask, but don’t hold your breath. Small steps. The amount of debt we choose to strap small businesses with is something we can and should control.

The Dorothys of the world want single-digit interest rates. Who doesn’t? Financial institutions, for one. Wall Street has become quite content with double-digit — triple-digit, even — interest rates. Yet most bankers, and certainly those setting lending policy at the national level, do not call neighborhoods home like the one where Dorothy opened her restaurant. If they did, things might be different.

Participants in peer-to-peer lending platforms generally understand that runaway interest rates are not only bad for these small businesses; they are also bad for communities. When you cannot pay off your principal because of interest rates, you do not have the time or resources to innovate, socially or otherwise, because all your energy is focused on generating revenue. How can we expect businesses to act responsibly, and do things like pay their workers a livable wage, if they are servicing their loan instead of their community?

Dorothy put this point succinctly: “Those smaller monthly payments made all the difference for me, allowing me to reinvest in my community, making sure I do right to the people here. If I had gotten a loan through the bank, all my energy would have been in trying to make my mortgage. That’s no way to serve a community.”

(Photo by Tom Collins, CC BY-ND 2.0)

Small businesses create a multiplier effect, or dollar turnover — the number of times a given dollar results in other local transactions. Locally owned companies tend to buy locally when it comes to the services of attorneys, accountants, graphic designers, carpet cleaners, window washers, and so on. In contrast, large chains handle many of these services internally — at “corporate” — to capture economies of scale. These corporate savings, however, come at the expense of local economies.

Among the thousands of small-scale food entrepreneurs with whom I have interacted over the years, I cannot think of one company that did not rely heavily on its local economy for supplies and services. Like most of us — my household included — they used Amazon and other “distant” suppliers. But when it came to doing taxes, painting walls, and repairing equipment, they looked locally. That is not the same story I hear from most of the CEOs and managers of large national chains whom I know. As reliant as Main Street is on, well, Main Street, national chains find it more efficient to obtain services and products from other large national, sometimes transnational, firms.

A study from the Maine Center for Economic Policy calculated that every $100 spent at locally owned businesses within the state generated an additional $58 thanks to those store owners having turned their dollars over within the community. For comparison, $100 spent at national chains generated only $33 in local impact, mostly through employee wages and rents. Small businesses, in other words, were found to generate a 76 percent greater return to the local economy than when money was spent at big-box outlets.

These findings mirror research that focused on Salt Lake City. In one study, locally owned retail establishments and restaurants returned 52 percent and 78.6 percent, respectively, of their revenue to the surrounding economy. By comparison, the national retail chains examined — Barnes & Noble, Home Depot, Office Max, and Target — recirculated an average of 13.6 percent of their revenue. The three restaurant chains examined — Darden, McDonald’s, and P.F. Chang’s — returned an average of 30.4 percent of revenue to the surrounding economy.

And that’s just their economic benefits. The social value of these enterprises, while perhaps harder to quantify, is no less significant. David Brown at the University of Colorado has described how the presence of Walmart — arguably the antithesis of Main Street retail — in a community is correlated, at statistically significant levels, with decreases in voter turnout and participation in political activities, lower levels of philanthropy, and declines in social capital. This pattern was observed in four different data sets based on data at the county and individual levels.

“The results,” he wrote, “imply Wal-Mart has a measurable impact on communities in the United States that reaches beyond prices, income, and employment. Big box retail, it seems, comes at a cost. Lower prices and all that comes with them hold important consequences for political participation.”

These findings parallel those reported in an article in the American Journal of Agricultural Economics, not an outlet known for its boat-rocking publications. Authors Stephan Goetz and Anil Rupasingha concluded that the presence of a Walmart in a county is correlated with lower levels of social capital — fewer social networks and less trust, for example.

(Photo by La Citta Vita, CC BY-SA 2.0)

Correlation, I know, is not causation. We need to ask why: why might the presence of national chains, such as Walmart, cost us as citizens? I can offer a couple of general observations in response to this question. First, national chains tend to foster car-munities, as they are often confined to a community’s outskirts — the only place that could accommodate their massive footprint and parking lot. Their car-centric business model becomes a type of self-fulfilling prophecy. This happens when locally owned mom-and-pop options, sited, literally, on Main Street and thus more easily accessed by bike and on foot, are shuttered thanks to Fed-focused lending policies. The walkability of a community is one of the strongest predictors of it having high social-capital levels.

My second observation simply picks up where the first leaves off: as national chains extract more wealth than they generate and leave in these spaces, communities suffer as communities. Financial inequalities exacerbate social distance, resulting in people who feel they have less in common with their neighbors.

It is a lot easier to do the right thing as a business when shareholders, community members, and customers are one and the same. It is a different beast entirely when the person signing your paycheck — or loan — does not give a crap about whether Main Street is littered with potholes or the high school’s ceiling leaks every time it rains. To quote Craig, a Seattleite and owner of a small ice cream parlor who also happened to get his business off the ground with a peer-to-peer loan, “Small business owners generally follow the credo ‘You don’t shit where you eat.’”

His point, restated: small businesses succeed by taking care of their communities, not by exploiting them. Craig’s crass credo came to mind about a week later, while I was talking with Marcela.

I was drawn to Marcela because she was both a peer-to-peer borrower and a peer-to-peer lender. In the world of Fed-focused lending, this dual identity would be considered schizophrenic. Conventional banks do not borrow from their borrowers. Turns out there are a lot of people out there like Marcela. These individuals started at the receiving end of a community loan, enjoyed the experience, and decided to pay it forward by funding a peer-to-peer loan to help some aspiring entrepreneur.

Marcela lives in North Carolina and is the owner-operator of a bakery that specializes in Eastern European pastries. At one point in our conversation, she shared with me how lenders and borrowers were matched up through the platform Slow Money NC. Loans can be made only between people in the same community, which I later learned includes people in the same or even adjacent counties. The purpose of this, Marcela told me, is so “borrower and lender, or lenders, as there’s usually more than one, stay connected.”

Not all peer-to-peer loans are interest-free. Those made through Slow Money NC are interest-bearing, though the rate is many points below that of a conventional small-business loan. I mention this to highlight that social dividends are not the only returns sought through these arrangements.

While community-based loans are far less restrictive than Fed focused loans, and therefore “riskier” in the eyes of conventional loan officers, their default rates remain low: between 1 percent and 4 percent among the lending platforms that I examined. Compare this with the failure rate of conventional small-business loans made prior to the financial crisis, back when banks were looser with their underwriting requirements: 12 percent.

(Photo by Maryland GovPics, CC BY-NC 2.0)

There’s a simple reason why peer-to-peer loans have lower default rates: borrower and lender are socially connected. It is harder to willfully default on a loan when it comes from a friend, which is precisely what lenders become in a lot of these instances. Meanwhile, at the other end of the loan, lenders do not want to see their friends (and investments) fail, so most do what they can to support them.

We are taught that the economy principally generates wealth. If those transactions happen to create social benefits, great, but the ultimate source of well-being is money. According to this outlook, social gains are usually incurred indirectly, through wealth. Peer-to-peer lending tells a different story, in which economic benefits occur because of social dividends — money isn’t the driver; it’s just a nice side effect.

It is a case of what’s old is new again, lest we forget that the word “economics” is derived from the ancient Greek word for management of the household: oikonomika. According to Aristotle, the economy is composed of two interrelated systems. One speaks to phenomena such as money and market transactions, what we tend to think of when calling the term to mind. Yet without the other component, the whole financial house of cards comes tumbling down. Think of all those nonmarket exchange relationships that make life not only worth living but also livable.

The futurist Alvin Toffler famously asked a room full of CEOs what it would cost their respective firms if all new employees had not been toilet trained and they had to pay for this preparation. Toffler’s point is much the same as Aristotle’s: markets would not exist without nonmarket actions. The world would be a lousy place were it not for all those nonmonetized activities.

Take Marcela’s experience with her peer lender, who had received a fairly sizable inheritance after her mother passed away. The lender, in Marcela’s words, wanted “to do something that gave back to her community while also generating some modest financial return.”

Marcela swiveled her chair, reached for a framed photo resting on a bookshelf, and handed it to me. I was looking at a picture of a very happy Marcela. She had one arm around someone I did not recognize. Both were giving the familiar thumbs-up sign. “That’s me and Josée,” the lender, “the day I got my loan.” That explained Marcela’s ear-to-ear smile.

Looking back, I realized that the very fact that she had that picture spoke volumes about the relationship. I mentioned this once to a loan officer at a conventional bank, asking if his picture adorns the offices of many small-business owners. He answered immediately, with a deep, chesty laugh: “Oh sure, I make lots of friends doing this; that’s why I never see any of them again.”

Back to Marcela: “Josée was always promoting my business among friends, on Facebook, at her work.” Marcela also admitted that knowing her lender “created extra incentive to not let her down.” I don’t think I’ve ever met a small-business owner who was concerned about defaulting for the sake of a Fed-focused lender.

Marcela’s sentiments square with findings from the vast literature on microlending programs. This form of financing is usually put to work in low-income countries, where small amounts of money are loaned to poor entrepreneurs to encourage self-sufficiency and to alleviate economic hardship. These programs also focus on providing social support, mentoring, training, and the like.

“It’s a virtuous cycle.” Clearly excited, Marcela began to wave her arms in a motion that looked like a mix between practicing karate and conducting a band. “Peer-to-peer lending creates an entirely new business model, from survival-of-the-fittest to we’re-all-in-this-together.”

Oikonomika.

Adapted from “The Food Sharing Revolution,” by Dr. Michael S. Carolan. Copyright © 2018 Michael S. Carolan. Reproduced by permission of Island Press, Washington, D.C.