Crowdfunding has helped credit unions and Community Development Financial Institutions (CDFIs) access millions in individual investment, and Ethex – the non –profit investing platform has been on the frontline. We hear from the team at Ethex on why crowdfunding is providing transformative opportunities for the Community Finance sector.

As financial struggles continue for lower income families in the UK, millions of people are still unable to access to traditional lending options, whether because of barriers of income or affordability or simply because of low credit scores and thin credit profiles.

Community Finance providers like credit unions and CDFIs have stepped up to help, offering fair, affordable and responsible credit options to those in financially vulnerable circumstances. They have also been instrumental in unlocking and understanding a complex benefits system for countless customers. And now people-powered crowdfunding is aiding even more access for those excluded from access to lending.

The growing need for nonprime credit

Almost no one wants to have to borrow money for things that they need, but there are times where credit can be the only answer for people to smooth over unexpected life events, make essential household repairs and purchases or, increasingly, just to make ends meet.

The FCA’s Financial Lives Survey estimated that in the six months to January 2023, 77% of UK adults felt the burden of keeping up with their bills and their credit commitments had increased.

At the same time, a growing number of people in the UK are being denied access to traditional credit options due to poor credit scores, previous bad payments or simply having no credit record at all. The number of underserved customers in the UK is rising, with a new report from PWC finding it has grown to over 20 million people.

But as the demand for credit increases, CDFIs and credit unions are looking at ways to grow their offerings and widen access to affordable credit,  and have found that socially minded retail investors are stepping up for the first time to invest in the development of ethical finance options.

Identifying retail investors

A retail investment raise is a fundraising strategy where a company seeks to raise capital from individual investors, rather than traditional institutional investors like venture capital firms or private equity funds.

Often the investors are impact focused and looking to see a social or environmental return alongside the possibility of financial benefits.

This approach is popular for startups, community-focused companies and smaller businesses, as it offers two key advantages for them:  

• Reaching out to retail investors can open a vast pool of potential capital, significantly expanding the funding options for companies   
• By engaging with individual (impact) investors, companies can create passionate supporters and advocates and build a loyal investor community

People-powered finance for growth

Over the past 12 months, 3 Community Finance providers have run highly successful investment raises totalling around £4m using Ethex – the impact investing platform that connects everyday people with ethical investment opportunities.

Thanks to Ethex, Fair4All Finance have paved the way for success across each of those offers. In the case of Great Western Western Credit Union (GWCU), Fair4All Finance innovatively provided additional capital into the Community Finance sector by matching up to £1m in funding by Ethex investors. Significantly, this transaction has been named a finalist in the UK Social Enterprise Awards by Social Enterprise UK.

Salad Money and Fair For You Enterprise CIC – both consumer lending CDFIs – had previously benefited from Fair4All Finance investment and this provided the necessary stability and reassurance for Ethex investors to follow.

In all cases, capital was raised through Ethex in the form of fixed rate unsecured bonds which were Innovative Finance Individual Savings Account (IFISA) eligible.

Through helping people to make money while supporting organisations that are making a positive impact on the world, Ethex has helped facilitate over £120 million in investments across more than 220 projects, with a community of over 26,000 registered investors.

The Community Finance raises are delivering well on expectations of impact and financial performance and they have pioneered a new investment frontier for Ethex investors. Retail investors now have the opportunity to make a tangible social impact by supporting financially excluded individuals who have been underserved by traditional banking institutions. Helping them avoid unscrupulous high-interest lenders that can lead to spiralling debt.

In addition to addressing financial exclusion and ethical lending for individuals, Ethex is seeking to develop its presence with Community Finance providers involved in enterprise lending. In the UK there are many thousands of viable small businesses – frequently operating in areas of relative deprivation – that are undercapitalised and underserved by mainstream finance. By harnessing tax relief schemes such as Community Interest Tax Relief (CITR), Ethex is seeking to build a role for retail investors in strengthening this sector.  

Opening doors for the Community Finance sector

The early successes seen from GWCU, Fair for You and Salad Money in raising finance from the UK crowd, rather than from traditional institutional investors is potentially transformational for the sector as it demonstrates a new opportunity to raise finance that is patient, flexible and, most importantly, that builds a community of supportive investors which cares about the duality of social impact and the prospect of reasonable financial returns.