New lending approach aims to bridge racial wealth divide

In response to the Covid-19 pandemic, the murder of George Floyd and the Black Lives Matter protests, foundations have donated millions of dollars to militant groups fighting for racial and economic justice. Philanthropy must “tackle the roots of systemic inequality” and “reinvent our democracy, our economy, our culture for the better,” says Darren walker, Managing Director of the Ford Foundation. Donors are called to support social movements and community organizations led by people of color pushing bold ideas like abolishing prisons and the police.

And then there’s this, also in response to the deep and troubling inequalities exposed by the pandemic and demands for racial justice: a wave of corporate-friendly donor giving that’s more pragmatic, less political, and meant to make a difference. help black people and Hispanics save their struggling businesses, create new ones, and create jobs in communities that desperately need them.

To that end, corporate foundations, Silicon Valley tech companies, banks, retailers, and private foundations are pumping money and new ideas into Community Development Financial Institutions, or CDFIs. CDFIs, most of which are not-for-profit, provide loans at affordable rates to help the poor build wealth.

These mission-driven lenders aren’t new or anti-establishment – they’ve been funded in part by the U.S. Treasury since the mid-1990s – but they’ve shown they can provide a financial lifeline for blacks, Hispanics and women. business owners who have been overlooked by traditional banks.

MacKenzie Scott, the ex-wife of Amazon founder Jeff Bezos, led the way in July with donations to seven CDFIs: Opportunity Fund ($ 15 million); Capital Impact Partners ($ 15 million); Grameen America ($ 25 million); Hope Enterprise (which refused to disclose the amount of its grant); the local initiatives support society, or LISC ($ 40 million); the Low income investment fund ($ 10 million); and Oweesta ($ 3 million). In most cases, Scott’s were the biggest donations in the history of each CDFI.

Among the companies, Google, Netflix, PayPal, Square and Twitter have pledged to give grants or deposit substantial sums – $ 170 million in Google’s case – in support of CDFIs or black-owned banks. Working with LISC, one of America’s largest CDFIs, Lowe’s awards $ 30 million in grants to small businesses run by people of color or women and $ 25 million to businesses in rural communities.

Meanwhile, the Aspen Institute and six CDFIs launched a nonprofit called EBA Fund this will create a secondary market for small business loans, buying loans from nonprofit lenders and selling them back to commercial banks. The startup, which started with a $ 2 million grant from the Citi Foundation, will allow CDFIs to lend more money to poor communities. The Bill & Melinda Gates Foundation and the Robert Wood Johnson Foundation, which typically do not support small businesses, have made smaller grants or loans to the EBA Fund, as has the Woodforest National Bank, which operates banks in hundreds of cities. Walmart stores.

“CDFIs are going for a while,” says Annie Donovan, who previously headed a CDFI support fund at the US Department of the Treasury and is now LISC’s director of operations. As the largest community development organization in the country, LISC has just launched a billion-dollar fundraising and investment effort aimed at eliminating racial disparities. “We work in communities where traditional capital is not available,” says Donovan.

Along with its work with Lowe’s, LISC manages a $ 100 million loan fund for New York State called the New York Forward Loan Fund, which is designed to help minority and homeowners and businesses. women who own small, low-income multi-family properties. – and moderate-income neighborhoods. It has attracted philanthropic support as well as government funding.

Racial wealth gap

The theory behind CDFIs is simple: even offering microloans – from $ 5,000 to $ 75,000 – to low-income entrepreneurs or small businesses owned by people of color will create jobs and wealth for those who do. need it most. The goal is not to repair or reinvent capitalism; it’s just to get more people into the market economy.

Brenton Gieser

By commercial bank standards, Opportunity Fund is small, with only about 6,000 borrowers. One of them is Maurice Brewster, founder and CEO of Mosaic Global Transportation in San Jose, California.

People of color are more likely than whites to rely on microloans to start a business, as fewer of them own their own homes or draw on family wealth. In most markets, many more entrepreneurs try to raise money than investors willing to invest, and a lack of access to capital has a disproportionate effect on minority entrepreneurs, according to the report. a report of the Ewing Marion Kauffman Foundation.

If the new focus on community finance proves effective, it could help close the lingering wealth gap between white and black Americans. The median net worth of white families – $ 188,200, according to the latest government survey – has been about eight times that of black families – $ 24,100 – since the early 1990s.

Brandee McHale, President of the Citi Foundation, says, “If you are a foundation that focuses on racial justice, then you should be a foundation that should focus on bridging the racial wealth gap.”

The Citi Foundation last month named 30 CDFI across the country, who will collectively receive $ 15 million to help small businesses. Global banks like Citi, JPMorgan Chase, and Wells Fargo have supported CDFIs for years, in part to comply with regulations that require them to make loans in poor communities.

Cost increase

The challenge for CDFIs will be to grow without straying from their mission of serving low-income or inexperienced borrowers. “In some ways, scale and impact are in tension,” says Brett Theodos, a senior researcher at the Urban Institute who has written extensively on the area.

Theodos explains that mission-oriented lenders need to know the community, carefully assess the prospects for a new business, provide services and materials in multiple languages, and, after making a loan, offer personalized business advice to borrowers. All of this drives up the cost of every transaction and helps explain why few conventional banks provide microloans to new entrepreneurs.

“The economy just doesn’t work if you try to provide responsible and affordable capital,” says Joyce Klein, director of the Business Ownership Initiative at the Aspen Institute. “To develop a microcredit operation, you have to collect a lot of grants.”

Timothy Ogden, senior fellow at Aspen and expert in microfinance, says that despite claims to the contrary: “Microfinance has always demanded a subsidy. It will always require a subsidy.

Rejected by 30 banks

Michael Rapaport, President and Chief Operating Officer of Opportunity Fund, confirms this assessment. Based in San Jose, Calif., Opportunity Fund provides loans nationwide, some of them to borrowers deemed risky by LendingClub, an internet company that connects people wishing to borrow money with individuals or companies wishing to grant loans. Opportunity Fund has the largest small business loan portfolio of all CDFIs, he says.

However, by commercial banking standards, Opportunity Fund remains small, with around 6,000 borrowers and a loan portfolio of around $ 165 million. (For comparison, Live Oak Bank, an online bank specializing in small business loans, provided $ 1.5 billion in loans last year.) To bolster its microcredit offerings, Opportunity Fund has joined forces forces in March with Accion US Network, the US subsidiary of Accion global nonprofit.

MacKenzie Scott’s $ 15 million donation “will be a game-changer for an organization like ours,” Rapaport says, particularly as he did during the pandemic. Opportunity Fund processed nearly 1,000 Paycheck Protection Program loans with an average value of $ 14,000 – a very efficient and unprofitable service, but one that likely saved many of these businesses from bankruptcy.

Like other CDFIs, Opportunity Fund has allowed some clients to defer or skip loan repayments during the current crisis. The Silicon Valley Community Foundation and Opportunity Fund have raised $ 13 million to reach a goal of $ 50 million for the Small Business Assistance Fund to prevent the self-employed and small businesses in difficulty from going bankrupt.

“We make an effort to work with the borrower when they are in difficulty,” says Rapoport. The Black Lives Matter protests have been a mixed blessing for small businesses, helping some black-owned businesses attract new customers but hurting others. “We had a few borrowers whose windows had been vandalized,” he says.

Entrepreneurs supported by Opportunity Fund are starting a wide variety of businesses – food trucks, restaurants, hair salons, nail salons, daycares, cleaning services, and a variety of retail stores. Independent truckers can look to CDFIs to replace an older truck with a newer, clean-burning vehicle.

Sometimes their businesses take off. Maurice Harris says he was turned down by 30 banks before getting a loan from Opportunity Fund to start Bloom & Plume, a luxury floral boutique in Los Angeles in 2010. Since then, he has attracted famous clients like Beyoncé and Rashida Jones , exhibited at the Museum of Contemporary Art in Los Angeles, and appeared in a Microsoft advertisement. But, he notes, there are still many obstacles facing black entrepreneurs. “Our world was not created for people like me,” he says.

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