Explaining mutual credit to small business owners

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Posted Nov 14 2021 by Dave Darby of Lowimpact.org

At Lowimpact.org, we’ve been banging on about something called ‘mutual credit’ for about 3 or 4 years now – constantly trying to think of ways to explain it that can be grasped really quickly. We think it really is a world-changing idea – in that it can help keep wealth in communities, keep small businesses alive, and reduce the need for banks or interest. Bad for giant corporations and good for small businesses, in other words.

Now I’m using ‘mutual credit’ as an umbrella term to describe a range of different tools – some of which will apply more to small businesses, some to local authorities, some to social enterprises or community groups, some to accountants and some to individuals.

In this article, I want to explain the concept as simply as possible for small business owners. If you’re a small business owner or a sole trader, I’d really like your feedback – does it make sense? Can you see any problems with it? How could it be improved? Any questions / anything you didn’t understand? If it makes sense to you, you can contact us and we may be able to work with you – to help you set up a local scheme. We’re calling this idea ‘Trade Credit Clubs’; we think it’s much easier for people to grasp, and will bring immediate benefits. 

The concept

I’m guessing that your business has regular suppliers and regular customers, and that they’re embedded in a network of trading businesses – probably locally. Those networks might be informal, or they might be more formalised via the local Chamber of Commerce, Rotary Club, local authority or some other local business network – and even accountants have networks of client businesses, some of which trade with each other.

So imagine a scenario in which business A owes £1000 to business B; business B owes £1000 to business C; and business C owes £1000 to business A. Can you see that if they realised that there was a circle of debt, they would also realise that they could cancel those debts immediately, and no-one would owe anyone else anything?

The problem is that businesses can’t see those debt circles, which means that often they’ll be struggling to repay debts that they don’t actually need to repay. They might fall into the clutches of loan sharks, or even go out of business unnecessarily.

We’ve been working with a group of tech, finance and organisational specialists called Mutual Credit Services. I’ll be blogging more about our history and the projects we’re involved with soon, and here’s a brand-new website. We can provide you with a Trade Credit Club package that allows member businesses to save on hard cash by ‘clearing’ debts with each other.

This is how it works

Groups of small businesses come together either independently, or under the umbrella of their local authority / Chamber of Commerce / Rotary Club / accountant / business network etc. One member (which could be the local authority / accountant etc.) agrees to be the ‘service provider’ or ‘service member’ – or MCS could do it for you.

When there’s a trade between two members of a ‘club’, details of the invoice are sent to the service provider (just the headlines – amount, date, and the two parties involved). MCS provide the software to the service provider to clear all those invoices. Here’s the fun part: the moment that you submit the invoice to the service provider, you can consider it paid!

How is this possible? Well, the service provider will credit or debit each business’ club account according to the invoice details, and after a specific time-period (that you decide for yourselves in your club) – it could be a week, a month, or any time that works for you – there’s a ‘settlement’, when every club member either pays or receives just one payment to the network, to get their account back to zero. So instead of having to make and receive a number of payments to other club members over the course of the month (say), which could mean bank charges, payment service fees, overdraft fees, chasing invoices and cashflow problems or worse – there’s just one transaction at the end of the month (or whatever time period you agree on).  

Now here’s another fun bit – your club could agree not to bother bringing balances back to zero. They could agree balance limits for all members – so for example, each business could be allowed to remain anywhere between £500 in credit and £500 in debit (say – again, this is something that’s decided in the club) at the settlement period. This would turn your Trade Credit Club into a genuine Mutual Credit Club. 

It drastically reduces the need for cash

If this sounds to you as if small businesses would need much less hard cash to get by, you’d be right. We came across some research from Slovenia, where we were amazed to discover that the government has been collecting invoices and clearing debts for small businesses all over the country for over 30 years. The research showed that a Trade Credit Club (without mutual credit), as described above, can reduce small businesses’ need for hard currency by up to 25% in ideal circumstances (i.e. with enough members), and that introducing credit limits and turning the club into a Mutual Credit Club can reduce small businesses’ need for hard currency by up to a whopping 50% (again, with enough members)! In a time of hardship and closures for small businesses, this could be just the lifeline they need.

Service providers can charge a small transaction fee to make it worth their while – but they might have other reasons for doing it too – for example, they want to keep small businesses in their network alive; if they’re an accountant, they want to keep their clients; if a local authority, they want to benefit their constituents; a community group – they want what’s best for their community. In which case, they might offer their services for free. But that’s something that each group can decide for themselves. But whatever’s decided, overall fees will be reduced, you won’t need anywhere near as much cash, and there will be much less work to do. Plus, as new members join the club, you’ll have the opportunity to gain new customers and suppliers. 

It’s already happening

These kinds of projects are springing up all over the world, in places like Sardinia, Kenya, Colombia, Australia and Wales, and (another fun bit), they can all be networked together so that the businesses in them can trade with each other seamlessly. We’re talking with them, and they’re keen. We’re also talking with people wanting to set up schemes all over the UK, in the Czech Republic, in Costa Rica and in India. I’ll be blogging more about federation soon too.

So watch this space. I’m going to be interviewing more people doing similar things in lots of different communities, and as mentioned, I’m going to be blogging about the history of the Mutual Credit Services group, and the projects we’re involved with. Who knows – you might join them. If you think this could work for you, and you’d like to know more, let us know via the contact page, and we’ll put you in touch with the good folk at MCS. (NB please also contact us if you think you’d like to help / volunteer). 

More on Trade Credit Clubs

More on the mutual credit concept

More on global federation (more complicated – but I’ll be blogging simpler explanations soon)


What do you think? Does this make sense? We’re sometimes told that the mutual credit concept is difficult to understand. Does this make it easier? 

We’d like to ask for help in getting this information out there – could you help us get this out to as many people as possible, via social media, blogs, word of mouth etc? 

Let us know below if there’s anything you don’t understand, or any other queries. Thanks.