Champion Impact Capital created the On the Road Lending initiative to address the need for low- to moderate-income working people with credit challenges to obtain affordable loans to purchase fuel-efficient, reliable transportation. The underlying social purpose is to enable people to find and retain good employment, avoid predatory lending, and build healthier lives as a function of being able to access good food, seek preventative or emergency health care, reduce stress, and increase access to social networks.
The structure of the initiative includes two separate supporting components—a loan fund capitalized through impact investment, and a sidecar nonprofit that provides wraparound services.
OTR Fund I is an impact investment for-profit limited liability company. Investors include individuals, corporations, foundations and institutional investors. Capital placed in the fund is used to provide loans financed at more favorable terms than the borrower could otherwise obtain to purchase newer-model (2013–2016) cars that are affordable and highly fuel-efficient with a reduced carbon footprint of about 35% over vehicles the clients trade. Because they are newer models, they are able to have a warranty that reduces the likelihood of costly, unforeseen repairs that often drive these borrowers to payday lenders.
The fund pays its investors an annual preferred return of 3% on their invested capital. Because of the emphasis on getting clients into cars that are better for the environment, as well as the fixed income nature of the return, the fund operates similar to a “Green Bond.” With the intent of the investment to generate financial, social, and environmental returns, the fund is considered an “impact investment” vehicle. While the fund is a for-profit company, the large (60%) tradeoff of potential revenue from discount-to-market interest rates, makes the fund a social enterprise.
The On the Road Lending sidecar nonprofit is what makes the initiative a success both financially and socially. Unlike subprime auto lending, where borrowers are financed exclusively on credit scores and purchase and finance their car the same day, On the Road Lending may work with clients for several months before they get their car. Clients are required to work with a financial coach, take financial education classes, learn car maintenance, and select from a relatively narrowly defined band of potential vehicles. Because of the close relationship that the coach builds with the client, the nonprofit logically acts as the underwriter and the loan servicer. Offloading these costs to the nonprofit coaching function enables the loan fund to offer much lower interest rates to the client—9.75%, versus 22% typically paid by these borrowers. These intensive wraparound services, coupled with the fact that the clients understand that the dollars to make their loans came from people in the community, result in a low default rate—2% compared with 35% for subprime dealers and finance companies.
This unique structure allows interest income from the loan fund to provide financial support to the nonprofit in the form of periodic grants. At scale the organization could potentially become self-sufficient without the need for ongoing fundraising.
Potential approaches to grow OTR Fund I and future funds include:
While the concept of impact investing has sometimes implied that financial returns would be concessionary, in favor of environmental and social returns, the reality has been that returns have more closely mirrored the market. Institutional and individual investors alike are seeking out impact investing vehicles as a function of values and conscious capitalism. Drawing increased investment to these projects requires competitive opportunities for yield. OTR Fund I has paid its investors 3% on invested capital annually, which is commensurate with fixed income benchmarks and in line with the emerging green bonds market.