Downtown Ypsilanti is vacant and gray on wintry Michigan mornings, save for one beacon of mid-morning activity: Beezy’s café. Since it opened in 2008, Beezy’s has become a daytime mainstay for locals, from artists and college students to young families, who come for the “simple, honest” food and communal atmosphere. On a street lined with bars and a strip club, it’s a warm and welcome addition to Ypsi (pronounced Ip-see), a former manufacturing town that’s still climbing its way out of the recession.
A big part of the draw is Bee Roll, the exuberant proprietor of Beezy’s, who sees her wholesome fare as a way to bring people together. So when she decided to expand into dinner service, her customers were thrilled. The problem was, her bank was not.
Expanding into dinner hours requires capital. But Roll was turned down for a bank loan, and she’d already paid off a couple of high-interest merchant cash advances and didn’t want to go that route again. In the past, she had experimented with “plate club” gift cards that allowed customers to pre-pay for meals, but that wasn’t enough.
“The whole ‘it takes money to make money’ adage is true,” sighs Roll. Without capital, “it’s more bootstraps and wishing and hoping and pennies and planning.”
It’s a predicament shared by many beloved Main Street businesses these days. But what Roll lacked in conventional capital requirements, she more than made up for in customer loyalty and demand. Shouldn’t that be worth something? What if you could turn that loyalty into collateral?
That’s the idea behind ZipCap, a new lending platform that is pioneering a concept it calls “loyalty capital.” A new twist in small business funding, it has the potential to benefit thousands of Main Street businesses with promising prospects but no conventional credit or collateral.
It works like this: Small businesses set up a page on ZipCap’s web site. They then invite customers to be part of an “inner circle” by pledging to spend a certain amount of money at the business over the course of a year. There’s no investment; customers just commit to spending money at a place they already frequent. Once a business gathers 100 inner circle members, they qualify for a loan or line of credit from ZipCap.
No FICO scores. No collateral. No signing away your mortgage (if you have one). The only requirements are that the business be locally owned, have been in the same physical space for two years, and be able to gather 100 pledges.
In Beezy’s case, more than 100 customers have committed to spend $475 a year at the café. To ZipCap, that’s like $50,000 in accounts receivable.
“We monetize something that had no value before,” explains Evan Malter, the founder of ZipCap. “Goodwill is often the #1 asset—sometimes the only asset—that small businesses have. We’re helping to put some value on that goodwill.”
It’s a unique model that falls somewhere between crowdfunding and loyalty programs, and between buying local and investing local.
Many businesses have loyalty programs—buy ten cups of coffee and your 11th is on the house. In those programs, benefits accrue directly to customers (and indirectly to businesses in the form of customer data). ZipCap flips the traditional loyalty model on its head, allowing customers to reward their favorite businesses.
Likewise, ZipCap shares similarities with crowdfunding, where entrepreneurs set up campaigns to drum up funding from their supporters. But with ZipCap, there’s no donation or investment, just a commitment (albeit a legally binding one). Some businesses choose to offer perks for their inner circle members, but the emphasis, says Malter, is on the impact customers can have, rather than the rewards they might get.
To start, ZipCap has raised a fund from accredited investors who believe in the concept of loyalty capital, says Malter. This fund backs the loans the company extends. But Malter believes he can prove over time that the risk associated with loyalty-backed loans is smaller—and then the capital will flow. Malter envisions community banks, municipalities, foundations and other local impact investors backing ZipCap loans—or maybe even a local fund.
Back to Basics
Malter, who has filed for a patent on the loyalty capital model, began working on the idea in 2012, after returning home from six years in Australia with his family. In their small suburb of Sydney, they bought bread from the baker, meat from the butcher, and fruit from the fruit shop. “When you buy bread from a bread maker you’re doing two things— you are getting fresh bread made with care, usually directly from the person who made it. And you’re giving that passionate bread maker an opportunity to do what they love,” says Malter. “We need that in our world.”
Back in southern California, when Malter’s wife came home one day with groceries from a big box store, he vowed to find a way to support local businesses that struggle to compete with megastores and national chains. The kinds of businesses that people want in their town—like Beezy’s.
“We want to do community capital in a responsible way,” says Malter
His first idea was to start a crowdfunding site for local businesses. But he soon came to believe that he should not be asking grandmas and people who might not know how to vet a business to invest in one. And he began to question the wisdom of saddling small business owners with dozens of shareholders. He then switched to a gift card model, but saw flaws there, too. “If the pizza oven breaks, you don’t want to have to go sell 100 gift cards,” he says.
Over the months, the idea of loyalty capital began to take shape. For Malter, it’s a back to basics model that lets all the players do what they naturally do best: the investor invests, the consumer consumes and the small business provides a service.
“We want to do community capital in a responsible way,” says Malter.
Malter launched ZipCap (the formal name is Zip Code Capital Inc.) in 2013, and began pilot testing the concept in 2014. Still in pilot stage, Malter and his team are selectively accepting small businesses. There are ten or so campaigns active on the site, including Kate’s Pie Shop & Record Store in Rockford, Illinois and Harvest Michigan in Pontiac.
In early March, Beezy’s became the first business to get a ZipCap loan based on loyalty, after 100 people pledged to spend $475 each over the next twelve months (that circle has since grown to 127). The loan is in the form of a $10,000 line of credit, at an affordable 3.9 percent interest rate. ZipCap also charges a modest monthly fee based upon transaction volume.
“Making dinners for people is gonna be great,” says Roll, who employs 14 well paid and cared for employees. She also opens her doors to the community, turning the café into a makeshift tutoring lab, micro-business launching pad, and hub for community fundraising—in addition to a great place to meet friends and share a meal. “It gives us another few hours to help change the world.”
Her customers tend to agree. Tyler Weston, a real estate professional in Ypsi, admits to initially being confused by the ZipCap model, but he quickly signed up, becoming inner circle member #8. “I love Bee and what she does for the community, so when given the opportunity to help her out, of course I step up,” he says “And in a very simple way—all I had to do was what I was already doing, which is coming here to eat.”
For Roll, the loan has been a lifeline. “In the scope of a $500,000-plus a year business, $10,000 isn’t a whole lot of money,” she acknowledges. “But it’s just the sort of injection that a small business needs to boost inventory after a long, slow winter and get ready for spring and summer business.” She plans to use the money to purchase a granita machine to add frozen drinks to the menu and to pay suppliers. Not terrifically glamorous stuff, but essential, she says. “I can’t run a business effectively without access to capital. I have no cushion, no rainy day fund, and it takes a lot of $7 sandwiches to bring pennies to the bottom line.”
Capital when you need it
On a pleasant Sunday evening, fifty or so of Roll’s inner circle members gathered to celebrate their communal success over food, drinks and a few heartfelt speeches. When Malter handed Roll a makeshift check for $10,000, she hugged him and said, only half joking, “Can I cry now?”
Malter explained to the crowd that the ZipCap model was not just about quick hits. “It’s being there, month after month, year after year, and knowing that, if you keep your memberships alive, Bee will always have that capital when she needs it,” he said. Many members, in fact, choose to automatically renew their pledges.
“I’m so excited about the potential of what this means for financing,” says Roll. “Being part of this at the beginning feels incredibly exciting and so much seems possible.”
Not just for Beezy’s, but for Ypsi and other communities like it. Not many here hold out hope that the manufacturing jobs that disappeared when General Motors closed its nearby factory will reappear. Instead, Ypsi’s economy will be revived by small, locally owned businesses that create jobs in the dozens, not the thousands. And that provide not just a service, but also a sense of place and community.
Weston, inner circle member #8, has already suggested ZipCap to other businesses in Ypsi. “It’s a great program. I hope to see it used more frequently in my town and others.”
Sabiha Zainulbhai is a first year Masters of Public Policy student at the Ford School of Public Policy at the University of Michigan.