Circular lending, or a lending circle, is a group of people  who agree to contribute a specific amount of money to be lent to one member of the group with the understanding that this loan will be paid back and typically re-lent to another member. 

The particulars of membership, contribution amounts, lending decisions, repayment terms, and more  all differ depending on the circle – and are typically determined by the members in a democratic fashion. This is the beauty of lending circles:  there is social incentive to repay the loan because those who lent the funds are people the borrower knows and trusts – and vice versa. 

Lending circles are typically and traditionally closed, meaning only the members can be borrowers. However, lending circles can also be open, meaning that the borrower can be outside of the circles. Open circles have less accountability as there is not a personal relationship between the borrower and the lenders, but there is still a social incentive to repay the loan. 

These peer-to-peer lending organizations are more than a financial tool. Lending circles are also social networks that advance empowerment and resilience in the face of structural exclusion. Today, lending circles remain powerful strategies for wealth-and community-building where mainstream banking and financial systems exclude and extract from communities of color and immigrant communities.

Circular lending is an underestimated financial and social tool for small businesses. Lending circles can be culturally-centered and adaptive in form: from a hyper-local group of community members meeting in a living room, to neighborhood assemblies facilitating discussion and voting with members, to online platforms where anyone can lend to a borrower that aligns with their values and priorities. 

Lending circles are also powerful wealth-building and community-building strategies in the face of systemic exclusion from the financial system and society at large. An estimated 70 million people in the United States and 1.7 billion people worldwide are unbanked and risk falling into deeper financial hardship from predatory “fringe lenders” (Baradaran in Monye, 2021; World Bank, 2017). In the U.S., structural racism shapes deep disparities in access to quality financial services. Compared to white households, Black and Hispanic households are about 5.6 and 4.6 times more likely to be underbanked, respectively (FDIC, 2017). BIPOC (Black, Indigenous, and People of Color) and immigrant communities build on the legacy of lending circles to provide quality financial services that community members need to invest in their businesses and their lives.

While lending circles are inspired by diverse cultural traditions and take on different organizational forms, they share a common grounding in participatory and place-based lending to advance community development. Members of a community — whether belonging is defined by a common place, identity, culture, religion, or values — pool resources and collectively decide how to extend financial and social support to members. While typically used to help members with personal financial crises, lending circles can support local businesses, small batch manufacturers in particular, grow in a more sustainable way. 

When the investment yields social benefits, monetary and otherwise, the returns are re-circulated through the community. Investing in a bake shop seeking to expand into a commercial kitchen, for example, generates financial returns for local investors alongside a host of other community impacts – from creating quality jobs for residents to strengthening interdependencies between the bake shop, local farms, and suppliers.

How Manufacturing and Lending Circles are Linked 

• Creating quality jobs: Living-income wages, low barriers to entry, and training that nurtures technical skill sets are common parts of many manufacturing careers. That means quality jobs are within reach for residents across the economic and education spectrum in a city.
• Environmental sustainability: Producing goods locally cuts down the carbon footprint of consumption by significantly cutting down externalities from transportation. Local producers can source their raw materials from their community and their region to further cut down on transportation externalities and support other local producers up the supply chain.
• Supply chain resilience: Investing in community capacity to produce goods strengthens local supply chain resiliency. Cities with strong manufacturing bases can draw on their relationships with local production networks during times of emergency. Made in NYC, a Local Brand Initiative with a longstanding relationship with the city council, became the locus of PPE production by streamlining prototypes and public health approval from local agencies (Urban Manufacturing Alliance and Local Progress, 2020).
• Strengthen and grow the local economy: When a lending circle invests in a local maker, the investment strengthens interdependencies between other local businesses and residents. Manufacturing has the highest value-added multiplier because cross-sector links with production-based businesses are so dense (MAPI Foundation, 2016). Investing in a local entrepreneur aspiring to open a brewery, for example, has dispersed effects throughout the local economy by generating economic activity with suppliers, buyers, and consumers up and down the supply chain.
• Creativity and innovation: Learning by doing is a powerful source of creativity and innovation that can transform communities and local economic activity (Meyer, 2021). Research from the National Institute of Standards and Technology (NIST) shows that co-locating production and adjacent industries inspires new ideas through collaboration and learning by doing (President’s Council, 2012).