Finance & Investment

Catalyst Credit Line:
A Financial Lifeline for Pre-Profit, Sustainable Startups

Young, sustainable companies have it tough. With all that excitement and idealism in building a new company comes a mountain of obstacles to overcome. But for purpose-driven companies pursuing opportunities that also create impact, that risk/reward ratio may be even higher.

By Gary Groff | Published 7 years ago | About a 6 minute read

Of those challenges, finding adequate financing is one of the hardest a young company faces. Successful early-stage enterprises inevitably have to make hard decisions about how to grow their businesses — and for mission-aligned companies, finding the right equity and debt investors is even tougher. A 2015 study from the Stanford Social Innovation Review found that “less than 2 percent of the angel investors on AngelList expressed interest in mission-driven markets.” If these businesses pursue debt providers before they are profitable, they are limited to a marketplace with online lenders with higher costs of capital. The struggle to access capital is one of the most critical aspects underlying growing market share and developing viable margins.

There are thousands of small companies out there — and more springing into the market every year. According to the Small Business Administration, small businesses make up 99.7 percent of all U.S. businesses; and in 2013, they employed 48 percent of the private workforce. But despite these encouraging statistics, more than half fail in the first year; and 95 percent fail within the first five years, mainly due to a failure in adequately anticipating cash flow.

It’s evident that the bulk of job creation comes from small business. If these businesses are the backbone of the US economy, how are investors and banks doing their jobs to support them? And in particular, what about those companies that specifically align their mission with their methods — those that embed sustainable and equitable practices within their business model — whose success is also a vote of confidence towards finding a better, more sustainable way of commerce?

Impact-driven small businesses are working even harder to make sure they’re tracking to a higher standard, putting additional effort into sourcing local ingredients, offering transparency in their practices and supply chains, and providing benefits, such as living wages, to their employees. These are the companies that we ideologically believe in collaborating with because they align with our values and represent an opportunity to bring positive solutions to a marketplace. But often, these companies are not quite ready for bank financing; as bankers, it frustrates us to turn away mission-aligned companies that are growing but not yet profitable.

Early-stage companies often turn to a patchwork of other funding options, from maxing out credit cards, taking out second mortgages or seeking out pricey online lenders to crowdfunding in order to finance growth.

However, we see that mission-aligned companies struggling through tough financial beginnings are likely to see payoffs down the road from the responsible roots they’ve planted. Customers are more likely to be fiercely supportive of a brand that has gone the extra mile. Where certain investors overlook mission-aligned companies either because they don’t understand the mission component or are intimidated by high costs in the early stages of development, they will inevitably miss out on financial returns as the business grows and customer loyalty develops. Mission-aligned companies that have grown sustainably from the start attract dedicated and talented employees who are willing to join a smaller team, and have a hand in crafting a company that means something to them.

A recent C Space study found that S&P 500 companies working to build sustainability into their core strategies are outperforming those that fail to show leadership in the space. Similarly, a 2015 study by the Global Alliance for Banking on Values proved that “sustainability-focused banks continue to show that serving the real economy delivers better financial returns than those shown by the largest banks in the world,” proving that mission-alignment can produce tangible dividends on both sides of the spectrum.

At New Resource Bank, we’ve specialized in collaborating with mission-aligned and sustainable companies for the last 11 years, and have watched small businesses we value struggle to get funding because of their size, because they are pre-profit and do not qualify for a loan.

It’s long bothered us that we cannot adequately support these early-stage companies that deserve our attention. To combat this, we recently joined forces with asset-based lender P2Binvestor to create a new fintech offering called the Catalyst Credit Line (CCL), providing up to $10 million of credit to growing enterprises that may not have yet reached profitability, but have strong enough indicators of success to draw a pool of qualified investors and the secure backing of a bank. CCL grants access to lower interest rates than alternative online lenders by a collaborative funding mechanism between New Resource Bank and a select pool of accredited investors who engage over an exclusive financial platform. The CCL provides a way for growing businesses with receivables and inventory to start a banking relationship that can mature over time, and gain access to even more favorable pricing. As lending rates continue to drop, the Catalyst Credit Line will support our clients’ growth into profitability and beyond.

Access to initial capital will continue to be one of the biggest challenges that growing enterprises of all kinds face. As investors and bankers, we must do a better job supporting mission-aligned companies, believing in their economic returns and empowering their communities to grow their businesses together.

Mission-aligned businesses of all sorts are making compelling products for consumers, differentiating both on the quality of product they place on the shelf as well as the ethical, transparent underpinnings of their business. We’ve seen these companies win fiercely loyal fans, start attracting more talented and engaged employees, and building strong relationships — just by the impact nature of their business.

Let’s double down on supporting sustainable businesses. The value and values created by this community make the initial struggle worth it, every time.