June 26, 2022

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A Newly Hot Approach on Loans Seeks to Close the Racial Wealth Gap

In response to the Covid-19 pandemic, the killing of George Floyd, and the Black Lives Matter protests, foundations have given many millions of dollars to activist groups fighting for racial and economic justice. Philanthropy must “attack the roots of systemic inequality” and “reimagine our democracy, our economy, our culture for the better,” declares Darren Walker, the Ford Foundation’s chief executive. Donors are called on to support social movements and community organizations led by people of color that push bold ideas like abolishing prisons and the police.

And then there’s this, also in response to the deep and troubling inequities laid bare by the pandemic and demands for racial justice: a surge of giving from business-friendly donors that is more pragmatic, less political, and intended to make an immediate difference by helping Black and Hispanic people rescue their struggling businesses, start 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 fresh ideas into community-development financial institutions, or CDFIs. CDFIs, most of which are nonprofits, make loans at affordable rates to help poor people build wealth.

These mission-driven lenders are not new or anti-establishment — they have been funded, in part, by the U.S. Treasury, since the mid-1990s — but they have shown that they can provide a financial lifeline to Black, Hispanic, and female business owners who have been neglected by mainstream 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 declined to disclose the size of its grant); the Local Initiatives Support Corporation, 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 companies, Google, Netflix, PayPal, Square, and Twitter have pledged to either make grants to or deposit substantial sums — $170 million in the case of Google — in support CDFIs or Black-owned banks. Working through LISC, one of the America’s biggest CDFIs, Lowe’s is awarding grants of $30 million to small businesses led by people of color or women and $25 million to enterprises in rural communities.

Meanwhile, the Aspen Institute and six CDFIs have started a nonprofit called the EBA Fund that will create a secondary market for small-business loans, buying loans from nonprofit lenders and selling them to commercial banks. The startup, which got off the ground with a $10 million grant from the Citi Foundation, will enable CDFIs to lend more money in poor communities. The Bill & Melinda Gates Foundation and the Robert Wood Johnson Foundation, which don’t typically 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 Walmart stores.

“CDFIs are having a moment,” says Annie Donovan, who formerly directed a fund to support CDFIs at the U.S. Department of the Treasury and is now chief operating officer of LISC. As the nation’s largest community-development organization, LISC has just launched a $1 billion fundraising and investment effort aimed at dismantling racial disparities. “We’re working in communities where traditional capital is unavailable,” Donovan says.

Alongside its work with Lowe’s, LISC is managing a $100 million loan fund for New York State, called the New York Forward Loan Fund, that is designed to help minority- and women-owned businesses and landlords who own small multi-family properties in low- and moderate-income neighborhoods. It has attracted philanthropic support along with government funding.

Racial Wealth Gap

The theory behind CDFIs is simple: Providing even so-called microloans — of $5,000 to $75,000 -—to low-income entrepreneurs or small businesses owned by people of color will bring jobs and wealth to those who need them most. The goal is not to fix or reimagine capitalism; it’s simply to bring more people into the market economy.

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Brenton Gieser

By the standards of commercial banking, 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, Calif.

People of color are more likely than whites to depend on microloans to start a business because fewer own their own homes or can tap into family wealth. In most markets, many more entrepreneurs are trying to raise money than there are investors willing to invest, and a lack of access to capital has a disproportionate effect on minority entrepreneurs, according to a report from the Ewing Marion Kauffman Foundation.

If the new focus on community finance proves effective, it could help close the persistent 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 be focused on closing the racial wealth gap.”

The Citi Foundation last month named 30 CDFIs across the country that will together get $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.

Driving Up Costs

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

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

“The economics simply don’t work if you’re trying to provide responsible, affordable capital,” says Joyce Klein, director of the Business Ownership Initiative at the Aspen Institute. “To grow a microlending operation, you have to raise a lot of grant funding.”

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

Turned Down by 30 Banks

Michael Rapaport, president and chief operating officer of Opportunity Fund, confirms that assessment. Based in San Jose, Calif., Opportunity Fund makes loans across the country, some of them to borrowers who are deemed risky by LendingClub, an Internet company that matches people who want to borrow money with individuals or businesses willing to make loans. Opportunity Fund has the largest small-business loan portfolio of any CDFI, he says.

By the standards of commercial banking, though, Opportunity Fund remains small, with about 6,000 borrowers and a loan portfolio of about $165 million. (By comparison, Live Oak Bank, an online bank specializing in small-business loans, made $1.5 billion worth of loans last year.) To strengthen its microlending offerings, Opportunity Fund joined forces in March with the Accion U.S. Network, the U.S. affiliate of global nonprofit Accion.

The $15 million donation from MacKenzie Scott will “be a game changer for an organization like ours,” Rapaport says, particularly coming as it did during the pandemic. Opportunity Fund processed almost 1,000 Paycheck Protection Program loans averaging $14,000 — a high-touch, unprofitable service but one that presumably saved many of those businesses from going under.

Like other CDFIs, Opportunity Fund has permitted some clients to defer or skip loan repayments during the current crisis. The Silicon Valley Community Foundation and Opportunity Fund have raised $13 million toward a goal of $50 million for the Small Business Relief Fund to keep struggling self-employed people and small businesses from failing.

“We try very hard to work with the borrower when they are in hardship,” Rapoport says. The Black Lives Matter protests were a mixed blessing for small businesses, helping some Black-owned businesses attract new customers but hurting others. “We had a few borrowers with storefronts that were vandalized,” he says.

Entrepreneurs backed by Opportunity Fund start a wide variety of businesses — food trucks, restaurants, barbershops, nail salons, day care centers, cleaning services, and a variety of retail stores. Independent truckers can turn to CDFIs to replace an older truck with a newer, clean-burning vehicle.

Occasionally, their businesses take off in a big way. Maurice Harris says he was turned down by 30 banks before getting a loan from Opportunity Fund to start Bloom & Plume, a luxury floral shop in Los Angeles in 2010. Since then, he has attracted celebrity clients including Beyoncé and Rashida Jones, exhibited at the Museum of Contemporary Art in Los Angeles, and appeared in a Microsoft commercial. But, he notes, numerous obstacles still face Black entrepreneurs. “Our world was not created for people like me,” he says.