Commentary: How Community Lenders Help Small Business
When Hurricane Ike wrecked Arga Bourgeois' health food store in Houston's impoverished Third Ward two years ago, her landlord didn't want to repair the building. Facing a shutdown, Bourgeois went to Accion Texas, a nonprofit that three years earlier had loaned her the money she needed to expand her store after banks had spurned her. This time Accion fronted Bourgeois $30,000, and by the spring of 2009 Sunshine's Health Food Store and Vegetarian Deli was back in business.
Bourgeois is quick to say that money from Accion Texas has been instrumental in her success. Just as important, though, has been Accion's business counseling. Advisers from the group have helped her develop a marketing strategy, better manage inventory, and improve cash flow. "Accion Texas didn't just say, 'Here you are, take it and you're on your own,'" Bourgeois says. "I also received education through them, a lifetime of learning and resources, and that's what I appreciate most."
Her store is one of more than 50,000 small businesses in America's low-income neighborhoods that have benefited from the combination of flexible financing and nitty-gritty technical assistance provided by groups like Accion. The first of these lenders, known as CDFIs—community development financial institutions—were formed in the early 1980s. Since then the industry has grown to more than 700 institutions, including loan funds and equity funds as well as credit unions and banks. All told, they manage $30 billion-plus in assets, in cities and rural areas and on Native American reservations.
CDFIs were initially financed by socially motivated investors, particularly faith-based groups such as nuns investing their retirement funds. Today, most new capital comes from commercial banks. In the past year more than $1 billion in investments from the likes of Goldman Sachs, Citi, JPMorgan Chase, Wells Fargo, and Bank of America has flowed to CDFIs for small business lending. The government is helping, too: The Treasury Dept.'s support for CDFIs increased 70 percent, to $247 million, in the last fiscal year.
These institutions have succeeded with the kind of financial discipline that many lenders forgot during the credit bubble. They have an incentive to make sure their clients succeed because CDFIs, not their investors, take the initial financial hit if borrowers don't repay their loans. In the three decades through 2008, only about 1 percent of their loans weren't paid back, according to the CDFI Data Project, an industry research collaborative that my company participates in. When problem assets and delinquencies spiked in the second half of 2008, CDFIs aggressively charged off possible losses and wrote down asset values at the first signs of trouble.
Perhaps most important, CDFIs recognize the challenges that borrowers have and address them with technical assistance: advice, mentoring, and hands-on help for everything from bookkeeping to business strategy. They stay in close contact with loan recipients, routinely knocking on a borrower's door if payment is even one day late. Lenders that need to maximize profits can't afford to give clients such close attention. CDFIs, which are profitable but not profit-maximizing, can.
When the economy contracts, the market for CDFIs expands, and since the recession they have been transforming lower-income neighborhoods, one transaction at a time. For example, the renewed national focus on healthy foods led by First Lady Michelle Obama draws heavily on the success of a Philadelphia-based CDFI, The Reinvestment Fund, which has financed more than 85 food stores in distressed communities across Pennsylvania. The Obama Administration's Healthy Food Financing Initiative aims to replicate The Reinvestment Fund's model to make healthy foods available in low-income communities nationwide.
The CDFIs' model of responsible lending helped such groups weather the downturn better than many other financial institutions. Today, most CDFIs are recovering rapidly, and they continue to pair their loans with the help that ensures borrowers will be able to pay them back. When you're lending nuns' retirement money, safety and soundness take on a unique imperative.