As we’ve discussed many times, minority-owned small businesses are challenged in accessing capital. A recent report by Wells Fargo and Gallup shed more light on this problem: African American business owners were more likely to be declined credit and, as a result, be more discouraged from seeking credit again. The role that CDFIs play is to address this gap. We provide financing to businesses that are unable to obtain loans through banks or other traditional means. To do this, CDFIs themselves need lending capital, but experience has shown that minority owned or controlled CDFIs face some of the same challenges as the markets we try to serve.
CDFIs require a diversity of funding sources to sustain our operations and our lending activity. These sources include foundations, banks, federal and state government agencies, individual and corporate donors, and others. Of course, as lending institutions, CDFIs also generate revenue through the loans that they make.
One critical source of funding is obtaining low-cost loans from banks and other institutions, which CDFIs then re-lend to their borrowers. These loans are important not only for the dollars that they provide– they also signify that our partners are invested in our mission and believe in the impact that we are having.
Unfortunately, minority owned/controlled CDFIs face similar challenges in accessing capital as the communities we aim to serve. Minority owned/controlled and smaller CDFIs are often closer to communities on the ground, but do not necessarily fit into the lending criteria of funding institutions. Though they are uniquely positioned to address the capital needs of communities of color, without adequate and affordable lending dollars, their impact will be limited.
Looking at the CDFI Fund’s Community Investment Impact System data, we can see that most minority CDFIs are smaller, in terms of assets and number, compared to non-minority CDFIs and CDFIs overall. In the chart below, based on data from 2012 representing 296 CDFI loan funds, we can see that the average asset size of minority CDFIs is significantly less than non-minority CDFIs and of the CDFIs overall. Minority CDFIs represent 32 percent of reporting CDFI loan funds, but only 15 percent of total assets.
Government programs provide a critical funding and tools that allow CDFIs to expand their reach, either through grants or through loan guarantees. But participation in these programs is low among minority CDFIs. When we look specifically at CDFIs that are members of the Opportunity Finance Network (OFN), the network organization for CDFIs across the country, less than half of African American and Hispanic owned/controlled CDFIs have received funding through the US Treasury’s CDFI Fund in 2014. Also, less than half participate in Small Business Administration programs, such as the Community Advantage 7(a) guaranteed loan program and the Microloan Program (see the chart below).
The impact of these funding challenges is significant. As mentioned above, CDFIs need adequate and diverse funding to achieve scale and self-sufficiency. More importantly, because CDFIs address a market failure, without the right funding and tools, they can only achieve limited impact in communities in terms of investment, community stabilization, and wealth creation.
Banks, agencies, and other institutions recognize the value of CDFIs– they understand that as mission-driven lenders, we meet the needs of individuals that are outside the financial mainstream. But it seems too often that they do not apply the same individualized and outside-the-box approach to evaluating CDFIS in their investment decisions that we apply when underwriting loans to our borrowers. This is a challenge that certainly can be overcome by working together, in order to truly fulfill the mission of reaching underserved communities and the vision of creating economic opportunity for all people.