Here at Ajah, we make it our business to know about all the financing options available to the non-profit sector, including the emerging field of social finance. So last Friday, we were very pleased to be able to attend a workshop on Community Bonds held by the Centre for Social Innovation (CSI) in Toronto and led by CSI’s CEO, Tonya Surman. The workshop was very well attended, drawing about 60 people from across Ontario, representing community organizations, the financial services commission of Ontario, lawyers and banking sector representatives.
The workshop introduced Community Bonds and explained how this innovative financial instrument made it possible for CSI to purchase a building while having close to no financial assets. So what is a Community Bond? A Community Bond (CB) is an interest bearing loan that is accessible to unaccredited investors and can only be issued by a nonprofit organization. The idea of the Community Bond is to help nonprofit organizations with little to no financial assets but with a strong community presence, turn their social capital into financial capital. The CB addresses a key issue for nonprofit organizations who want loans but lack collateral. Instead of depending solely on wealthy philanthropists, corporate sponsors, foundations and the government, the Community Bond provides a way for nonprofits to obtain loans from regular citizens and community members who act as investors. In addition to providing funding for nonprofits, the Community Bond engages citizens with community organizations by allowing them to make investments in ideas they believe in.
While no two Community Bond stories will be the same, it was useful to understand what made this idea a success for the Centre for Social Innovation. CSI is a Toronto-based nonprofit organization that leases work spaces to social entrepreneurs with a goal of bringing together ideas and contributing to the development of social innovation. For CSI, the Community Bond idea came from the desire to obtain a building due to the rapid growth in demand for their shared office spaces, yet a serious lack of financial assets. So, CEO Tonya decided to see if it would be possible to leverage CSI’s primary asset – its relationship with its community, in order to obtain funding to purchase a building.
For CSI, there were three crucial elements which contributed to making their Community Bond idea a success:
- CSI board of directors invested: Having the support of their board acted as a signal, boosting investor confidence and reducing problems of asymmetric information by making clear that insiders endorse the idea.
- They received a loan guarantee from the City of Toronto: This also acted as a signal and boosted investor confidence, which allowed CSI to obtain a larger mortgage with a better rate.
- The asset they were financing was real estate: Investors tend to feel more comfortable investing in tangible assets. In case of default, a tangible asset can be repossessed and liquidated so debt-holders may be at least partially reimbursed. The lower risk involved in investing in a real-estate asset allowed CSI to offer a lower interest rate to its investors.
While this could be a great way for nonprofits to obtain loans and fund projects, Tonya stressed how important it is, particularly in the growth stages of this instrument, that the quality of investment ideas are adequately high and that the initial projects succeed, so as to maintain the credibility of this new type of funding. Community Bonds require significant resources to implement, and bear risk. Any organization considering this form of financing should ensure that they are prepared to raise, manage and repay loans, and that they understand what this entails.
For a detailed account of how CSI made Community Bonds work for them, see their guide “The Community Bond: An Innovation in Social Finance” available for purchase online for $85. If you think this idea may work for you, be sure to visit the CSI website in the coming weeks as they will be making their legal agreements available for purchase. Some other organizations worth checking out who are adapting the Community Bond idea to their projects include West End Food Coop, Zooshare, SolarShare.
A big thanks to CSI for hosting an informative workshop which brought together a variety of inspiring organizations and communities, and for contributing to expanding the financing possibilities for nonprofit organizations!