Small Business Capital Lifelines are Fraying

During a time of unprecedented societal disruption, providers for capital of small- and minority-owned businesses are at risk

The COVID-19 pandemic has highlighted more than any event in our lifetimes the important to the "real" U.S. economy of small businesses, which generate more than half of GDP. 

It's highlighted the hanging-by-a-thread fragility of enterprises owned by minorities or located in disadvantaged communities. 

And it's also created existential challenges for the mission-oriented financial partners who serve that community. 

Even in the best of times, businesses like Karibu Grocery and Deli, located in St. Paul, Minnesota, struggle to get access to capital and to the basic financial services they need to survive and grow. 

Opened by the Ali family in summer 2018, Karibu sells groceries and serves Somali food in east St. Paul. The family faced a number of challenges before they were even able to open Karibu's doors. While siblings Abdiwali, Ikram and Mohamed had a promising location, a business plan and some start-up capital lined up, they struggled to secure additional financing for Karibu because of their limited credit histories. 

Karibu's story is anything but unique. During the Coronavirus pandemic and social unrest roiling low-income communities, traditional lenders have pulled back from making smaller, more service-intensive loans in what they perceive as high-risk communities. 

According to Forbes.com, only 12% of Black and Latino business owners who applied through mainstream banks or credit unions for forgivable loans under the Paycheck Protection Program (PPP) received what they applied for. 

Deprived of access to credit, and with an average of less than 30 days of cash on their balance sheets, nearly half of the 500 minority businesses responding to a survey by Global Strategy Group predicted they will be forced to shutter their doors permanently. 

If there are financial lifelines of any kind for minority entrepreneurs amidst this confluence of crises, they may be community development financial institutions (known as CDFIs") – not-for-profit capital providers making investments aimed at expanding economic opportunity in low-income communities. 

It was through a CDFI that the Ali siblings and Karibu Grocery & Deli found their capital lifeline. In addition to support provided by the City of St. Paul, the African Development Center and other funding sources, the 30-year old, Minneapolis-based Community Reinvestment Fund USA (CRF) granted the Ali's a loan that enabled them to open Karibu. 

Recently, CRF was able to network with more than 40 other CDFIs to help originate over $500 million in PPP loans predominantly for Latino-, Black-, women- and Native American-owned businesses. 

Nationally, about 300 CDFIs have approved more than $7 billion in PPP loans. That's out of a total of the more than $520 billion approved for PPP loans. 

CRF is one of more than 1,100 community development financial institutions certified by the CDFI Fund, a division of the U.S. Department of the Treasury created in 1994. The CDFI Fund makes approximately $200-300 million in capital infusions to CDFIs each year, which organizations like CRF combine with foundation grants and leverage with various types of loans from commercial banks, who then get regulatory credit for their investments under the Community Reinvestment Act. 

Collectively, they have $211 billion in total assets and made more than 750,000 loans to small businesses in 2019 totaling $21.5 billion. 

Unfortunately, that's a drop in the ocean relative to overall need. 

Many CDFIs are being tested by the same factors threatening the survival of the minority-owned businesses they serve, namely COVID-19, the shutdown of whole sectors of the economy and elevated social unrest. 

Because a significant percentage of the businesses they lend to tend to be in the service, hospitality and restaurant sectors – parts of the economy that have been disproportionately affected by the pandemic – the credit quality of CDFI's loan portfolios is even more stressed than that of regulated financial institutions. 

"This is definitely a situation where we have to 'put our own masks on first' before we can help others," says CRF's founder and CEO Frank Altman.

The lifeline for CDFIs could be a provision in the HEROES Act – a coronavirus relief bill passed by the U.S. House of Representatives in May. The bill would appropriate $1 billion to make capital injections into CDFIs – four to five times the annual amount the CDFI Fund normally makes available each year. As of late August, the fate of that appropriation was stalled negotiations with the U.S. Senate. 

Long term, however, other non-governmental solutions are needed if CDFIs are to continue to serve as the provider of capital for minority businesses. 

The growing popularity of impact investing may hold some promise. Over 25 years, Calvert Impact Capital has raised over $2 billion by offering Community Investment Notes to investors in denominations of as little as $20, making the proceeds available to CDFIs and other mission-driven intermediaries. Online technology company CNote's flagship also offers the opportunity to invest directly in CDFIs.

The Ali family and Karibu Grocery & Deli are only one proof point of how critical the access to capital CDFIs provide is to small- and minority-owned businesses and, by extension, to the U.S. economy. 

See the stories of Karibu and other small businesses and organizations who have turned to CDFIs for vital support.