With high perceived risks and potentially limited rewards, community-based projects often struggle to attract the attention of mainstream finance. These hurdles force them to turn to alternative financing methods like community financing, which have gained traction as the financial system faces societal pressure to become more sustainable and equitable.
Many forms of alternative finance are by no means new and have been practiced informally for hundreds of years. However, while these methods once only included relatives and friends, they now operate on a global scale.
Here, we’re going to take a look at two related types of financing that community projects use: community funding and community financing, as well as some examples and key differences.
What is community financing?
Community financing is a concept that you may already be very familiar with thanks to platforms such as Kickstarter and Indiegogo, but it offers much more than novelty tech funding.
In its broadest sense, community financing involves raising funds from a group of people, typically through donations, loans, investments or a form of pre-sale. to support a specific project or initiative. These funds could go towards anything from starting a business to supporting a local nonprofit organization to funding a community development project.
Funds can be raised in many ways, including:
- Crowdfunding: This can be within a small community, such as a village, or on international platforms like Kickstarter and GoFundMe.
- Microfinance: Some local organizations provide very small loans to entrepreneurs and small business owners who may not have access to traditional financing.
- Peer-to-peer lending: Rather than a financial institution lending funds, individuals provide loans to develop a project, often at lower interest rates than traditional banks.
- Community investment funds: These funds pool capital from a group of investors to provide financing for local businesses or community development projects.
Community financing can help raise the money needed for projects that might not have access to traditional sources, while also offering the opportunity for people to actively invest in projects they believe in.
What is community funding?
Community funding also involves raising money to support a specific community cause or project. However, unlike with community financing, it most often involves the use of grants, donations and sponsorships.
Examples of community funding sources include:
- Government grants: National and local governments can provide grants to support community-based initiatives.
- Corporate donations: Some businesses provide funding and other resources to support local nonprofits and community-based organizations.
- Community development financial institutions (CDFIs): These local organizations provide financing and other support to community-based initiatives and businesses in underserved areas.
Community funding versus community financing
Community financing and community funding both involve raising money to support community projects or initiatives. However, there are some key differences between these two approaches, such as:
- Where the money comes from: Community financing typically involves raising funds from within a community, while community funding can rely on external sources.
- Type of financing: Community financing typically involves loans or investments, while community funding is more likely to be grants, donations and sponsorships.
- Scale: Community financing is often for small-scale projects while community funding can be used for both small and large-scale community-based initiatives.
Overall, both community financing and community funding are important tools to support community projects. Despite their similarities, their differences can dictate the types of projects that can access them.
Whether a project chooses between community financing or community funding will depend on its specific needs and goals. In many cases, a combination of funding sources can be the most effective way to raise the funds needed.
The GLF provides community financing for community-led projects in the Global South through the Restoration Stewards program. The GLFx platform also provides listings on a wide variety of community financing and funding opportunities.