The light at the end of the pandemic tunnel is brightening, but a full small business recovery is going to take time, money and a concerted effort. And if this is a fair recovery that helps underfunded small businesses (those owned by women, entrepreneurs of color, and those in rural communities), we must continue to activate and empower financial institutions in Canada. community development (CDFI) – nonprofit lenders. who did Yeoman’s job during the depths of COVID-19 to distribute federal aid to our nation’s hardest-to-reach small businesses.
The paycheck protection program ended on May 31, leaving a tremendous opportunity for the private sector to step up to fill many gaps that PPP did not address. Businesses can and should work with these nonprofit lenders who have provided so much help to small businesses during the pandemic.
Community development financial institutions have been a crucial lifeline for small businesses across the country during the pandemic and for decades before. These lenders, which number more than 1,100 nationwide, provide affordable loans and technical assistance to businesses, with a mandate to lend at least 60% of their lending volume to underserved borrowers. After the start of the pandemic, a subset of around 300 CDFIs granted $ 7.4 billion in PPP loans in the first three months. And when the PPP portal reopened in early 2021, CDFIs were granted a period of exclusive access, recognizing that they are best placed to reach those hardest hit by the health and economic effects of the disease. pandemic. To date, these institutions have deployed nearly $ 15 billion in PPP loans.
It was not just the federal government that recognized the value of CDFIs during the pandemic. Companies have started investing in CDFIs at much higher rates than ever before. As Laurie Spengler, CEO of Courageous Capital Advisors, and George Surgeon, CEO of GSJ Advisors, point out, companies have been âdrawn to their mission, their relevance in the context of Covid-19 and their demonstrated ability to have an impact in communities where there are few options for responsible financial institutions, especially for low-income people, while improving their own environmental, social and governance profiles. “
Businesses can – and should – play an ongoing role in helping small businesses rebuild themselves by supporting CDFIs, even after the worst of the pandemic is definitely behind us. Ongoing business investment and partnerships with CDFIs, in the form of loans and outright philanthropy, will help create a more equitable small business sector and a much stronger economy overall.
It is in the interests of business to do so. Businesses benefit from a healthy and diverse small business community. Before the pandemic, small businesses employed nearly half of America’s workforce and generated two-thirds of new jobs. And history shows that it is small businesses that contribute to economic recovery after major crises. They create the prosperous neighborhoods where the employees of the companies live; they stimulate economic growth which stimulates consumer spending; and many provide goods and services directly to large companies.
And it is the CDFIs that have the potential to provide the capital necessary to maintain the strength of our diverse small business communities. Collectively, they raise $ 16 billion in capital for small businesses each year, with 68% going to businesses owned by people of color and women, as well as those in low-income communities.
Yet CDFI’s assets under management represent less than 1% of total assets under management by banks and credit unions not regulated by CDFI. The CDFI industry has long discussed how to evolve, but we hadn’t seen a wide emergence of solutions or recognition of their contributions until the pandemic devastated small businesses. Over the past year, we’ve seen the rise of innovative new lending models that can make CDFIs more attractive to businesses looking to work with them.
Indeed, some of the most successful small business relief efforts during the crisis were achieved through new public-private partnerships using CDFIs to distribute loans. For example, in the California Rebuilding Fund, Wells Fargo, Bank of America and First Republic Bank joined with philanthropic, state and local partners to provide $ 50 million to enable 10 California CDFIs to disburse loans to small businesses and to offer technical assistance. Eighty-six percent of the initial loans went to businesses with 10 or fewer employees, and 79% to businesses that historically lacked access to affordable credit, including businesses in low-income communities and those owned by women and people of color. A similar regional effort, the Southern Opportunity and Resilience Fund, is raising up to $ 100 million in capital for small businesses in 15 states, with support from Capital One, Microsoft, JPMorgan Chase, and more.
As we emerge from a long economic downturn, these partnerships provide us with a model for improving the small business finance landscape in this country. To drive a more efficient and fairer economic recovery, we need American businesses to give small business a boost – and CDFIs are the perfect vehicle to do so. With a new commitment from the private sector to partner with CDFIs to provide them with capital, these lenders can put money in the hands of small business owners, which will revitalize our struggling economy and help us rebuild stronger. than before.
In short, we need a new era of corporate responsibility, where private companies take on the role of CDFIs that bring market-based solutions to small businesses that contribute to our country’s prosperity and make money. entrepreneurship a viable route to wealth creation in America.
Chris Pilkerton is the General Counsel of Accion Opportunity Fund and the former Acting Director and Legal Counsel of the US Small Business Administration.