Eason Counseling Associates nearly tripled its staff in 2019 after founder VaShonda Eason began to pursue the school-based mental health business on a full-time basis.
By March of 2020, the firm had a staff of 25 operating out of offices in Rogers and Fayetteville, said Haven Eason, VaShonda’s husband and COO. Before becoming an entrepreneur, she had worked for another behavioral health agency.
Then the COVID-19 pandemic shut down schools in northwest Arkansas. “I was pretty concerned that we were going to go under,” said Eason, who worked in the consumer-packaged goods industry before joining his wife’s business in 2018.
Then Forge Community Loan Fund, a nonprofit lender based in Huntsville, Ark., arranged one of the SBA’s Paycheck Protection loans. Eason declined to reveal what his company borrowed but said it resumed counseling via telehealth and plans to start in-person sessions when school returns this fall. Eason Counseling now has about 30 employees — and its PPP loan can be converted to a grants as long as small businesses use them for payroll and other specified costs.
Over the last six months, Forge and other nonprofit lenders known as CDFIs emerged as critical links – financial first responders – for tens of thousands of other businesses that were too small for banks.
The First Responders Could Be In Trouble
Now, the lenders could use a lifeline of their own. They are expecting high default rates – possibly as high as 20%. The Trump Administration has also partially rolled back federal regulations under the Community Reinvestment Act. Under recent regulatory changes, large national banks will be able to meet the act’s requirements without necessarily investing in community institutions like CDFIs, said Willa Seldon, a partner at The Bridgespan Group, a social impact advisory firm based in Boston.
Banks motivated by the act provided more than half of the money borrowed in 2018 by CDFIs, which use the money to make loans, according to the Opportunity Finance Network, a CDFI trade association, which said loans and investments from banks have helped fuel the industry’s growth since the mid-1990s.
“If they get funding, it is for something programmatic, an initiative. It’s not funding for core operations,” said Seldon.
In addition to a need for operating funds, the sector faces other headwinds, Seldon said. One is increasing competition from banks for CDFIs’ most credit-worthy borrowers. Fintech firms approved as lenders during the pandemic are a new source of competition as well.
CDFIs Are Drawing New Attention But Facing 20% Default Rates
On the plus side, the sector is drawing greater attention than ever, particularly as vehicles for addressing racial inequities in the economy, said Bill Bynum, CEO of Hope Credit Union and Enterprise Corp., a CDFI based in Jackson, Miss. The credit union has assets of about $360 million and operates in Alabama, Arkansas, Louisiana, Mississippi and Tennessee.
“I’ve never heard CDFIs discussed more in the nearly four decades I’ve been doing this work than in the past several months,” Bynum said.
Philanthropists are beginning to wake up to the issue, stirred in part by the Black Lives Matter movement and its focus on racial and economic injustice. In June, Google split $15.5 million in loans and $750,000 in grants between seven CDFIs that serve minority businesses. Some got loans, some got grants and some got both. Netflix followed with a move to park up to $100 million in deposits with financial institutions that serve Black communities.
“I’ve been saying that CDFIs are really having a moment … They are uniquely positioned for the context that we’re in now,” said Connie Smith, a senior vice president and diverse community capital program manager for San Francisco-based Wells Fargo & Co. She is based in Jacksonville, Fla.
However, the institutions are not equally accessible everywhere and they are not widely known. “I still think there’s an opportunity to get the word out that this resource exists,” Smith said.
At Wells Fargo, she is working to formalize processes for bankers to refer people to CDFIs if they are not yet bankable, rather than simply turning them away. The process would work the other way, too. CDFIs could hand off customers who are ready for a more traditional banking relationship.
“I think that’s certainly an opportunity across the industry,” Smith said.
Where CDFIs don’t exist, there is a strong temptation to create them. “We see this all over the place,” said Adina Abramowitz, an industry consultant in Philadelphia and managing partner of an organization called CDFI Friendly America.
Founded in early 2020, CDFI Friendly America tries to dissuade communities from starting their own CDFIs — which takes time and money — and instead, hire people who can connect their small businesses with existing institutions, Abramowitz said. The group already has established outposts in Bloomington and South Bend, Indiana.
“For too long CDFIs have been told they are the best-kept secret,” she said. “We all hate that but it’s a reality. In many areas, CDFIs are not as well-known as they should be.”
Scattered around the U.S. and created by federal legislation in 1994, CDFIs are designated banks, credit unions and nonprofit loan funds with a mission to serve small businesses, many owned by women and minorities in urban and rural areas where traditional banks may be few and far between.
Numbering about 1,100 overall, they tap into low-cost sources of capital and lend it out with a broader view of credit risk. They make loans that banks, based on conventional metrics like credit scores, might deem too risky. In 2017, roughly 75 percent of their loans were targeted to low-income families, high-poverty communities and underserved populations, according to the 2019 report by the CDFI Fund. Through 2018, they had extended total financing of $74.2 billion, according to the Opportunity Finance Network.
CDFIs mitigate the risk through flexible forbearance policies and technical assistance to borrowers, not through higher interest rates. Depending on the type of CDFI, delinquency rates range from 2.84% to 5.29%, higher than their conventional peers, according to a 2017 report by the New York Fed. But because of their willingness to work with borrowers, CDFIs don’t write off more loans on average than conventional lenders. The Fed report also noted that CDFIs increased lending during the last downturn while conventional banks retreated.
“For us, it’s mission lending, so the mission doesn’t include risk rating. It includes providing access to everybody and that’s where the additional support is needed,” said Philip Adams, who became Forge’s executive director on March 20. Founded in 1988 by a group of organic farmers, the lender had its status as a CDFI lapse this year due to a paperwork error amid staffing changes but is planning to renew its status for 2021. It has assets of less than $10 million.
The institutions, sometimes described as “financial first responders,” also have proven critical in times of natural and economic disaster, from the aftermath of Hurricane Katrina to the wreckage left behind by the Great Recession. They have been playing a similar role in response to COVID-19.
CDFIs have factored into a range of federal, state and local efforts to aid small businesses gutted by the pandemic. In Pennsylvania, a network of CDFIs is dispensing $200 million in federal aid to small businesses, with half of it going to minority-owned companies. The U.S. Small Business Administration, meanwhile, eventually set aside $10 billion in Paycheck Protection money for CDFIs.
A Three-Step Loan For Reopening
The lenders have cooked up programs of their own, too, aided occasionally by local donors. Communities Unlimited, a CDFI in Fayetteville with about $15 million in assets, has created a series of loans designed to help businesses adapt to the pandemic.
The three-part series starts with a $5,000 pivot loan that allows businesses to keep their doors open or add new revenue streams, said Ines Polonius, CEO of Communities Unlimited, which operates in Arkansas, Alabama, Louisiana, Mississippi, Oklahoma, Tennessee and Texas. The second step is a $10,000 reboot loan that businesses can take out to replenish their inventory, bring back staff and reopen.
“So many people used their last dime to stay open and they had nothing with which to reopen,” Polonius said.
The final leg is made up of larger loans for businesses that have successfully pivoted but may need more financing to carry out their plans, Polonius said. A caterer in Texas, for example, borrowed $48,000 to buy a food truck.
More recently, Communities Unlimited has been working to aid borrowers who took out predatory high-interest loans masquerading online as Paycheck Protection loans, Polonius added.
“Some of our clients stepped into that because they were so desperate before we could set up relationships,” she said. In their need, they ignored the fine print.
CDFIs are counting on their loans being repaid — that is how they repay the private, institutional and government lenders that provide them with capital. But they know not all borrowers will succeed, and the pandemic only complicates those calculations.
“Right now, in the social impact arena, people want to give me 2 percent money,” Polonius said. “But I still have to pay it back. If I end up with 20 percent losses, which our industry is looking at, then I have to come up with 20 percent from somewhere.”
Grants known as credit enhancements would provide a cushion — and allow CDFIs to remain responsive and flexible. But the money has been slow in coming, said Polonius, who has been applying for grants. “I’m in month six of making these loans and there are still no credit enhancements on my books. I can’t just go to my borrowers and not make more loans.”
Donors also are reluctant to fund staff out of fear they will be let go when the money runs out, Polonius said. But if she had the staff, Communities Unlimited could generate the loans and income to sustain them, she said. “They don’t see it that way.”
This story was produced as part of the Arkansas Reporting Project, focusing on entrepreneurship in Northwest Arkansas and the Arkansas-Mississippi Delta, sponsored by the Walton Family Foundation.