Investing in small businesses has typically been a project for banks and other financial institutions. But a grass-roots group in Boston called the Ujima Project is reshaping that model by letting residents – not wealthy financiers – decide for themselves how to invest communal resources in local companies. Their approach is named after the Kwanzaa principle of “community work and responsibility.” It’s a response to rising urban inequality and it’s reshaping how communities here think about neighborhood economics. “Small business owners are very aware that there's all this capital floating around and there is no way for them to connect to it,” says Ramón Borges-Méndez, associate professor of community development and planning at Clark University in Worcester, Mass. “I think the reaction has been, ‘Let's see what we can do ourselves. Let's see what we can do in these communities in order to start mitigating that inequality.’ ” With interest in Ujima and other similar efforts growing, this equity-driven idea could take root in cities across the country.

The kale is from down the street. The honey came from 10 minutes away by bike. The hot sauce? It was made across the hall. For Fresh Foods Generation, local resources matter.

Founders Cassandria Campbell and Jackson Renshaw launched the company in 2015 with a mission to bring healthy food to city residents who usually couldn’t afford it. They’ve seen their business grow from a single food truck to a cafe and catering service, and their staff balloon from two to 14 during peak season.

The duo want to keep expanding their reach and to do so, they plan on seeking the help of a brand-new community initiative with some lofty goals. Named after the Kwanzaa principle of “community work and responsibility,” the Ujima Project is a group that yesterday launched what it calls the “nation’s first democratic investment fund.” The Ujima Fund will allow residents from low-income neighborhoods to decide for themselves how to allocate communal funding to local businesses.

The initiative here reflects a broader trend – growing interest nationwide in how to boost communities where residents face significant economic headwinds. Across America, a persistent challenge is not just widening rich-poor gaps but also opportunity disparities linked to geography, down to the ZIP Code level.

And although the idea of community-based investing is an old one, Ujima seeks to take it in a grass-roots direction that could serve as a model. For low-income and minority entrepreneurs, the project is building a bridge to investment funds that used to be out of reach.

“Small business owners are very aware that there's all this capital floating around and there is no way for them to connect to it,” says Ramón Borges-Méndez, associate professor of community development and planning at Clark University in Worcester, Mass. “I think the reaction has been, ‘Let’s see what we can do ourselves. Let’s see what we can do in these communities in order to start mitigating that inequality.’ ”

Redlining’s legacy

In Boston, economic power has long been tied to race. A 2015 report from the Federal Reserve Bank of Boston found that white households in the city have a median wealth of $247,500. That figure for black households was just $8. Racial disparities here also exist in home ownership, retirement funds, and debt.

To understand where this inequality comes from, it’s important to consider the history of banks in communities of color, Dr. Borges-Méndez says. Redlining in the 20th century placed lower value on real estate and businesses owned by people of color – especially if they were black. And with the Great Recession a decade ago, banks pulled back on loans to small businesses assuming, sometimes incorrectly, that those projects were riskier. The legacy of that disinvestment, says Borges-Méndez, is not only a lack of wealth – it’s a fundamental business disadvantage.

“If you don't fit what the bank considers as their standards for a good application, the cycle just keeps going on until you find someone who’s willing to quote unquote take a risk or make an investment,” says Ms. Campbell at the catering business. “Some of those things are like ‘Do you have collateral?’ So that’s often like ‘Do you own your own house?’ ‘What does your credit score look like?’ ”

She adds, “I think that Ujima recognizes that [with] businesses starting off particularly in the neighborhoods that are hardest hit with income disparities, those things might not be the strongest indicators of how successful a business will be.”

How democratic investing works

The Ujima Fund will pool investments from nonprofits, individuals, businesses, and civic organizations both locally and nationally. Neighborhood assemblies, composed of community members who pay a small yearly fee, vote on how to allocate those funds to local business owners.

As long as businesses meet a list of community standards (things like committing to a green energy plan and employing a minimum percentage of women and people of color) they can qualify for a loan. Some members also work with local finance experts to assess the business plans and make recommendations before the vote.

Ujima offers several levels of investment, each named after another Kwanzaa principle. The Kujchagulia Note for non-accredited investors starts with a minimum of just $50. The Nia Note for accredited investors asks for a $5,000 minimum. Depending on the contribution, investors can lend for three- or seven-year increments.

The people who distribute the fund’s resources to businesses are also potential customers – a different dynamic than the parallel trend of social-impact investing or the lending that traditional banks do under the Community Reinvestment Act. That relationship ensures that projects receiving funding have community interest. It also incentivizes members to patronize them.

“There is an increasingly growing number of people … that no longer want to plug their money into the Wall Street system,” says Kwaku Osei, chief executive of Cooperative Capital, a community investment firm with a similar mission, based in Detroit. For people investing in their neighborhoods, “there is a sense that because you’re close to it you could in some ways affect the outcome.”

Unlike the Ujima Fund, Mr. Osei’s organization is a for-profit, and once its fund opens, it expects to offer annual returns of at least 6 percent to investors. That’s about double the highest return rate the Ujima Fund expects for some investors. And at Ujima, interest rates paid by borrowers are expected to be 5 to 10 percent, slightly higher than what most banks offer. These facts cause at least some concern from participants here.

“It takes a lot of financial discipline and a lot of hard work to step outside of industry standards and create the world you want to live in. So I wouldn’t say that I'm not worried about it,” says Campbell.

But, she continues, “I think that they have definitely shown discipline and commitment and consistency, and they have definitely built a base of people who are committed to seeing that happen.”

For Borges-Méndez, the rise of impact investing from banks signals that the interest among financiers exists, and community initiatives like Ujima could find solid support.

The wisdom of crowds

So far, this new investment model has at least found solid interest, and Ujima aims to raise $5 million that can be put to use in loans. Director Nia Evans was recently in Chattanooga, Tenn., to meet with stakeholders about starting a similar fund there. And Osei, in Detroit, says he’s spoken with community leaders from Los Angeles to Baltimore about replicating his approach.

But scaling this up won’t necessarily be so simple. The Ujima Fund’s structure was designed for a Boston-specific context that links local nonprofits, companies, and governments here. Ms. Evans refers to the fund as an “ecosystem.”

“While we think it’s scalable, we also understand that there isn't going to be some some rigid cut-and-paste template, it is going to be very dependent on what the local context is,” she says.

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Despite the challenges, Campbell, who received a community-allocated grant at an Ujima event earlier this year, is optimistic. To earn the funding, she and Mr. Renshaw had to convince about 150 residents that their business could make it and in the process air somewhat intimate financial details with the group. That kind of grit and transparency fuel her hopes for Ujima, too.

“People were really worried about how we were going to get local food at an affordable price point into some neighborhoods … and still be a for-profit business,” she says. “But at that time we were very steadfast. Everybody eats.”