Breadcoin Loan Program Parable
(Written by Eddie Kaufholz, Breadcoin Board Member and Supporter, and Inspired by Matt Luecke, Breadcoin Supporter)
At the corner of a once-bustling intersection stands a humble taqueria, a cherished establishment in the community. For two generations, it has served the neighborhood, including the new wave of “foodies.” The lunch crowd is a vibrant mix of diversity that mirrors the crossroads where the taqueria resides.
Every day, without any fuss, the owner prepares trays of fresh flautas for a few loyal patrons. It’s understood that these warm, crispy treats are set aside for those who might otherwise go hungry. There’s an unspoken understanding among the patrons; we’re all there for the amazing food, and there’s no need to make a fuss about the charitable act.
Then, one day, the usual lunch crowd arrives to find the restaurant darkened, with a sign on the door reading, “Congelador roto. Sin comida – Freezer broken. No food.” A week passes, then another, and still, “sin comida.” Concerned about the owner’s well-being, the local church organizes a pop-up lunch. They know that taking out a loan for a new freezer would be a heavy burden for a business that prioritizes care over profit.
On a bustling Saturday, neighboring restaurants join forces to serve both food enthusiasts and regulars, all with the goal of contributing to the Freezer Fund. The response is overwhelming. When the taqueria owner timidly appears at the event to connect with her beloved customers and express gratitude, the pastor quietly presents her with a check exceeding the cost of the freezer, ensuring the corner shop can reopen.
“Why have you done all this? And how can I ever repay you?” she asks.
“Just keep serving those trays of flautas. That’s what we need most,” the pastor replies.
With a knowing nod, the taqueria owner whispers a “thank you” and resumes her tradition of handing out churros to the kids.
The Challenge
We live in a world where most local restaurant owners are barely making ends meet with higher wages, increased food costs, and slowing demand. In this environment, many small restaurants don’t have enough cash on-hand to pay for a large equipment purchase. When a restaurant’s freezer breaks, the owner can’t just go to Best Buy to get a new one. They need to purchase a commercial grade freezer that often exceeds $10,000. These unexpected expenses for a business can be the difference between staying open and having no choice but to close. Often, the owners of restaurants can’t get a loan from a bank for loans under $50,000 because its not profitable for a bank to issue “small-dollar loans.” In some circumstances they would, but it would be similar to a “signature loan” where the bank doesn’t require collateral against the loan, and issues the loan at 20%+ interest per year. The solution for most businesses is to put the expenditure on their own personal credit card and try to pay off the loan as soon as possible. This is a very risky option because the accruing interest on their credit card can be upwards of 30% per year.
We also live in a world where the wealth gap creates opportunities for the children of wealthy parents to have business connections and additional capital for fledgling enterprises while people who live in low-income communities don’t have those same connections or access to capital. This further exacerbates the growing inequality in our country. Not only is the money flowing out of underserved communities each month, but so are all the opportunities for entrepreneurship. A caterer might only need $25,000 to move to a food truck business from their catering business or $50,000 to move to a storefront from a food truck business. But if you don’t have access to this amount of capital, your ability to grow is limited.
The Breadcoin Solution
Breadcoin is solving both the “small-dollar loan” and the “capital gap” problem. The microfinance loan program allows participating vendors to take out a loan after redeeming Breadcoins for at least 3 months. These are often community-oriented restaurants that are operating in underserved communities. Many of these restaurants were already feeding the community before they joined Breadcoin. It is often the reason we heard about them in the first place. These community-oriented business like Mama’s Pizza Kitchen are the exact types of businesses that we’d want to support, right?
When the vendor takes out a loan with Breadcoin, they pay back the loan over the course of a 12-month or 24-month repayment period using the Breadcoins that they are redeeming each month in the community. If we weren’t able to drive enough demand to their business to cover the loan payment, the business pays the remainder of the loan payment back in dollars without any interest. The payment in Breadcoin has a small (approximately 5.8%) interest rate because we want to make it viable for banks and credit unions to extend these loans in the future.
The credit history of Breadcoin vendors is based on how many Breadcoins are being redeemed at their restaurants, food trucks, or catering businesses. Suppose there are two Breadcoin vendors across the street from one another. In this particular neighborhood, there are 300 Breadcoins being distributed each month. Of those 300 Breadcoins, 250 are used at Business A and 50 are used at Business B. Business A will have more access to credit because of their monthly Breadcoin redemption record. It is also a fact that Business A is a better credit risk because the community is choosing to eat at their establishment fives times as frequently as the other location.
Breadcoin is able to lend in underserved communities with a relatively low-cost way to underwrite the loans. This is really exciting because there are many banks across the country that would like to satisfy their Community Reinvestment Act obligations. In the future vision of Breadcoin, we will be able to give them the opportunity to issue loans using Breadcoin’s financial technology company as a third-party service provider.
Current Breadcoin Microfinance Program
Since the beginning of the year, we have originated three loans through our microfinance program with origination amounts of $32,400. In 2023, we originated two loans with origination amounts of $7,900, and in 2022, we originated two loans with origination amounts of $17,000. During that time, we haven’t had any defaults on loans. During the pandemic, we did have one vendor go out of business and their loan had to be written off. With more than $80,000 loaned through the microfinance finance program, the program is an incredible success. It also demonstrates how Breadcoin empowers local entrepreneurs to address local food challenges.
