Getting Out On The Bleeding Edge of CDFI Collaboration
The phrase "the bleeding edge" has generally come to mean newer, more extreme, and riskier technologies or strategies that go beyond what we normally describe as conventional or even cutting edge approaches. The bleeding edge is not the most comfortable place to be and for this reason companies and institutions often remain inside the boundaries of conventional thinking. Community Development Finance Institutions (CDFIs) and the funders who support them are not immune to this type of risk aversion, but In the dynamic landscape of small business lending supporting the growth of Black and Latino businesses, CDFIs are going to have to push towards this frontier.
CDFI's play a key role in providing access to capital for Black and Latino businesses that face barriers accessing traditional business lending and growth capital. This role is even more significant as we try to help these businesses in the post pandemic economic landscape. As CDFIs work to accelerate growth for Black and Latino small businesses, it's evident that collaboration among CDFIs must elevate beyond the conventional strategies like one-stop web portals and cross referrals.
Black and Latino entrepreneurs share in the challenges of their communities as it relates to access to access to capital and small business literacy. Among other things, these small businesses are emerging from communities with historically low relationships with traditional banks. The higher rates of being unbanked exacerbate the challenge of establishing a robust financial foundation.
CDFIs must evolve and refine their efforts and focus on helping Black and Latino businesses not just survive, but grow. For Black and Latino small businesses out of the startup phase who have survived for more than two years, it's often the case they fueled their growth to that point with debt. This isn't a surprise considering that Black and Latino entrepreneurs frequently have limited access to capital from traditional banking institutions, and lack the informal but affluent friend and family networks from which to raise start up capital. It's not uncommon for businesses to get their start running on high cost credit card or installment loans, but this is an even more prevalent state of affairs with Black and Latino small businesses. While the debt can facilitate start up, overreliance on it becomes a drag on growth, constrains profitability and diminishes the businesses' ability to attract financing, even from CDFIs. CDFI's can do a better job in fueling the growth of Black and Latino entrepreneurs by aligning their products to correspond to how these businesses often present. Going further, CDFIs must deepen their collaboration with each other in ways that move the ball on the real goal, helping them grow.
Collaboration for Debt Relief and Restructure
For starters, there is a pressing need to develop financial products and financing approaches that specifically target the debt accumulated by these businesses. A one-size-fits-all model is not feasible; instead, tailored solutions that account for the diverse needs of these entrepreneurs are essential. Recognizing the debt profile that Black and Latino small businesses often present with, CDFIs should collaborate proactively to provide both debt relief and debt restructure. This collaborative effort can involve the pooling of resources, shared risk, debt restructuring and outright debt cancellation. By working together, CDFIs can amplify their impact and create a more robust support system for entrepreneurs seeking to alleviate the constraint on growth because of debt.
Extensive Small Business Literacy Support
Addressing the small business literacy gap is a fundamental aspect of empowering Black and Latino small businesses. CDFIs need to go beyond traditional lending roles and become hubs for targeted small business technical education. To truly increase effectiveness, CDFIs need to offer more than passive training approaches. Investing in the capability to create well-designed roadmaps for business growth and offering technical assistance and coaching that builds the financial management capacity of the entrepreneur is the direction CDFIs should head. This combination can help businesses to make informed financial decisions, access the right capital at the right time and set the stage for long-term sustainability and growth.
Collaborative Underwriting, Growth Management & Capital Access
CDFIs come in different shapes and sizes and target their support to small businesses in different stages and different sizes. In markets where multiple CDFIs are active, it is not uncommon for entrepreneurs to have engaged with one or more of them in the quest for capital and support. In some markets, this results in a small business having financing relationships with multiple CDFIs. A small business may find themselves with loans from multiple CDFIs on their balance sheet. It usually means that the business went to each of them separately with essentially the same request, and they each responded with the resources they had at hand. When this happens, its an indicator of insufficient collaboration. In most cases, these CDFIs have gotten onto the businesses' balance sheet through underwriting decisions that happened separately and their financing most likely occurred without a feasible growth plan on the part of the business, and without coordination with the other CDFI providers. The outcome can be a business in which two or more CDFIs have invested, but the business is not actually on the growth path they engaged the CDFIs for in the first place. CDFIs need to proactively identify small businesses in this situation and think together about how their debt is helping (or not) this business to grow. Going beyond that, CDFIs should engage that business to chart a multi-year growth strategy to which they pledge debt and technical assistance to implement. This goes beyond simply replicating the traditional banking model with slightly better rates and more risk tolerant underwriting. This approach gets out to the bleeding edge of charting a a growth strategy fueled by a multi CDFI coalition of resources across the growth cycle of the small business. It puts the financing power and technical resources of multiple CDFIs behind the small business, not just one. The force multiplier effect on Black and Latino small business growth would be dramatic.
The Road Ahead: A Collaborative Blueprint for Growth
In order to truly uplift Black and Latino small businesses, CDFIs can't view collaboration as just about being more convenient to connect with. Collaboration should be viewed as a strategic tool with a laser focus on creating growth, rooted in a shared commitment to economic empowerment. Collaborative initiatives could include joint coaching and technical assistance efforts, knowledge-sharing platforms, and the establishment of a collective fund specifically dedicated to debt relief. This kind of collaboration makes even more sense given that CDFIs have various loan limits and target small businesses at differing levels of scale. It's not efficient for every CDFI to independently create this kind of capability. Far better for it to be provided as a collaborative, shared resource.
As we navigate the intricate landscape of small business lending, it's imperative that CDFIs rise to the occasion and evolve their collaboration techniques. Black and Latino small businesses require more than just a traditional lending model with somewhat better rates; they need tailored solutions that address the complexities of debt financing and small business literacy. CDFIs get out on the bleeding edge by innovating products, collaborating extensively, and providing targeted small business technical support. The bleeding edge isn't comfortable, but when they reach that frontier, CDFIs can pave the way for a more equitable and inclusive economic landscape, where the full potential of Black and Latino entrepreneurs is not just acknowledged but actively nurtured.
