When Valerie and Cesar Beltran decided to open Beltran’s Meat Market & Grill in Northglenn four years ago, they thought their past experience of running their own meat market in New Mexico and then a Front Range tortilla factory was enough to make them creditworthy.
But as opening day approached, the couple realized they needed more than a home equity loan to pay for unexpected expenses. They applied for a small business loan. Their bank said no.
“They didn’t really want to take the risk. There just wasn’t collateral in it for them to take that risk,” said Valerie Beltran, the family’s hard-working matriarch who raised six children and also picked up her Realtor’s license. “I’m a female, I’m a minority, I’m a veteran. I tried to pull every card I could, but traditional banks did not want to look at us.”
But there was a lender who would. Actually, a few were willing to work with a startup with no revenues or collateral — and without charging exorbitant interest. Colorado Enterprise Fund, a certified community development financial institution (CDFI), offered a market-rate loan and guidance. The experience proved so beneficial, the Beltrans repaid the loan and went back for a second one to help their son, who opened Beltran’s Grill in Broomfield in July, after COVID-19 delayed his plans.
“It wasn’t just money,” Beltran said. “Colorado Enterprise Fund offered to help with marketing, offered help with QuickBooks accounting and offered help with getting our business plan together to make it stronger. They just gave you more support.”
CDFIs, like the Colorado Enterprise Fund, have been around for decades and are seeing an uptick in interest by borrowers and investors as the coronavirus continues to disrupt the local economy. They exist as part of a government effort to encourage banks and lenders to invest in their local communities and provide credit to those in lower-income neighborhoods. By statute, CDFIs offer financial and educational support. In good times, such lenders appeal to borrowers who find it very difficult to qualify for a traditional bank loan.
And in tough times?
“We come in as a source of support because banks pull back,” said Ceyl Prinster, CEO of Colorado Enterprise Fund, which started in 1976. “And many businesses that in normal times would be bankable are, all of a sudden, not so bankable.”
The allure of risky lending: Social impact
CDFIs are often overlooked or not known to the folks who would benefit the most. Many of these mission-minded organizations are not banks or credit unions. They’re not regulated by the Federal Reserve. They don’t take deposits. Instead, they’re non-profit organizations that manage loan funds certified by the CDFI Fund, which is part of the U.S Department of the Treasury. The market-rate loans are backed by federal and philanthropic grants or investors and must target a specific applicant.
“CDFIs have been kind of under the radar for a really long time, you know, like the best kept secret,” said Yuliya Tarasava, a cofounder of CNote, an Oakland, California-based company that provides investors with a portfolio of CDFIs by category, race, gender or region. “And yet, they’ve been doing all this amazing work in our communities, literally in our backyard.”
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An organization like the Colorado Enterprise Fund has seen its reach expand, with 1,113 loans for a total of $32 million in its 2020 fiscal year, which ended Sept. 30. That’s five times the number of loans and triple the amount of last year. In its latest completed report in 2018, it had done $13.8 million worth of loans for 235 businesses, created 1,242 jobs and offered 3,066 hours of coaching and business advice. By 2018, assets had grown about 50% in three years, as borrowers paid back loans and the organization attracted new investors.
And that’s a key part of growth. CDFIs are attracting more impact investors and private companies looking to be more mindful with their money. Some are incentivized by federal tax credits to invest in economically distressed communities. Others say they just want to support a certain underserved population.
In March, Google partnered with the Opportunity Finance Network to create a $125 million fund to help CDFIs working with businesses impacted by COVID.
In June, Netflix made a $10 million investment in HOPE, a Jackson, Mississippi-based CDFI that focuses on communities of color in the South. HOPE’s CEO Bill Bynum told the Wall Street Journal that the attention from Netflix “was more valuable than the deposit itself,” and helped “draw millions of dollars more in commitments.”
This spring, as hordes of companies applied for the federal Paycheck Protection Program, several smaller mom-and-pop businesses missed out. Many didn’t have the right banking connections or were confused about how to meet the terms to get the loan 100% forgiven.
The inequity caused the U.S. Small Business Administration and Treasury Department to take note. After a second round of paycheck-loan funding was made available by Congress in late April, the SBA and Treasury set aside $10 billion for CDFI lenders.
Ultimately, 308 CDFIs made $7.5 billion in PPP loans to 114,717 businesses nationwide — an average of $64,506 per loan. By comparison, in the first round of PPP loans, the top lender made 27,307 loans at an average of $515,304. The Colorado Sun received a paycheck loan.
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CDFIs are one of the best ways to reach those small businesses in need. As banks consolidated, they closed local branches. Many commercial banks now partner with CDFIs to fulfill federal requirements and meet needs in low-income communities.
Earlier this week, FirstBank pledged $60 million to support Habitat for Humanity and Impact Development Fund. IDF is a CDFI dedicated to housing affordability for Coloradans. The pledge is of the bank’s “Banking for Good” program, which does help meet its federal requirements but also is done “regardless of regulatory requirements,” said Leah Dirks, president of mortgage and consumer lending at FirstBank.
“We contribute (financially), serve on boards, work together to design and implement joint programs when possible,” Dirks said in an email. “We also work with CDFIs to bridge the lending gap for borrowers. Many CDFIs also help increase access to resources for minorities and women owned businesses, which aligns well with FirstBank’s own diversity and multicultural banking efforts.”
Redefining risk
Congress passed the Community Reinvestment Act in 1977 to stop banks from redlining, which is the discriminatory practice that cut off lower-income neighborhoods from credit. But discrepancies remained 15 years later, which led President Bill Clinton to push for the Riegle Community Development and Regulatory Improvement Act of 1994.
The 1994 law led to the creation of the CDFI Fund, which annually certifies banks, credit unions or nonprofit organizations. Certification requires organizations to have a primary mission of promoting community development among underserved customers. The annual certification helps the CDFI qualify for federal grants, which has totaled $2 billion since the CDFI Fund’s inception.
But to qualify the target applicants, CDFIs often blur eligibility guidelines, repayment deadlines and other things traditional banks require and expect from borrowers.
Colorado Enterprise Fund, for example, will consider an owner whose credit score is 600, where traditional banks often require a minimum of 670, Prinster said. CDFIs go beyond the data.
“We’ll look at whether this is the result of medical issues or divorce or something that’s a one-time thing. Or is it a chronic disregard for financial obligations?” Prinster said. “We can take a little bit more of an individualized approach on that and discount for those factors.”
They’re allowed to prioritize what matters differently, she added.
“Collateral is another thing. We realized that you usually don’t get fully paid back from collateral so we might weigh that a little less strongly than a bank would,” she said. “We’re going to weigh the cash flow, the historical cash flow, the projected cash flow for a startup, and some other factors (less, so) we can just be more generous.”
The Carsey Institute at the University of New Hampshire studied the impact of CDFIs during the Great Recession for the Treasury Department. It concluded that serving distressed communities costs more because of the additional services required to train folks to be fiscally responsible.
But overall, CDFIs learned to manage the risk of providing loans to low and moderate income individuals and communities. The loans maintained “performance standards generally equivalent to those of the conventional financial sector,” said the report.
Today, there are more than 1,100 certified CDFIs, including 19 in Colorado. About half are nonprofit loan funds, while the rest are banks, credit unions and holding companies.
CDFIs just really know how to manage their risk, said Helen Leung, chief operating officer at Aeris Insight, which rates CDFIs on the same CAMEL standards banks use: capital, assets, management, earnings and liquidity.
“CDFIs monitor their loan portfolios very closely,” Leung said. “CDFIs would call a small business owner if their payment falls behind by 15 days. They say, ‘What happened? How can we help?’ And you say, ‘I lost my guy who delivers my pizzas.’”
CDFIs are much smaller than commercial banks and must have a community-minded mission. They’re available when their customers hit trouble spots.They know how to make arrangements if the customer can’t pay on time.
“It’s not that they are lenient. It’s not that they give up money without going through a very good critical underwriting criteria. We look at their procedures and we look at their portfolios and the way they manage their loans is very hands-on,” she said. “This is why they’re successful.”
But it’s not like CDFIs will give just anyone a loan. Applicants may not need a business plan, revenues or historical financials to qualify, but there are underwriting standards, said Alex Wise, executive director of Community Enterprise Development Services, an Aurora-based CDFI.
Her organization asks borrowers two questions: Can you pay us back and will you pay us back?
The idea, said Wise, is to determine whether the business can generate enough cash to pay back the loan but also have money to meet payroll, purchase supplies and budget for the next month.
“The ‘Will you pay us back?’ is really looking at their character and moving them beyond just what is their credit score number. It’s really saying, ‘Have you shown to be someone who is professional, someone who is courteous, who’s respectful?’ Someone who is most likely to honor their debts,” Wise said. “There are certain situations where people just can’t do it because of really bad luck, like a car accident. And there are other people who won’t do it and may walk away from their debt. We’re trying to filter through those.”
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Affordable housing, race, religion and other specialties
Colorado Enterprise Fund focuses on small businesses but others in Colorado have more specific niches. Oweesta Corporation in Longmont exclusively serves Native communities and tribal members. Colorado Housing Enterprises in Westminster focuses on affordable housing and helps borrowers with down payments.
Aurora-based Community Enterprise Development Services started by serving refugees and immigrants in 2011. It has since expanded to any underserved racial minorities and continues to delve deeper into the needs of its target communities.
For example, there’s a large Muslim population in Aurora. CEDS worked with the community to configure an alternative to a loan because interest is forbidden under Islamic law. CEDS added Murabaha, an Islamic financing structure that sets a fixed cost. Instead of interest, CEDS charges a monthly fee to offset the cost of administering the loan.
“And because that fee is not tied to the performance of the loan but is separate, it is permissible,” said Wise, who previously worked in impact investing in Somalia. “We have a product that’s fairly general that can really apply to all of our Muslim clients and that’s about a third of our portfolio.”
Since CDFIs are based in a community, they are able to rally support from local philanthropists or impact investors when needed. Colorado Enterprise Fund wanted to offer paycheck loans last spring but didn’t have enough funding and the federal backing for CDFIs had not yet kicked in. So it asked its community partners for help. Philanthropic groups, including the Gates Family Foundation and Bohemian Foundation, stepped up and helped raise $11.2 million for PPP loans.
Colorado Enterprise Fund made $18 million in paycheck loans to about 800 small businesses in the state.
Thornton dental hygienist Maria Francisco-Matias found out about Colorado Enterprise Fund’s PPP program after reading a Delta Dental newsletter. Her memories of applying for a business loan were not good. “I don’t think they even looked at my application to be honest with you,” she said. “I never heard back from them.”
But Francisco-Matias started full-time with her practice in February. She works out of the Every Child Pediatrics clinics in Thornton and Aurora and provides preventative dental care to children who are also getting health care checkups by a physician. About 95% of Every Child’s patients are from low-income households.
When the COVID-19 safety measures went into effect in late March, her business had to close. But when state orders allowed her to return, she couldn’t afford the required personal protective equipment. She applied for a paycheck loan from the Colorado Enterprise Fund and was approved. She went back to work June 10 and continues to share her experience with others.
“I told my accountant about it and I said, ‘If you know other people who need loans, this is a great organization who I got mine through,’ because he couldn’t find one for me either,” she said. “I think it’s because he was involved with bigger banks.”
Leung, with Aeris, said CDFIs will continue to be a useful resource to kickstart budding entrepreneurs, help people buy a home and encourage economic development in distressed communities, whether the pandemic gets better or worse.
“In good economies, CDFIs graduate their borrowers and they become good enough, credit wise, to go ask for a bank loan. Everybody says ‘Hooray, we graduated,’” Leung said. “In bad economies, banks say, “Hey, this borrower does not meet our risk parameters. Can you help and keep him afloat?’
“It’s very cooperative and symbiotic,” Leung said. “It’s not competition although in good economies, we do see banks coming in and competing with CDFIs. But CDFIs don’t lend to make a buck. They lend to create impact and help the community.”