It took several years for us at Capital Good Fund to figure out our business model. After all, we started out by offering small business loans and loans to cover the cost of citizenship, and for the first two years those were our only products. Starting in late 2010 and early 2011 (we incorporated in early 2009) we began to realize two things: first, that our business loan portfolio was not performing well, and second, that there was a significant need in the community for personal loans. Once we overcame the philosophical aversion to a nonprofit offering loans for things like furniture or rent, we saw an opportunity to compete with the $100 billion predatory financial services industry–payday lenders, pawnshops, rent-to-own stores, auto title lenders, etc.
But we still hadn’t come close to figuring out our approach. There was much to figure out–underwriting, product mix and design, customer acquisition and retention, and loan closing and servicing. Over the next couple of years we phased out business loans (which ended up having a default rate of 19%) and made tremendous investments in personnel, back-end systems, and community partners.
As a result, by 2014 we had gotten to a point where we had our business model and understood how to scale it. We had, for instance, discovered that banking history is a strong indicator of likelihood to repay, and learned that the only way to profitably do small-dollar personal loans is by having a balanced portfolio–mixing $300 loans at higher interest rates with $15,000 loans that have lower rates but are lower-risk and have a higher profit margin. More importantly, we determined that in order to become operationally self-sufficient through earned income–critical if we are to reduce dependence on unreliable philanthropy and scale–we needed to make 17,000 loans in five years. The problem? We would need $15 million in operating funds over that time to hire 60 people, market, and improve our systems; suffice it to say that our experience showed that we were unlikely to raise that much money through philanthropy.
So instead we launched a $4.25 million Direct Public Offering through which we are paying social investors up to 6%. As part of the Offering, we developed a robust and detailed plan for how we would scale, pay back our investors, and change lives. Among other things, it outlined who we would hire and when, where we would expand, what products we would offer, etc.
We began raising capital in late 2015 and as of this writing in August of 2016 we have raised $730,000 from 55 individuals and foundations. However it was earlier this year that we had raised enough funds to kickstart the plan with a series of hires and operating improvements, and the investments are already baring fruit. For instance, last month we financed 37 loans totaling $77,000–a record–while maintaining a 92% all-time repayment rate, and 99% of our $570,000 in outstanding loans are on time.
Why were we able to have so much success? This is no surprise: when you have a great business model and the resources to carry it out, you’re likely to succeed. Some of the things that have contributed to our recent growth and performance are: the launch of electronic loan closings; more loan officers and customer service representatives; a more intuitive and quick online loan application interface; and standardization in our policies, procedures, and underwriting.
This isn’t to say that it will be easy to hit our targets moving forward. We have a lot of capital to raise, a lot of loans to make, and a lot of loans to have repaid. A good model and sufficient resources don’t guarantee that things will work out, but after nearly seven years of struggling to have the capacity just to keep the lights on, it’s both surprising and unsurprising that we are doing so well. There is a saying that you don’t want to throw good money after bad, but when it comes to investing in Capital Good Fund it’s more a matter of throwing good money after good!
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