Biz: Creative Interest & The LoanSpark Collective: Amanda Palmer’s Other Venture

Written by Jem Bahaijoub Posted in: Biz on June 05, 2012

Everyone’s talking about the success of Amanda Palmer’s Kickstarter campaign, the most successful music kickstarter project to date. Without a doubt Amanda Palmer is a tour du force in the music industry, constantly breaking away from industry norms while creating new and impressive ways to thrive artistically. However, what I’m finding more interesting than Palmer’s Kickstarter campaign is the launch of her LoanSpark Collective and the term she’s coined “Creative Interest.”

Alternative funding models are not new to the music industry. Donation based models have been around for some years. What makes The LoanSpark Collective so very different from a Kickstarter campaign is that instead of asking lots of people for a little money, it asks a handful of people for a lot of money. In Palmer’s words “Loanspark loans offer a new vehicle for serious artists to fund the next level of their career, giving a clear, non-monetary benefit to the loan provider.”
Capital interest v Creative Interest - Finance 101*
So how does “creative interest” work and how is it different from traditional funding? Jason Sturgess, Professor of Finance at Georgetown University explains: “Traditional funding involves a lender (a bank) lending to a borrower (an individual or company). The borrower asks for $25,000, for example, and the lender assesses the risk that the money will not be paid back. The higher the risk of the loan not being paid back, the higher the interest charged and the more costly it is for the borrower. For an independent artist who often has inconsistent income and no assets to offer the lender as security (such as a house), the risk to the lender is higher and the interest rate will be high. The bank may not be willing to lend at all. The artist may resort to funding a new record with credit cards where the interest rate is as high as 20%. Why does this matter? Let's say the artist borrows at 20% per year for two years, then the artist ends up repaying $33,600 on a loan of $25,000. And this is repaid after other costs and probably taxes.” Ouch!
The Advantage of Creative Interest
So how does the Loanspark Collective model work in comparison? Amanda Palmer borrows $25,000 of hard cash from a fan and repays them the total amount back within 18 months plus interest in the form of a performance. Palmer says that for a $25,000 loan, she "will perform a concert for you: in your home, at a party you're hosting, or an event you create for the occasion. OR, better yet, you can donate me as a performer to the charity of your choice." Let's say the monetary value of this is $4,000, i.e. Amanda Palmer would charge $4,000 to show up and play for an hour in your home. So what’s the advantage? Sturgess says, “To the fan the interest received is around 10%, which is better than the bank pays on a savings account, and the fan gets to feel part of the artistic process.” Is the cost to Amanda Palmer $4,000? Probably not; she probably perceives the cost of the gig as far less. Hence the implied interest she pays is less than 10%, and definitely far less than 20%. So it's a win-win situation.”
How Do You Calculate YOUR Creative Interest?
In its simplest form, creative interest is payment-in-kind. You, the artist, offers to repay the interest with your trade rather than money. This relies heavily on TRUST and the fan placing a high value on your trade. Creative Interest is therefore essentially intangible.  However, what is important is that you have a group of core loyal fans, rather than a large dispersed group of music buyers. Your ability to use creative interest is determined by the relationship you have with your fans, their personal perceptions and public opinion. The following are questions you can ask yourself when trying to evaluate your creative interest:
  1. How much do you need to borrow?
  2. What will you use the funds for?
  3. Will the funds generate new income?
  4. How will you repay the loan? Remember that Amanda Palmer is repaying the loan with dollars and the interest with her music. She expects to generate enough income from the new album to repay the loan. And her fans believe this. If they did not they would probably not lend her the money. If you don’t repay the loan you can guarantee that fans will walk away.
  5. What can you offer? Be realistic. Say you offer a private performance: how much would you charge for this?
  6. What is a reasonable return to your fans? Ten percent may be lower than your fans demand given your artistic assets. Once again, be realistic.
  7. Say your private performance is valued at $1,000 and a reasonable return to your fans is 20%. This means you could borrow $5,000 for one-year and offer the performance as creative interest. Does $5,000 help you? How many times do you need to do this?
  8. Finally, if you do this, be gracious. You are trading on emotions. Your fans believe in you, are investing in you so they deserve to be handled with care!
So can ANY artist do this? In theory yes, but to a much lesser extent. The Loanspark Collective uses artistic assets--Amanda's brand, fan loyalty, and trust--in place of physical assets to arrange funding. Just as posting a house as security alleviates the risk for the bank, Amanda's fans understand her artistic value in a way that a bank is unable or unwilling to, and believe that she will be able to repay them.
However in practice, only certain artists can utilize this funding model--artists with considerable artistic assets to start with. Amanda Palmer has spent years building up a loyal fan base by touring, tweeting, blogging, traveling, networking, innovating and creating. She is not an artist who has started from scratch. In fact she relied on loans from her friends and family to fund her first record with the Dresden Dolls, before she entered into a contract with Roadrunner Records. So in a sense she is returning to her roots, adopting her original financial model but on a larger scale.
Palmer is certainly paving the way for other independent artists in the music industry, demonstrating that you do not need major corporations, like labels and banks, to survive and thrive. However, like any loan-based funding model, it is still a financial contract with risks. If you fail to return the loan, you risk losing fans and jeopardizing your career. A high price to pay. The difference being you retain artistic freedom and control.
To get involved in the LoanSpark Collective as either an artist or lender, visit 
* disclaimer: if you are familiar with traditional loans then please skip this section!
Jem Bahaijoub is the founder of imaginePR, a music marketing company based in Washington DC. Connect with her on Twitter and Facebook.
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