Fair chance enterprises can foster a regenerative, inclusive economy—with flexible growth financing
Nov 2 2022
By Amy Bird, RSF Senior Relationship Manager, Social Enterprise Lending
Fair chance hiring is a growing trend, most often promoted as a way to help formerly incarcerated people find work after prison, breaking the cycle of poverty and recidivism. Popularized by well-known brands like Dave’s Killer Bread and encouraged by high-profile groups like the Second Chance Business Coalition, the shift is also a boon to enterprises struggling to hire the right people.
But ex-felons aren’t the only people who benefit from these kinds of fair chance opportunities: Many individuals with disabilities, people experiencing homelessness, military veterans and spouses of active military members, as well as people from communities that lack resources and opportunities, struggle to find steady employment despite having valuable skills.
A growing class of enterprises offering second chances to several or all the groups above is emerging to meet the moment. These for-profit and nonprofit organizations have enormous potential for impact, producing immediate social value while working to build a regenerative and inclusive economy for the future. But they face a particular set of growth and financing challenges, requiring solutions that draw creatively on their strengths and are tailored to their business model.
RSF has funded several enterprises with fair chance workforces at their core, including DC Central Kitchen, a nonprofit that uses high-quality food discarded by restaurants to feed those in need while teaching culinary skills to people experiencing chronic unemployment; Quality Connections, which helps people with disabilities become independent through employment, job training and practical life learning; and Boldr, which aims to interrupt cycles of human exploitation and economic disparity by boosting access to digital training opportunities in underserved communities.
In working with fair chance enterprises over the past 10 years, we’ve found that flexible funding, mission alignment and network connections are critical to success. Current RSF Social Finance borrowers Belay Enterprises and Drive Change show what’s possible with catalytic capital.
Belay Enterprises: Creative sub debt activates growth despite “bad business model”
Belay Enterprises incubates budding social enterprises until they’re economically viable and then spins them off—a self-proclaimed “bad business model” that makes for a difficult investment pitch. It also trains and employs people struggling to find work after experiencing homelessness, incarceration or addiction, as well as people who are marginalized due to disability and other factors. In addition to Belay’s flagship project, Bud’s Warehouse, a highly successful secondhand home improvement supplies store, the organization supports a diverse group of enterprises including a coffee shop, a secondhand baby goods store and a woodworking business, offering a wide range of opportunities for employees to develop their skills.
Belay generates income through its businesses. But reinvestment in its mission—and that bad business model—created funding challenges. When Bud’s Warehouse outgrew its original rented facility in 2016 and Belay sought to buy a larger facility, it did not meet standard loan-to-value requirements.
RSF was able to loan Belay some of the money it needed. To bring in the rest, the lending team coached Belay on how to approach community organizations, foundations and others to become secondary lenders, meaning if Belay defaulted on its loan, they would not be repaid. That default didn’t happen, and after a recent loan refinancing, Belay was able to pay back many of the community members who contributed. Others donated their entire principal investment to Belay, recognizing its positive impact on the community.
“We’ve been around for 27 years and didn’t know how much our standing would change since buying the building, but it did,” said Belay CEO James Renier. “The loan allowed us to grow our operations and hire many more people who otherwise found it very hard to find jobs.”
Drive Change: Mission alignment, patience and relationship building propel expansion
Drive Change is a New York–based nonprofit that offers formerly incarcerated young adults opportunities in the hospitality sector while working to decrease inequities within the industry. Jordyn Lexton, a former high school teacher at Rikers Island prison, founded the organization in 2014 after spending several heart-wrenching years watching students suffer violent injustices in the carceral system. Lexton knew that on release, the odds were stacked against their former students—finding a job and achieving self-sufficiency would be extremely difficult with a criminal record.
Kim DiPalo, chief operating officer at Drive Change, said the term “second chance” is a misnomer for formerly incarcerated youth. “Most of these kids weren’t given a first chance,” she said. “Most of them were born into poverty. Many of them were homeless. The beautiful thing about Drive Change is that we set them up for success in a way they’ve never experienced before.”
On the surface this may sound like a slam-dunk for attracting funders, but DiPalo noted that Drive Change competes for funding with organizations that train participants to enter higher-profile, higher-paying fields like tech. “Lots of funders that want to help incarcerated youth succeed tend to donate to organizations that teach high-demand skills like coding with the assumption that the trainee will not want for a job and the funder’s money will have made a guaranteed impact. But coding isn’t for everyone. The tech industry can’t employ everyone,” she said.
Drive Change overcame that bias and in summer 2018 landed a $2.6 million grant from the Manhattan district attorney’s Criminal Justice Investment Initiative. It doubled the organization’s budget, but the money’s disbursement over three and a half years created a cash flow challenge. Drive Change needed funding to cover the expenses of ramping up its programming while it waited for more of the grant money to pay out.
Drive Change needed working capital. The Kohlberg Foundation, a big Drive Change supporter, suggested that the organization reach out to RSF. We were able to provide a $350,000 revolving line of credit, even though Drive Change was in a proof-of-concept stage, because Kohlberg offered a $250,000 loan guarantee.
DiPalo said that round of funding and the ongoing relationship illustrate the three most important qualities funders can offer second chance organizations: partnership in the mission, advice on funding options and access to network partners that can help the enterprise grow. Without the line of credit, Drive Change would have folded, Lexton said.
This year, Drive Change is committed to distributing almost 40,000 meals (up from 10,000 in 2021) made up of culturally appropriate, healthy groceries through its weekly Food Empowerment events. These and other events offer employment opportunities to its fellowship graduates, exemplifying the mutual investment in and commitment to Drive Change’s work.
Organizations like Belay Enterprises and Drive Change seek to break harmful cycles, providing professional opportunity and formal training to people who would otherwise be left behind. Their missions are essential to building a fairer economy that works for everyone. Funders that recognize the importance of offering economic opportunity to all communities can further that goal by devoting time to understanding each enterprise’s mission, the field in which it operates and the unique challenges it faces while approaching financial decisions with patience and flexibility.