Saturday, August 7, 2010

Hello World! -- the concept

Natural Finance solves the contradiction of the following 2 axioms:
  • It is stupid for any investor, not closely affiliated with management and/or with quality access to inside information, to invest in the common shares of an enterprise.   Because a distant shareholder can only guess at company valuation, and has no power to stop management from overpaying itself or bankrupting the company before paying him.
  • It is stupid for founders/management of an enterprise to finance exclusively with debt, because they risk losing the enterprise too easily due to solvency covenants. 
The main conceptual natural finance instrument is soft loans with no fixed term, or fixed payment. They are repaid based on ability/profit, and repaid in the queued order they are made.  Typically all revenue above 1 month's worth of operational expenses is paid back to soft loan investors.

New project and operations are financed through new soft loan issues, at buyer's bid rates.  The average resulting interest rate is the natural rate for the enterprise.  Existing loans, in addition to being paid through operational surpluses, can be repaid (in queue order) by anyone willing to invest at slightly below the natural rate (through a market replacing mechanism that is essentially perpetual offer to sell at ever decreasing interest rates), or can be transferred (sold) in a private transaction to any other entity.

Unsecured soft loans have the highest organic payment priority.  Traditional bond/debt investors benefit from investing in queued soft loans by not risking dilution from future debt.

Secured queued soft loans have next payment priority.  They aren't quite as soft, as they do have fixed payments for interest and depreciation designed to keep the loan principal value equal to the secured value of an asset, but are soft in that pay downs below the secured value are paid from contributions (profits) related to the asset, in addition to general contributions once unsecured soft loans have been fully repaid.

The last queued soft loan tranche is deferred management and labour compensation.

Because natural financed corporations require no equity investment, the ultimate purpose holders of the corporation are completely flexible.  From greed-purposed (such as traditional public corporations, but 100% of stock ownership defaulting to founders/management.) to any percentage of social purpose (labour, customers, community, charity, innovation/R&D, society(tax), and humanity).  When a founder chooses to have a fully social purposed corporation, he may typically assign himself a success prize for successfully delivering the enterprise to its purpose-holders: by paying off all of the soft loans it incurred to be in a position to reward those purpose-holders.

A key component for fostering trust and integrity of natural financed corporations is 3rd party control of all bank accounts and payments (and a 4th party bank that ensures 3rd party integrity).  This 3rd party comptroller, trained in natural finance standards, can enforce all contractual promises made by the enterprise, and regulate salaries and rights the enterprise entitles itself and its employees.  Management/employees never touch customer or investor money (except for cash sales).   In the case of investor to investor loan buy outs, not even the enterprise bank accounts touch investor money.

Liquidity for an enterprise is generally guaranteed by backstop bidder(s) who guarantee bidding on future operational needs for x years, up to $y in placed investments, and at a predetermined rate.  Some consideration for doing so is generally expected, but high returns from backstop bids are partially self-justifying.

Natural financed corporations allow a confident entrepreneur to finance projects of all risk profiles (including those with too little risk and return for traditional equity investment) as long as he is willing to draw low salaries until the success path for the project has evolved.  As the company's success becomes established it is natural/normal for new investors to come in, bidding down the company's financing costs, and enhancing its success chances even more.

the manifesto is the more detailed and comprehensive description

first of 3 part series introducing soft loans


  1. I read your post several times but still fail to grasp the concept you're promoting. Maybe I'm just dense, or perhaps I need the idea expressed in different language? I will endeavor to read the "manifesto" document when I have more time; perhaps that will answer my questions.

    Do you represent the capital side or the venture side, or are you simply putting forth an idea you have, hoping to attract the interest of a firm willing to give it a try? Is this only for the UK market?

  2. Its more of an entire new industry. Worldwide. Governments just getting out of the way is all that's needed, but they will want involvement.

    This site is the start of a world membership organization (education, standards, help with common software) and may form the first member too. The core members are the legal/accounting/relationship banking trained comptrollers. Though banks and financing company affiliates will help.