What Is Catalytic Capital?

What is catalytic capital?

Great question!

The textbook definition, or a common understanding of the term, is investment funding—such as debt or equity. This type of investment accepts greater risk or below-market financial returns to generate a positive social or environmental impact. It steps in where traditional investors fear to tread, unlocking essential funding for underserved areas and breakthrough innovations.

We agree with this definition, especially the part about unlocking essential funding. While there are financing opportunities for food actors and businesses to access capital, applications can be complex and, depending on the lending institution, the loan itself can be expensive. Interest rates can be up to 13 percent through a Community Development Financial Institution (CDFI), like Business Impact NW. CDFI’s are considered catalytic capital investors. Working with other lending institutions, like your local bank or a credit union, is also an option and may offer the resources you need at a lower or more standard interest rate. Any financial institution wants to see documents like a profit and loss statement and balance sheet, and to understand the business's cash flow. But given the cyclical and seasonal nature of the food business, banks are often skeptical about business viability.

When we consider a catalytic investment, we review the same paperwork as any other lender or funder. We want to know what we invest in will make a real difference. We are not in the business of lending large amounts of money to a single entity. Instead, we want to position ourselves as a first-mile, middle- or last-mile partner and advocate in a community. This is what we mean when we say we are a philanthropic bridge.

For instance, a first-mile investment may be needed to show more assets on the balance sheet to leverage a conventional loan. An example of a last-mile investment could be a pledge to an organization for a cash match if a grant is awarded. In another scenario, state and federal grants are available to many farms, food producers, non-profits, and distribution centers.

Grants made through a foundation or corporation are straightforward. You apply; if awarded the funds, you get a check. Then at the end of the grant period, you provide a report on how the money was spent and the impact made in accordance with the proposal guidelines.

State and federal grants are different and act more as a contract. Once the contract is negotiated and finalized, the work begins. The grant recipient pays for all expenses required under the contract. They then submit an invoice to the funder, along with documentation that staff and operating expenses have been paid and supplies or equipment have been purchased. Only then does the grant recipient get paid. In most cases, invoices and financial reports must be submitted monthly. Because of this cycle, small and mid-sized organizations with minimal operating reserves can have cash-flow issues, putting the organization at risk of failure. This is an example of a middle mile investment.

The Local Food Trust is rooted in philanthropy on purpose! We believe those little bits of good (your investments), paired with guidance and coaching, innovation, stewardship, and food sovereignty, may not overwhelm the world, but they will certainly make the place you call home better for everyone.

We would love to hear from you about the food work you are doing in your community.