As the U.S. grapples with the triple crises of the COVID-19 pandemic, economic recession and systemic racism, a pain point has emerged in federal efforts to build an inclusive and equitable recovery – the lack of funding for community development finance institutions, or CDFIs.
CDFIs have a rich history, providing low- to moderate-income households, small businesses and operating nonprofits like health clinics with access to responsible, affordable capital. Amid ongoing crises, CDFIs are proving to be the single best avenue for getting capital into the hands of the hardest hit communities.
However, federal response efforts thus far have largely failed to reach the kinds of small businesses and entrepreneurs that need it most, the same entrepreneurs that are regularly held up as a key to the economic recovery. If we let these Main Street business fail, we put the communities that just barely survived the Great Recession at ever greater risk.
Decades of systemic disinvestment from communities of color have hampered the reach of current federal response efforts. Less than a quarter of Black-owned and less than a third of Latinx-owned businesses have a relationship with a commercial bank, preventing many from accessing PPP loans. CDFIs, by contrast, have strong relationships with small businesses that power Main Street economies. Their firsthand knowledge of local conditions allows them to lend responsibly to entrepreneurs in low-to moderate-income communities—expertise that will become all the more important as the economic crisis unfolds.
CDFIs have demonstrated resiliency in the face of economic downturn before, but they urgently need our long overdue support now. CDFIs traditionally derive their loan capital and grant funding from just a few sources, such as foundations, banks seeking Community Reinvestment Act (CRA) credit, and grants from the Treasury Department’s CDFI Fund. These resources are now being strained, just as we need CDFIs most.
Impact investors – individual, corporate or philanthropic investors who pursue positive social, economic and environmental outcomes alongside financial returns – are stepping up and rushing capital to support CDFIs. In places like Chicago and New York State, they have collaborated with local government to launch resiliency funds for small and micro-businesses, with an explicit intent to reach women- and minority-owned businesses. These resiliency funds provide risk mitigation through guarantee provisions while the lender-borrower relationship is maintained at the community level as a local network of CDFIs originate and service the loans.
In the case of Chicago’s Small Business Resiliency Loan Fund, the program allocated its $100 million in funding after receiving 11,000 applications for more than $300 million in loans in a matter of days. Of the applicants, 48% were non-white owned, 44% were women-owned, and 95% had fewer than 20 employees.
This model has been implemented in rural communities as well. The family office Ceniarth led efforts with other family offices, including Candide Group’s Olamina Fund and Money in Motion, to mobilize over $14 million in zero-interest loans from philanthropies for the Rural Community Assistance Corporation (RCAC), a rural CDFI, to bolster its ability to lend under the Paycheck Protection Program (PPP), as many rural businesses and nonprofits were left out of the first round of PPP funding.
Corporations are also starting to understand the critical role of CDFIs in the recovery. Google recently announced the launch of the $125 million Grow with Google Fund through its corporate treasury to support small business lending via the Opportunity Finance Network (OFN), a national network of CDFIs. Google committed an additional $5 million in grants to OFN with a specific focus on reaching Black communities.
Netflix made a similar move by pledging two percent of its cash holdings – about $100 million – to community institutions to provide direct support to Black communities. The first $25 million will go into the Black Economic Development Initiative, a new fund managed by the Local Initiatives Support Corporation (LISC), that will invest in Black financial institutions serving low- to moderate-income communities and Black community development corporations. Another $10 million will go to Hope Credit Union as a “Transformational Deposit” to finance small businesses, housing and healthcare in communities across the Deep South.
It is encouraging to see corporations using their vast reservoirs of cash to support communities in the recovery. But CDFIs need more loan and grant capital and improved operational capacity which cannot be addressed by the private or philanthropic sectors alone.
Current and new impact investors must continue to act creatively to extend the lending capacity of CDFIs and invest in the broader infrastructure for lasting staying power throughout this crisis. In turn, policymakers should learn from and leverage investor-led responses to fortify CDFIs and, in doing so, ensure an equitable recovery for our communities.
Fran Seegull is the Executive Director of the U.S. Impact Investing Alliance, an organization working to grow demand for impact investing across America, attract more impact capital across asset classes globally, and build the impact investing ecosystem.