The Jinotega region of northern Nicaragua is a broad valley surrounded by cloud-capped mountains. The geography and climate make it an ideal setting for growing coffee. But until a few years ago, the region was missing the main ingredient for establishing trade: cash.

“It was as if we didn’t exist,” says Fátima Ismael, general manager of Soppexcca, a coffee cooperative. Too remote and too poor to attract traditional banks, the people of Jinotega were cut off from the capital they needed to buy land and equipment. Those fortunate enough to own their farms still struggled to survive when waiting for payments from faraway buyers.

With no collateral, Soppexcca’s members had no hope of receiving loans except from moneylenders who charged exorbitant rates. Since becoming a client of the nonprofit lender Root Capital, however, the cooperative has expanded from a few dozen struggling farmers to more than 650 coffee growers who make a decent wage while practicing environmentally sustainable farming. They also use business strategies that improve their community’s financial future.

Across much of the developing world, rural artisans and farmers are trapped in poverty because their financial needs are too big for microlenders but too small for commercial banks. To fill this credit gap, William “Willy” Foote launched Root Capital (originally called EcoLogic Finance) in 2000. The Cambridge, Mass.-based nonprofit has since lent $100 million to 200 grassroots businesses in 30 countries, getting cash to some 340,000 people. Repayment rates are 99 percent.

As a result, Root Capital has become a well-recognized leader in the social capital field, attracting investors ranging from Starbucks Corp. to the Rockefeller Foundation. Meanwhile, Foote, a charismatic, guitar- strumming CEO, has received honors from Ashoka, the Skoll Foundation, Fast Company, and the Social Venture Network, among others.

But the big prize remains elusive: convincing finance institutions to follow Root Capital’s lead and begin lending to rural communities. “That’s how we’re going to put ourselves out of business,” says Foote. And that can’t happen fast enough.

Growing the idea

Many social entrepreneurs can trace their breakthrough idea to a singular life-altering event. For Foote, it was more like two years of what he calls “slow-drip” thinking. After starting his career on Wall Street, he moved to Latin America to do corporate deals for Lehman Brothers. But when Mexico devalued the peso and the emerging markets boom went bust, Foote shifted to journalism. Traveling back roads to rural villages, he gained a firsthand look at “what happens when markets are pretty much broken,” he says. “Capital’s not going to fl ow to the communities that need it most.”

Instead of following through with his plan to enroll in Harvard Business School, Foote changed directions—literally—during the long drive from Mexico to Massachusetts. He recruited a staff that shared his ability to build relationships “in boardrooms and on back roads and in beat-up buses,” he says. If it took singing folk songs to break the ice, Foote was quick to pick up his guitar.

Root Capital’s founding coincided with the explosion of demand for fair trade coffee. Big specialty coffee buyers like Starbucks and Green Mountain Coffee Roasters Inc. wanted to build their brands around fair trade values, but they did not have a steady supply of fairly traded coffee. “What these buyers weren’t willing to do,” Foote says, “was become a banker” to the coffee cooperatives that could meet demand if only they had enough working capital.

That’s where Root Capital came in. The nonprofit’s innovation is that it accepts future sales contracts as loan collateral. Farming cooperatives can then use the short-term loans—which averaged $260,000 in 2008—to pay growers immediately upon delivery of the coffee harvest. Root Capital also makes larger, longer-term loans (of up to $750,000) for equipment upgrades and other capital investments that cooperatives need to expand.

The steadier cash flow that short-term loans provide helps small farmers raise themselves out of poverty, says Sue Mecklenburg, senior advisor for ethical sourcing at Starbucks. Mecklenburg says better cash management gets farmers out of crisis mode and on the path to being “more effective small businessmen” who understand budgeting, make accurate sales projections, and invest in techniques that improve yield. “The role of credit is at least as if not more important [than the price of coffee] in enabling farmers to double their income,” she says.

When buyers in North America and Europe receive their coffee, they repay the loan plus interest directly to Root Capital in U.S. dollars. The interest allows Root Capital to cover its operating costs, give borrowers technical support, and grow the dollars available to lend. This formula fulfills not only growers’ need for capital, but also buyers’ desire for more stable supply chains. “This transaction helps ensure that farmers do deliver to the cooperatives so that the cooperatives can deliver to the buyer,” Mecklenburg says.

The formula works so well that Starbucks now invests directly in Root Capital, increasing the number and amount of loans that the organization can then make to rural poor people. Starbucks initially lent Root Capital $2.5 million in 2004, but has since increased its investment to $7 million, making Starbucks the nonprofit’s largest investor. Starbucks is willing to make the loans “because of what we consider to be a blended investment—financial return to us and the social good that this money does,” says Mecklenburg. In addition to loans from corporations, foundations, and wealthy individuals, Root Capital also receives philanthropic grants and donations and earns interest income.

Diversifying goods

Fair trade coffee was Root Capital’s “innovation space,” Foote says, “where we found a classic gap and filled it.” Although the organization’s biggest business continues to be coffee, Root is now applying what it has learned to other commodities: cashews in Africa, cocoa in Central America, and organic cotton in India. It is also investing in other industries, such as textiles in Latin America. One client, California-based Indigenous Designs, is an intermediary between the natural- fiber clothing artisans in places like rural Peru and fashion houses like Eileen Fisher Inc. Workers produce finished goods to exacting design standards, fulfilling orders that may run to thousands of pieces.

Making this multistep process work takes cash, “and that’s where Root Capital comes in,” says Scott Leonard, founder of Indigenous Designs. With secure credit, cooperatives can maintain central hubs that distribute materials and orders to workers. Workers then get paid on completion of their orders. They also have access to technical training. “Imagine the confidence we have when we talk with department stores that need us to produce tens of thousands of pieces,” Leonard says. “We have the infrastructure to finance these cottage industries and make sure artisans receive a better-than-average wage. It’s become scalable.”

Investing in impact

Across various products and regions, the needs of rural artisans and farmers are strikingly similar. Most have never had bank accounts and therefore “don’t know how to run a cash flow or do basic cost accounting,” says Foote. “We didn’t anticipate that early on,” he acknowledges. Root Capital now delivers financial literacy training along with access to credit. That’s essential, Foote says, if the rural poor are ever to become customers of traditional banking services.

This holistic approach to finance appeals to socially minded investors. “Simply solving one piece of it isn’t good enough,” says Antony Bugg-Levine, managing director at the Rockefeller Foundation. “You have to provide not only the financing mechanism but also the other aspects of market linkages, including financial education.”

As part of its new impact investing initiative, the Rockefeller Foundation recently approved a $2 million loan to Root Capital. The loan is an important vote of confidence in the organization, which is launching an ambitious capital campaign. By 2012, Root Capital aims to grow its lending capacity from $25 million to $60 million, which will allow it to lend $105 million per year (over two lending cycles) to more than 350 rural businesses, ultimately representing about 1 million small-scale farmers and artisans.

Creating a new class of capital to fill the “missing middle” between microfinance and commercial lending will require being “pathologically collaborative” with other nonprofits, Foote says. In that spirit, Root Capital is a founding member of the Aspen Network for Development Entrepreneurs (ANDE), an alliance that aims to grow this market into a recognized asset class that supports small and growing businesses in the developing world.

In the current economic climate, dollars from socially minded investors are stretched thin. Foote predicts that investors will be attracted to the small and growing business sector by the very characteristics that have made Root Capital successful: transparency, strong relationships, and measurable results that are good for people and planet. And if logic alone doesn’t close the deal with investors, Foote is always ready to sing them a song.

Suzie Boss is a journalist from Portland, Ore., who writes about social change and education. She is coauthor of Reinventing Project-Based Learning: Your Field Guide to Real-World Projects in the Digital Age.

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