CDFIs Go Big for Small Businesses
During Small Business Week 2023, OFN celebrates the mom-and-pop shops, contractor teams, clothing stores, nail salons, bodegas, restaurants, and so many other small businesses that power the American economy.
Most American businesses are small — 99.9%, in fact. Defined as independent businesses with fewer than 500 employees, these firms pack a mighty punch, employing more than 61 million people and creating the majority of jobs since 1995.
The small business sector is not only critical to the economy, it’s also growing, helped in part by CDFIs. Across rural, urban, and Native areas, CDFIs invest in passionate people with great ideas who want to contribute to their communities and build their local economies.
In short, CDFIs love small businesses and want to help more of them succeed, even when other lenders retreat.
Leveling the financing field
Every small business at some point needs capital, which usually comes in the form of financing. But many budding entrepreneurs don’t have the experience, cash flow, credit, or equity to qualify for a traditional bank loan.
Where banks see risk, CDFIs see opportunity. CDFIs bridge small business financing gaps. Nationwide, these community-based lenders provide equitable, responsible capital and other services to the nation’s smallest and most under-resourced businesses. And they do so successfully: With a cumulative net charge-off rate of less than 1%, CDFIs lend productively in low-income, low-wealth markets.
In 2021, certified CDFIs had more than $25 billion in small business and microloans in their portfolios, many for minority- and women-owned businesses. And unlike mainstream institutions, CDFIs are there for the journey, providing technical assistance and coaching to help businesses launch, grow, and thrive.
More than lenders, many CDFIs also advocate for federal policies and practices that promote more in small business lending and protect borrowers from predatory alternatives.
Leaning in when others step back
The recent surge in entrepreneurship has led to an increased demand for small business capital. At the same time, troubling economic signals, from inflation to rising interest rates to bank failures, are constricting financing.
On top of a credit crunch, entrepreneurs of color face the additional challenge of longstanding inequitable access to financing. In 2022 alone, Black-owned small businesses were more likely to apply for bank financing and two times as likely to be denied loans as white businesses.
Rather than stepping back from these challenges, CDFIs lean in. The specialized lenders are allies in a rocky and unequitable economic environment and financial first responders for businesses vulnerable to collapse during crisis.
CDFIs provide capital and vital support services in the aftermath of increasingly common natural disasters and economic crises, such as the 2008 recession and COVID-19 pandemic. They’re quick to act because the industry has deep experience leaning in and doing so without sacrificing financial performance.
Invest in CDFIs to invest in small businesses
During the pandemic, more public and private sector investors recognized the unique expertise of CDFIs to lend to hard-to-reach markets in hard times. Corporations, foundations, and the federal government turned heavily to the industry to help keep small businesses afloat.
CDFIs were included as Paycheck Protection Program (PPP) lenders when the government realized larger banks weren’t reaching minority- and women-owned businesses with PPP loans. Mission-driven lenders rose to the occasion, outperforming larger lenders. And the 2020 Federal CARES Act included $12 billion in funding for CDFIs and minority depository institutions to deploy in low-income, low-wealth communities, including small businesses.
During this time, Google partnered with OFN on the Grow with Google Small Business Fund and Google.org grant program, investing loan and grant capital in CDFIs to help small businesses survive the pandemic. And numerous leading banks and philanthropies are putting long term money in OFN’s Finance Justice Fund, which aims to close small business and other financing gaps through CDFIs.
Building an inclusive economy, one small business loan at a time
Behind every small business, whether it’s a one-person outfit or 500 employees big, is a person with an idea. CDFIs invest in these people, not a credit box. As a result, thousands of small business owners that might not otherwise have had a chance are now living their dreams and strengthening the backbone of the American economy.
Throughout #SmallBusinessWeek, OFN will spotlight many CDFI-funded small businesses on social media. We’ll also shine a light on CDFIs, which are often also small businesses. Join us and share our posts to help amplify the #CDFIstory of #SmallBiz lending.
Next month, OFN’s small business work continues at our 10th Small Business Finance Forum. On June 20 and 21 in Chicago, hundreds of CDFIs, funders, investors, and partners will explore how CDFIs can continue delivering capital and vital services in an uncertain economy, when small businesses will need their steady champions.
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