These community banking institutions should be the center of the recovering economy
The light at the end of the pandemic tunnel is growing brighter, but a complete small business recovery is going to take time, money, and a concerted effort. And if it is going to be an equitable recovery that helps under-resourced small businesses—those owned by women, entrepreneurs of color, and those in rural communities—we must continue to enable and empower community development financial institutions (CDFIs)—nonprofit lenders that did yeoman’s work during the depths of COVID-19 to distribute federal aid to the hardest-to-reach small businesses in our country.
The Paycheck Protection Program ended on May 31, leaving a tremendous opportunity for the private sector to step up to address many of the gaps that PPP didn’t fulfill. Corporations can and should work with these nonprofit lenders that delivered so much aid 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, of which there are more than 1,100 nationwide, provide affordable small-dollar loans and technical assistance to businesses, with a mandate to lend at least 60% of their loan volume to underserved borrowers. After the pandemic began, a subset of about 300 CDFIs delivered $7.4 billion in PPP loans within the first three months. And when the PPP portal reopened at the beginning of 2021, CDFIs were granted an exclusive access period—recognition that they are best positioned to reach those being hit the hardest by the health and economic effects of the pandemic. To date, these institutions have deployed close to $15 billion in PPP loans.
It was not just the federal government that recognized CDFIs’ value during the pandemic. Corporations began 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, corporations were “attracted by their mission, their relevance in the context of Covid-19, and their demonstrated ability to deliver impact in communities where there are few responsible financial institution options, particularly for low-wealth people—while improving their own environmental, social, and governance profiles.”
Corporations can—and should—play an ongoing role in supporting small businesses to rebuild by supporting CDFIs, even after the worst of the pandemic is definitively behind us. Continued corporate investment in and partnerships with CDFIs, in the form of both loans and outright philanthropy, will help create a more equitable small business sector and a much stronger economy overall.
It’s in corporations’ interest to do so. Corporations benefit from a healthy and diverse small business community. Before the pandemic, small businesses employed almost half of the U.S. workforce and generated two-thirds of new jobs. And history indicates that it is small businesses that help economic recovery after major crises. They create the thriving neighborhoods where corporate employees live; they drive economic growth that spurs consumer spending; and many supply goods and services directly to big businesses.
And it is CDFIs that have the potential to deliver the capital necessary to keep our diverse small business communities strong. Collectively, they mobilize $16 billion in capital for small businesses each year, and 68% goes to businesses owned by people of color and women, as well as those in low-income communities.
Still, CDFI assets under management are less than 1% of total assets under management by non-CDFI regulated banks and credit unions. The CDFI sector has long discussed how to scale, but we had not seen a broad emergence of solutions or recognition of their contributions until the pandemic devastated small businesses. In the past year, we’ve seen the rise of innovative new lending models that may make CDFIs more attractive to corporations seeking to work with them.
Indeed, some of the most successful small business relief efforts during the crisis were 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 philanthropic and state and local government partners to provide $50 million to allow 10 California CDFIs to disburse small business loans and offer technical assistance. Eighty-six percent of the initial loans went to businesses with 10 or fewer employees, and 79% to businesses that have historically lacked access to affordable credit, including businesses in lower-income communities and those owned by women and people of color. A similar regional effort—the Southern Opportunity and Resilience Fund—is mobilizing up to $100 million in capital for small businesses across 15 states, with support from Capital One, Microsoft, JPMorgan Chase, and more.
As we emerge from a long economic shutdown, these partnerships provide us with a model to improve the small business financing landscape of this country. To stimulate a more effective and equitable economic recovery, we need corporate America to give small businesses a boost—and CDFIs are the perfect vehicle for them to do it. With a new private sector commitment to partner with CDFIs to provide them with capital, these lenders can get money into the hands of small business owners that will revitalize our ailing economy and help us rebuild stronger than before.
In short, we need a new era of corporate responsibility, where private corporations embrace the role of CDFIs that bring market-based solutions to the small businesses that drive our nation’s prosperity and make entrepreneurship a viable path to wealth creation in America.
Chris Pilkerton is the chief legal officer for Accion Opportunity Fund and the former Acting Administrator and General Counsel of the U.S. Small Business Administration.