For Carly Meyer, president of the Princeton Merchants Association and vice president of retail administration for the Bank of Princeton, stories about entrepreneurship were as familiar as those of Dr. Seuss.
From as early as she can remember, her entrepreneurial father, owner of a Chicago construction company, was parlaying one business into another, and it wasn’t easy for him. “I watched him struggle when it was time to grow the businesses, and it was hard to get banks interested in lending him money — although he would always pay back the loans,” she says.
Taking seriously the challenges her father faced, she became a banker as an adult.
“I have a passion that is born out of those experiences of watching him grow his business and taking the risk he did and not having investors or private money to grow his business,” she says. “I got into banking and finance to try to be able to say yes more often to their loan requests, to become their partner and watch their businesses grow.”
Given Meyer’s sensitivity to the capital needs of local businesses, she was supportive of board member Fran McManus’s suggestion that the Princeton Merchants Association invite Michael Shuman, an activist in the local economies movement, to talk about the strategies, institutions, and creative mechanisms that a community might use to bring more local investment dollars into area businesses — a subject that jibes well with the association’s mission: shop local.
From what she knew about Shuman, Meyer was particularly impressed with his statistics on the multiplier effect of dollars invested in local stores and businesses.
Citing them, she says, “If half of the employed U.S. population spent $50 in independently owned U.S. stores, it could generate something like $42 billion in revenue. And for every $100 spent in a locally owned store, $68 returns to the community through taxes, payroll, and other expenditures. If you shop online, none of it stays.”
McManus, owner of Zafra Press, marketing consultant to the Whole Earth Center, and on the board of the Princeton Merchants Association, is excited about being able to look together with her business colleagues at the idea of local investing on a townwide basis.
She says, “For me personally, as a resident, I would like to put my money into a special bank account that is interest bearing and also designed to be loaned to businesses in my community that I value. I would feel like I was getting a lot for my money.”
When she told her husband about this idea, similar to one in Shuman’s new book, “Local Dollars, Local Sense: How to Shift Your Money from Wall Street to Main Street and Achieve Real Prosperity,” he responded, “I get it. If I had that money in that account and was in JaZam’s and saw somebody pull out a phone and order a book from Amazon, I’d say, ‘Don’t do that. I’m an investor in this business.’”
Shuman’s workshop, “Unlocking the Economic Power of Local,” will be Tuesday, March 13, from 9 a.m. to 4 p.m. at the Carl Fields Center at Princeton University. Cosponsored by the Princeton Merchants Association and Princeton University’s Office of Community and Regional Affairs, the cost is $100; $75 for Princeton Merchants Association members; $25 for students (without lunch). For information and to download the registration form, click on “events” at princetonmerchants.org.
Shuman, who has worked in the local economy movement for 15 years and written two important books, “Going Local” in 1998 and “The Small-Mart Revolution” in 2006, has seen his ideas undergo a significant evolution since his last book.
He says, “Over this period of time it has become clearer to me that the biggest obstacle to the movement toward localization and the prosperity that flows from that at the grass roots level is capital — how do we get more local capital into local small businesses?”
At present, he says, almost none of the existing long-term capital is making its way to small businesses. Consumers’ long-term savings that should, in his opinion, be funding a stream of cash to small businesses are instead sitting in stocks, bonds, mutual funds, pension funds, and insurance funds. These savings of about $30 trillion dollars, twice the country’s gross domestic product, are largely going to fund large corporations.
Shuman would like to see a greater balance of investments between large and small businesses. “In an efficient capital market, if half the businesses were small and local — which they are in terms of output, jobs, competitiveness — and half large, capital would be allocated with half to small and half to large businesses,” he says.
“But none of that long-term capital touches small businesses. In our society, we are systematically overinvesting in Fortune 500 companies and underinvesting in businesses we know most likely will produce jobs.”
To make the transition to local investing will require both personal and systemic changes, and some broader policy changes are already underway, suggests Shuman. One has to do with a potential congressional reform of crowdfunding — a strategy for gathering small amounts of money from lots of people to fund business projects, for example, through a site like indiegogo.com.
The biggest obstacle to crowdfunding is security laws that make it exorbitantly expensive for a startup to ask for investment funds from friends who are not “accredited investors,” which would require that their net worth exceed $1 million or their income $200,000 in the two most recent years, with a reasonable expectation of continuing at the same level.
“Accredited investors can put money into any business, at any time, with no legal paperwork,” says Shuman. “Unaccredited investors can only put money into any business if they have paid what amounts to $50,000 to $100,000 of legal work. That has been an impossibly expensive barrier for the 99 percent to put money into the 99 percent of firms that are small.”
The U.S. House of Representatives recently passed a bill that would permit startups to offer and sell securities via crowdfunding or social networking sites, with some limitations. But several alternative bills are now languishing in the Senate.
“What’s happening in the Senate is that the securities regulator community rightly understands that if it passes, many are going to lose their jobs,” says Shuman. “It is a deregulation that is going to gut their industry.”
This type of unemployment does not particularly bother Shuman. “True, it will put a lot of unnecessary regulators out of work, which is a good thing,” he says. “They are basically the protectors of Wall Street, and they need to step out of the way.”
In his Princeton workshop Shuman will explore the issue of capital from the perspectives of small businesses, of individuals who want to invest locally, and of public policy makers.
For groups like the Princeton Merchants Association, one idea he suggests is working with a local bank to create dedicated certificates of deposit whose funds can be lent to local businesses. This approach enables unaccredited investors to buy these special CDs that then serve as collateral for low-interest loans to local businesses. The approach, says Shuman, is relatively easy and avoids problems with the high costs security laws impose on unaccredited investors.
The worker-owned co-op Equal Exchange in West Bridgewater, Massachusetts, set up such an instrument with Wainright (now Eastern) Bank, which created a special three-year CD requiring a minimum $500 deposit. In return the bank provided Equal Exchange with a million-dollar line of credit. Open to both accredited and unaccredited investors, the CD was FDIC-insured against bank failure, but of course at risk if Equal Exchange ever defaulted on the loan.
Because investors felt they were getting a “social return” on this CD, they did not seek any increased reward for the extra risk they were taking on. The bank, which profited from the normal spread between the interest paid by Equal Exchange and the interest paid to the CD holder, did have to bear the extra administrative costs of running this program but was willing to do so because it saw the CD as a way to implement its values.
Shuman is enthusiastic about the possibility of creating many such CDs. “That option remains open in every community around the country — working with a bank to create a special kind of instrument, the funds of which can be targeted to local businesses. From a banker’s perspective it is tails I win, heads you lose. Either way they get their administrative fees, and the money in the CDs is 100 percent collateral for the loan.”
Another option for local businesses would be to work with either local government or a nonprofit to set up a revolving loan fund to benefit local businesses. Although close to 1,000 such funds exist in the United States, all but three that Shuman has been able to find take money only from accredited investors.
However, templates do exist for including unaccredited investors: Invest Ohio in Columbus and specialty revolving loan funds in North Carolina and Vermont. “The challenging thing is having to work with state securities regulators to design this and make it open to unaccredited investors,” says Shuman. “That’s the piece that is cutting edge.”
A number of communities have created investment clubs that include unaccredited investors and put their money in local businesses. Such clubs have one proviso, that every member must be actively involved in every investment, which serves to keep numbers relatively low, often under 20 people. “Because this is a well-established way that people can organize themselves,” says Shuman, “it turns out to be one of the legally open avenues for people to begin to invest in local businesses.”
One such group is the No Small Potatoes Investment Club, an offshoot of Slow Money Maine. Its president, Linzee Weld, noticed that local businesses were having difficulty obtaining financing — both farmers who needed to build infrastructure and food vendors who needed to buy ingredients, containers, or on-farm storage space. At first individuals made personal loans to these businesses, but they quickly realized that doing so as a group would reduce risk. So, after investigating SEC rules and getting approval from state regulators, they started their investment club.
Another route Shuman proposes is that of getting funds that are “not quite securities” from customers via advance purchases. The Awaken Cafe in Oakland, California, is raising the money it needed to open a new cafe from its existing customers.
“They decided to do advance sales of coffee to their customers, which turns out to be a very clever way of avoiding security filings,” says Shuman. The cafe’s customers bought $1,200 worth of coffee in advance for $1,000 — a great discount for them and sorely needed funds for growing the business.
Businesses can also turn to community banks for loans. The Bank of Princeton, says Meyer, is a community bank focused primarily on business and commercial loans that can also do consumer loans. Her bank’s role, she suggests, is to supply as many loans as it can to help local businesses grow and stimulate the economy, a responsibility she takes quite seriously. “I feel like I’m guarding these businesses with sword and shield,” she says.
The role of a community bank is to provide businesses with the loans they need to buy new equipment or to expand so that they can better serve the local community. Community banks, says Meyer, are able to lend more easily and quickly than national banks, and the reason this is so harks back to old-fashioned lending in the days of savings and loans.
What used to be important and still is to community bankers is the “character” piece of the loan equation — the banker’s knowledge, when reviewing a loan application, that no matter what happens to this particular borrower, he will do everything in his power to pay back the loan. “We know our clients very well. We know who they are, how long they have been in the community, and what they are involved with, and that’s what makes that character piece make sense,” says Meyer.
For big banks, she says, the character piece is not in the forefront of lending decisions. “When lending spun out of control and banks were doing more risky deals, the character component was not thought of as important as the FICO [credit] score or collateral,” she explains. For big banks, the approval process also takes a lot longer because they have centralized underwriting and business processing that are done out of state. For the Bank of Princeton, all this work is done in the community.
The Bank of Princeton keeps its footprint local, lending only in New Jersey and Pennsylvania, and focuses on companies ranging from mom and pop shops to businesses earning $20 million in revenue.
“If you are putting money in a local bank, the money it is lending out will be going toward the local community, which make it a great place for those depositors to live and work,” says Meyer. “Their money is put out in the street to work for the community.” The Bank of Princeton, now with close to $600 million in assets and 11 branches (with new ones opening by year end in New Brunswick and in Philadelphia’s Chinatown), has grown substantially since it opened in 2007.
Shuman suggests that although the picture for lending by community banks is somewhat more positive than for the big banks, all banks and credit unions that qualify for federal deposit insurance must follow higher federal standards in their lending practices and require higher down payments, more collateral, and stronger credit ratings. Although such standards have made lending tighter across the board in the wake of the financial meltdown , the brunt has fallen on smaller businesses.
Nonetheless the data does show that local and smaller banks lend a much higher percentage of their portfolios to small businesses than do big banks, says Shuman. “Even though those small and midsize banks account for 22 percent of the assets of all banks, they were responsible for more than half of all the small business lending over the past year.”
Many businesses would prefer to issue equity rather than take on heavy loans, preferring to give up some degree of control in order to have their money free and clear. Or they simply can’t get loans because of the way that the current system is organized.
For companies at that middle stage where they need financing from $100 million to a couple million, say to start a second restaurant, it is often difficult to secure funding.
“It is hard to get because the only people permitted to do that kind of investment are accredited investors,” says Shuman. “So the entire universe of unaccredited investors who could be interested, because they are customers, family, or someone else linked to the business, legally can’t put money in; and accredited investors are typically putting money into globally focused vehicles, venture funds, and so forth.”
Summing this up, he says, “The law forbids the one sector that is interested from putting money in local businesses; and for the ones who could put money in no institutions exist to interest them in putting their money locally.”
So, in Shuman’s conception, something needs to be done to create ways to make lending possible and easy for unaccredited investors. He envisions a two-step process, the first making it cheaper for local businesses to do cost-effective public stock offerings, and the second developing local stock exchanges.
Cutting-Edge Capital, of Oakland, CA, where Shuman is research director, is currently working to devise cookie-cutter approaches to public offerings, working on one state at a time. “If Princeton were interested,” he says, “I could imagine us thinking about how to do this for New Jersey.”
A company in Berkeley called Nolo Press did something similar 25 years ago to make it easier and cheaper to create wills, trusts, and estates, and managed to put substantial numbers of lawyers out of work. “It made things people spend a fortune on out of the box,” says Shuman. “Think of what could be done with a lot of the offering documents needed for a stock to go public.” The approach he envisions could lower the cost to a business of doing a public offering from $100,000 to $5,000 to $10,000.
“This opens the universe of what people can invest in,” says Shuman, who adds that once a critical mass of local stocks exists, a community can consider a local stock exchange, which Shuman calls “the homerun of local investment.” Such exchanges would be electronic platforms where both accredited and unaccredited investors can buy and sell local securities easily.
Shuman sees such exchanges initiating a huge social change where people begin to move their long-term investments from Wall Street to local businesses. “My goal is that the distribution of long-term capital begins to look like the presence of different sizes of business in the economy,” he says. “Local small business represents approximately half of the economy, and I would like to see half of long-term investment in local small business.”
Such a $15 trillion shift would certainly “mess up Wall Street,” he says. With the first trillion-dollar shift, demand for Wall Street stocks would go down, putting downward pressure on stock prices. In response, more people would think about moving their money to local alternatives.
“I think this movement could proceed very quickly once it gets under way,” says Shuman. “My feeling is that as the local investment revolution gets under way, watch out if you stay invested in Wall Street, because Wall Street will be riskier and more likely to crash.”
He maintains that Wall Street has looked so good up until now not so much because of the underlying value, profit, and performance of large companies, but because the law has prohibited people from putting their money into local small businesses.
Although they both ultimately wound up in the financial sector, both Meyer and Shuman started their college careers with very different career paths in mind.
Meyer studied education at Northern Illinois University in Dekalb, but after graduating in 1998 quickly decided she was moving in the wrong direction.
“I realized that he who holds the money makes the rules,” she says, and she told her father she was going to move to New York City. “I told him I was going to take risks too, and he said, ‘Go for it; I’ll be here if you need me.’”
She started out selling real estate, but was quickly drawn to the banking side. After four years as a mortgage broker for Equity One, she was recruited to the Bank of New York-Mellon Wealth Management, where she headed up business development for the Mid-Atlantic region, putting together loans for individuals and families of high net worth.
“Most of my clients were entrepreneurs who had a business and had acquired their wealth through being entrepreneurs,” she says.
Four years later, in 2010, she decided to move to the community lending space and joined the Bank of Princeton.
“I saw the pattern of what would be changing in the banking industry,” she says, “that bigger banks would be a more difficult place to get business done, given the turmoil from 2008 to 2010,” she says.
With banks consolidating, shifting, and moving, she says, it was getting hard for businesses to get loans, and smaller banks were playing a new role.
“I saw a trend for community and smaller banks to have a chance to serve the client base that I had built as banker — through relationships,” she says.
Shuman grew up in North Massapequa on Long Island, and his family moved St. Louis when he was 16. His father, who died last year, was an engineer for Western Electric until it was broken apart by Judge Harold Green, and his mother was a registered nurse.
In 1979 he graduated from Stanford University, where he initially wanted to be a filmmaker but then got interested in energy policy, economics, and international affairs and majored in international relations.
In 1982, after completing Stanford Law School, Shuman started a nonprofit, the Center for Innovative Diplomacy, dedicated to getting citizens and cities directly involved in foreign policy as citizen diplomats, for example, by having Americans travel to the Soviet Union as a way of trying to prevent war.
The organization’s magazine, the “Bulletin of Municipal Foreign Policy,” went to several thousand mayors and city council members, educating them about how cities could influence foreign policy: from developing sister cities in controversial places like El Salvador and Nicaragua, to establishing nuclear free zones, to divesting from South Africa during apartheid.
By 1990 the organization had more or less accomplished its goals, and Shuman went to Washington to work for a think tank called the Institute for Policy Studies, first as a visiting fellow and ultimately as director.
“I started to think about community development and how to base it on locally owned businesses and local self-reliance,” he says.
After leaving the Institute for Policy Studies in 1998, Shuman worked as a contractor helping economically disadvantaged communities to create sustainable small businesses. He ran the Village Foundation’s Institute for Economic Empowerment and Entrepreneurship, with a focus on African-American young men in the United States, and worked with the Training and Development Corporation in Maine.
In 2001 Shuman helped launch the Business Alliance for Local Living Economies, or BALLE, which brought together the national audience that had developed around local economic work in response to his 1998 book “Going Local,” which laid out an underlying theory of community development and was in some sense a critique of globalization.
Over time the audience for this type of discourse on the local economy evolved from what Shuman calls “the antiglobal crowd — a hippy, lefty, anarchist, protest kind of person” to small businesspeople.
“By 2000, 2001, more and more of the people interested were not activists but businesses that were fighting for their survival,” he says. These were pragmatic, conservative types who, though formerly card-carrying members of chambers of commerce, had gotten fed up with the “uncritical, rah rah Fortune 500” views of their organizations.
Shuman’s 2006 book, “Small-Mart Revolution,” took the perspective of these small businesspeople and elaborated on what could be done to help them, through “buy local” campaigns, economic development, support for entrepreneurs, building business alliances, and changing public policy to get rid of biases against local small business.
In the years following the creation of BALLE, Shuman became acutely aware that the single biggest obstacle facing small business is capital, and about a year ago he left BALLE, where he had worked part time for a few years, to start Cutting Edge Capital, which helps communities and businesses figure out local investment strategies.
Politically Shuman regards himself as someone who is pretty critical of both mainstream parties.
“Because at the end of the day I am a pretty principled decentralist, I believe in local empowerment, and both parties are thwarting local empowerment in their own ways,” he says.
McManus is hopeful that the Princeton Merchants Association, which brings together retailers in Princeton Borough and Township and businesses that support them, can play a critical role in the follow-up to some of Shuman’s big ideas.
“Our job at the Princeton Merchants Association is to take these events and create a place where we can talk about them as a community of businesses,” says McManus.
Despite the complexity of some of Shuman’s ideas, she understands, through her work in the food and agricultural world, that there is a difference between aspirations and reality, and she is looking to Shuman to articulate the possibilities. “In Princeton there are very smart money people,” she says. “My hope is that ideas will be thrown out that we can make happen or put into practice. In my experience, working in the community it isn’t so much a straight path. Ideas get put out there, and they begin to percolate, and it may be a while before they come to fruition.”
The Bank of Princeton, 183 Bayard Lane, Princeton 08542-3719; 609-921-1700; fax, 609-921-8350. Andrew Chon, chairman. www.thebankofprinceton.com.
Princeton Merchants Association, Box 584,Princeton 08542. Carly Meyer, president. www.princetonmerchants.org.