Should the focus of attention be how to get loans to underfunded and underrepresented entrepreneurs? (Or just get the $$$ to the CDFIs?).
There does not seem to be a standard among CDFIs for loan terms and rates. I note that Calvert Impact Capital has lower rates than others, with a prominent CDFI charging 8% interest + 2% origination fees + personal guarantees. There are many community banks with better "access to capital" than some CDFIs.
This is an excellent explanation of many of the challenges that CDFIs face in trying to scale up small business lending to underserved borrowers. It’s great that Patrick and Beth recognize and explain the fact that CDFIs will likely never have balance sheets big enough to really address the overwhelming need. I think, however, that more needs to be said about the challenge of covering the costs to originate loans with an average size of $37,000. That loans size is probably near the breakeven point for the most efficient CDFI lenders (unless we want them to be charging interest rates in the mid- to high double digits). It’s a good bet that well over half of the loans made will be smaller than that, which means even if the CDFI retains the loan on its balance sheet and keep all fee and interest income it will lose money on the deal. If the CDFI sells the loan it loses the future interest income—which is even worse. I agree that this model is the way to go to achieve more scale, but for it to be sustainable for the CDFI, there will need to be a meaningful premium paid to the CDFI at the time of sale. And the premium should be higher, as a percentage of the loan amount, the smaller the loan. Another crucially important piece of this puzzle is the challenge of customer acquisition. CDFIs, by and large, aren’t very good at it and even if they were they lack the budgets to reach potential clients at scale. The rebuilding funds have the advantage of local and state government participating in spreading the word, but in normal times that doesn’t happen. We are going to need banks and other corporate partners to participate in efforts to market the loans that CDFIs can offer. The organization I founded, Opportunity Fund (now Accion Opportunity Fund) forged such a referral partnership with fintech lender Lending Club, which spends millions on customer acquisition every year. The partnership has enabled us to offer small business loans to borrowers in 45 states at very meaningful volume for a CDFI.
COMMENTS
BY Tim Strege
ON June 24, 2021 01:40 PM
Should the focus of attention be how to get loans to underfunded and underrepresented entrepreneurs? (Or just get the $$$ to the CDFIs?).
There does not seem to be a standard among CDFIs for loan terms and rates. I note that Calvert Impact Capital has lower rates than others, with a prominent CDFI charging 8% interest + 2% origination fees + personal guarantees. There are many community banks with better "access to capital" than some CDFIs.
BY Eric Weaver
ON July 16, 2021 11:02 AM
This is an excellent explanation of many of the challenges that CDFIs face in trying to scale up small business lending to underserved borrowers. It’s great that Patrick and Beth recognize and explain the fact that CDFIs will likely never have balance sheets big enough to really address the overwhelming need. I think, however, that more needs to be said about the challenge of covering the costs to originate loans with an average size of $37,000. That loans size is probably near the breakeven point for the most efficient CDFI lenders (unless we want them to be charging interest rates in the mid- to high double digits). It’s a good bet that well over half of the loans made will be smaller than that, which means even if the CDFI retains the loan on its balance sheet and keep all fee and interest income it will lose money on the deal. If the CDFI sells the loan it loses the future interest income—which is even worse. I agree that this model is the way to go to achieve more scale, but for it to be sustainable for the CDFI, there will need to be a meaningful premium paid to the CDFI at the time of sale. And the premium should be higher, as a percentage of the loan amount, the smaller the loan. Another crucially important piece of this puzzle is the challenge of customer acquisition. CDFIs, by and large, aren’t very good at it and even if they were they lack the budgets to reach potential clients at scale. The rebuilding funds have the advantage of local and state government participating in spreading the word, but in normal times that doesn’t happen. We are going to need banks and other corporate partners to participate in efforts to market the loans that CDFIs can offer. The organization I founded, Opportunity Fund (now Accion Opportunity Fund) forged such a referral partnership with fintech lender Lending Club, which spends millions on customer acquisition every year. The partnership has enabled us to offer small business loans to borrowers in 45 states at very meaningful volume for a CDFI.