As a general rule, disadvantaged people have reduced access to credit, making them vulnerable to predatory lenders charging high and even astronomical interest rates. There's a long and unfortunate history of wealth stripping by such lenders in low-income communities. But the tragedy here is not just that wealth is siphoned away from Americans who can least afford such a hit; it's also that new wealth isn't being created to the degree that might otherwise be the case, with small business owners unable to find the capital to set up shop or expand. Too often, such owners are themselves prime targets for usurious lending practices that inflict mortal wounds on their businesses.
Foundations have long recognized these challenges and have supported a range of community development financial institutions from which small businesses can seek capital. CDFIs are U.S. Treasury Department-certified banks, credit unions, loan funds, and venture capital funds catering to populations underserved by the wider financial sector.
The Opportunity Finance Network (OFN), a national network for CDFIs, is a key player in this space, drawing support from a range of foundations over the years including from Ford, Kresge, Annie E. Casey, and corporate backers such as Wells Fargo and Citi. OFN describes its members as “profitable but not profit-maximizing,” a third way between traditional finance and direct grants for community development. For philanthropy, supporting CDFIs can be a way to multiply benefits by indirectly building up a community’s private sector potential.
As the good guys on the lending scene, effective CDFIs need publicity as well as direct support for their work. Since 2014, OFN’s Small Business Leader Awards have recognized CDFI lenders that go above and beyond for local entrepreneurs. Backed by the Surdna Foundation and Goldman Sachs’ 10,000 Small Businesses program, this year’s awards went to four lenders: Accion, the Carolina Small Business Development Fund, the Community Reinvestment Fund, USA, and Montana & Idaho CDC.
The financial component is modest: $50,000 to be shared among the winners. But Surdna and Goldman Sachs also back the Small Business Finance Collaborative, the OFN program that yearly awardees are drawn from. Beginning in 2015, the collaborative gathered 24 CDFI lenders to study how to build capacity in the small business lending field.
OFN and its partners are intent on making the CDFI model work in more places and for more people. From 2007 through this year, it has played host to a heftier CDFI awards program, the Wells Fargo NEXT Awards for Opportunity Finance. The program has given out over $76 million to 24 CDFIs since 2007, with support from the MacArthur and Kresge Foundations, Prudential and, naturally, Wells Fargo.
Starting next year, the NEXT initiative will continue awarding grants as the NEXT Fund for Innovation, providing flexible financing for new models, platforms, and processes in the CDFI industry. Support of $500,000 to $2 million in financing will go to three CDFIs per year.
CDFIs aren’t a new phenomenon, but they seem to be gaining momentum lately, along with the asset building movement as a whole. As we've reported, the range of funders giving for financial inclusion has expanded in recent years, with more banks playing a notable role. (That role has also raised some concerns, as we've discussed elsewhere.) Amid the various strategies and tools backed by such funders, empowering lenders who are truly committed to their communities seems especially promising. Capital is the fuel of the American dream, after all.
We’ve written about several other recent initiatives in this area. They include Sam’s Club’s Giving Program, JP Morgan Chase’s $125 million PRO Neighborhoods initiative, and a partnership between Surdna and Kresge (frequent OFN funders) to support entrepreneurs engaged in creative placemaking.