To Address the Racial Financing Gap, CDFIs are Essential

Businesses owned by entrepreneurs of color have been particularly impacted by declining revenues introduced by COVID-19. Despite government efforts to provide relief, many small businesses have not received the support they need. Fortunately, Community Development Financial Institutions (CDFIs) have helped fill the gaps that traditional financing systems cannot. CDFIs are mission-driven lenders that serve the communities that too often get left behind, including people of color, returning veterans, new citizens, and more.

Earlier this week, the Economic Opportunities Program of the Aspen Institute hosted a conversation about the role of CDFIs in supporting entrepreneurs and advancing equity during these uncertain times. The discussion featured Bill Bynum (Chief Executive Officer, HOPE); Michael Barr (Joan and Sanford Weill Dean of Public Policy at the University of Michigan); Nicole Jordan-Reed (Owner and Founder, Nicole Jordan Catering, LLC); Joyce Klein (Director, Business Ownership Initiative of The Aspen Institute); and moderator Helaine Olen (Opinion Writer, The Washington Post).

Discussants began by recognizing the host of challenges entrepreneurs of color face when trying to secure credit lines, even pre-COVID. Nicole Jordan-Reed shared her past experiences with being denied loans in spite of meeting stringent bank requirements, and faced the same challenge when applying for relief funds -- her PPP application being denied twice. While Nicole was able to secure funds by relying on her personal and professional networks, her experience is unique in contrast to other minority business owners. Bill Bynum warned that for many other entrepreneurs without many alternatives it’s common to fall prey to predatory lending institutions and payday lenders. This susceptibility, in addition to the hurdles of redlining or the profit maximizing focus of traditional business models, make CDFIs so important for low income and racially marginalized communities. A credit union model allows HOPE to service the public with a different level of accountability. The institution also operates with local knowledge that larger banks do not have, moreover, CDFIs offer communities of color a more personalized experience that does not merely apply one-size-fits-all formulas to their capital and potential for growth. 

Beyond the benefits CDFIs bring to communities, these mission-driven lenders are setting a precedent for new banking frameworks. Increased collaboration between CDFIs and large banks can introduce them with how to best deliver credit to POC entrepreneurs. More importantly, increased collaboration with banks could provide new consumer protections to CDFI clients since there isn’t any mention of small businesses in the Truth in Lending Act. The federal government has an important role to play in creating reform that requires increased transparency from banks and other lenders. Moreover, the government ought to have established a priority distribution of relief programs for small businesses and POC entrepreneurs; especially as they face disproportionate challenges. More grants are necessary and only the federal government can move to do that, especially as the administration negotiates another relief bill.  Additional actionable steps for the federal government are to create a program that can provide liquidity to CDFIs, and increase emergency capital. Above all, expanding the CDFI grant program is imperative for the well-being of marginalized entrepreneurs and businesses.



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