ZipCap, short for Zip Code Capital, is a San Diego-based startup alternative lender featured in the Business section of today’s New York Times. It provides low-cost loans to local businesses that aren’t able to get credit from traditional banks–presumably either because they’re not (or not very) profitable or because they don’t have a good enough financial handle on their enterprise to know whether they make money or not.
ZipCap helps a client business form an “Inner Circle” of customers who pledge to buy a minimum amount of stuff from the client over a specified period. ZipCap lends against that commitment. In the case of the restaurant/coffee house featured in the NYT article, 130 entities pledged to spend $475 each ($61,750 in total) over the following year. That got Beezy’s Cafe a $10,000 loan at 3.99%.
If all of this were new spending, my back-of-the-envelope guess is that it would bring in $40,000 or so in fresh operating income, far in excess of what would be needed to repay the debt. For Beezy’s to be better off simply from forming the Inner Circle, a quarter of the pledges would have to be new spending, or about $2.50 a week per Inner Circle member. That figure would need to be adjusted up if not everyone keeps his word.
It seems to me, from the limited data in the NYT and on the ZipCap website, that ZipCap isn’t really about lending.
It’s not a social service, either. Chances are that Beezy’s would be better off getting, say, business students from a local college to create financial tracking to help figure out what makes money for the cafe and what doesn’t.
What ZipCap does do, I think, is provide a socially acceptable, non-toxic way for a struggling business to proclaim that, though it might appear to be thriving, it isn’t …and, at least implicitly, that it won’t be around for long unless it gets more community support.
Of course, there may be unintended consequences of the Inner Circle creation. Assuming the extra spending doesn’t come out of thin air, IC creation at Cafe A may force Cafe B to close its doors. Or it may make it extra hard for a new Cafe C to get started.
It will also be interesting to see how ZipCap deals with rising interest rates, as and when they occur.