The Most Vulnerable Small Businesses and Communities Will Be Left Behind Without Targeted Action: The Fed and Treasury Can Make Sure They Are Not

March 25, 2020 • William (Bill) Bynum, Joyce Klein & Tim Ogden

You’ve heard about how important small businesses are to the economy and the nation. You’ve heard various figures being proposed to help those small businesses: $300 Billion, $350 Billion, $500 Billion.

What you likely haven’t heard is who typically receives small business stimulus funds. Even with the vast figures being proposed those funds won’t reach the most vulnerable businesses or the most vulnerable communities. We know because we’ve seen it in the past.

Unless there is specific funding for businesses in lower-income areas, the money won’t get there. Why? Because most of those areas don’t have branches of big national or regional banks. They don’t have Small Business Administration offices. And even if they did, in the midst of a crisis most banks can’t make small loans to people without a credit score or one that is less than prime. Even the SBA has credit standards that leave these communities behind.

It’s understandable. Those loans aren’t profitable enough for most banks. They require more underwriting, they require more engagement with the borrower, they require expanding the definition of acceptable risk beyond the traditional credit box to take a bet on those who have never had a fair chance.

Even with the vast figures being proposed those funds won’t reach the most vulnerable businesses or the most vulnerable communities.

Fortunately there are lenders who do serve these customers and their communities: Community Development Financial Institutions. CDFIs are mostly non-profit, mission-driven lenders that serve the people in the parts of America that too often get left behind. People in struggling rural and urban communities. People of color. Returning veterans and new citizens. People who weren’t bailed out after the financial crisis, and only recently started to see their communities’ unemployment levels fall and wages rise.

They are first-time entrepreneurs who have worked for years to scrape together enough money to start a business of their own. The small and micro-businesses that they own are food trucks and restaurants, hair and nail salons, child care centers, and other services we all rely on–businesses that are now closed by government order or not bringing in any revenue because of voluntary social distancing. These businesses mostly borrow less than $250,000. Their owners are typically paying themselves less than $50,000 a year. Because of who and where they are, these businesses are more likely to employ people trying to grab the first rung on the economic ladder.

If relief and recovery efforts are going to reach these small and micro-businesses, it has to specifically direct funds to the CDFIs who already serve them. Programs that are channeled through the Small Business Administration will not get to them. We’ve been working with a variety of stakeholders in this space including the Aspen Institute’s Microfinance Impact Collaborative, and the Opportunity Finance Network and Inclusiv, two important industry groups made up of community development lenders, to come up with a plan.

We need a two-pronged strategy. The first prong, as painful as it sounds, is about triage. Many of these small and micro-businesses cannot survive the current emergency measures keeping their customers away and their doors closed. Most proposals floating around are about extending more credit to businesses. More credit isn’t going to help these businesses, it’s just going to put their owners further in the hole. What these businesses need is the ability to suspend operations without destroying the owners’ credit or losing their existing assets. The relief they need is the ability to defer their loans for the long-term–at least until the economy starts growing again. The CDFIs who have made loans could offer to suspend those payments. Many have already done so. But CDFIs are like any other business–go without payments for too long and they will become insolvent themselves, unable to help anyone.

Many of these small and micro-businesses cannot survive the current emergency measures keeping their customers away and their doors closed.

To help the borrowers who cannot survive and keep the CDFIs healthy enough to help those who can, the Federal Reserve and the Treasury should work together to buy these loans from CDFIs, giving borrowers relief from payments in the short-term and avoiding credit damage in the long-term. The Fed could set up a special purpose vehicle (SPV) with a backstop from Treasury’s Exchange Stabilization Fund to enable the loan purchases, the same structure the Fed and Treasury are using for other financial programs. The SPV could potentially even sell on some of these loans, with incentives like tax benefits and CRA credit to help lower the total cost.

Funding an SPV to buy a substantial portion of the existing loans to businesses in the worst hit areas and industries would allow CDFIs to put their resources into helping other businesses in their community survive with a combination of loan deferrals, rescheduling and new credit. How much would it cost? Less than $2 billion to buy all of these loans nationally in the worst hit sectors. If you’d like more details on how the special purpose vehicle could work, click here.

There would be another huge benefit of the Federal Reserve and Treasury providing a specific vehicle to buy those loans. Such a step would enable other public and private funds to be put to their best use as part of the second prong: preparing for the coming recession and the recovery. Additional investment in the Treasury Department’s CDFI Fund (various proposals call for $1 billion in additional funding) as well as State government funds and private philanthropic dollars could be turned immediately to new lending to spur the recovery, and ensure it reaches the most fragile communities fast, rather than last, as it did after the 2008 recession.

The figures being floated are mind-numbing. It seems crazy to say “we are only talking about a few billion dollars.” In the context of $1 trillion+ response to the crisis, it really is a drop in the bucket.

It’s a critical drop though. Without it, we know what is coming. Another round of hardship for our most vulnerable neighbors. Another decade of lost jobs and lost opportunities for many communities and people.

The Fed and the Treasury have the funds and the authority to do this right now. Keep in mind too, that a $1 investment in CDFIs typically generates $10 in additional capital. Enabling CDFIs to get businesses restarted and growing in these communities will have a huge benefit in terms of getting the economy going again: these people are going to put the dollars they get to work immediately.

The only way to ensure that we avoid an even more painful replay of the last recession and slow recovery is to make sure that these communities, businesses and the CDFIs that serve them are included, specifically and intentionally, in the public and private response to the crisis.

If you recognize the importance of small and microbusiness lending through CDFIs, and the need for dollars to flow to disadvantaged communities, would you join us by endorsing this call for specific support? Contact us at boi@aspeninst.org to sign on and we’ll add your name to the other leaders who are supporting this action to help vulnerable businesses. Current signatories include:

Luz Urrutia, CEO, Opportunity Fund
Paul Quintero, CEO, Accion East, Inc.
Robert F. Boyle, CEO, Justine PETERSEN
Janie Barrera, President and CEO, LiftFund
Anne Haines, President/CEO, DreamSpring
Lisa Mensah, President and CEO of Opportunity Finance Network
Cathie Mahon, President/CEO of Inclusiv
Michael Barr, Joan and Sanford Weill Dean of Public Policy, Ford School of Public Policy, University of Michigan
John Bridgeland, CEO, Civic Enterprises and Former Director, White House Domestic Policy Council under President George W. Bush and Member, White House Council for Community Solutions under President Barack Obama
Jonathan Morduch, Professor of Public Policy and Economics, NYU Wagner Graduate School of Public Service
Agnes Noonan, President, WESST
Nancy T. Swift, Executive Director, JEDI
Paul E. Taylor, Director of Small, Minority and Women Business, Mayor’s Office, Baltimore City
Jennifer Tescher, President & CEO, Financial Health Network
Bulbul Gupta, CEO, Pacific Community Ventures
Donna Gambrell, President & CEO, Appalachian Community Capital
Della Clark, President, The Enterprise Center Capital Corporation
James H. Bason, President & CEO, TruFund Financial Services, Inc.
Sara Razavi, CEO, Working Solutions
Phil Black, Executive Director, Community Investment Fund of Indiana
Joseph Brancucci, Senior Vice President – Chief Lending Officer, Financial Partners Credit Union
Nita Shah, Executive Director, MESO
Grace Fricks, President and CEO, Access to Capital for Entrepreneurs
Watchen Harris Bruce, President & CEO, Baltimore Community Lending, Inc.
Patrick Snyder, Executive Director, BizStarts
Erik R. Pages, President, EntreWorks Consulting
Marshall E. Crawford, Jr., President & CEO, The Housing Fund
Luis E. Mora Rechnitz, President, FINANTA
Amy Bunton, EVP | COO, Pathway Lending
Tonita McKnight, EDFP, Business Development Officer, Albany Community Together, Inc.
Leslie Benoliel, President & CEO, Entrepreneur Works | Entrepreneur Works Fund
Shirley Senn, Chief Social Impact Engineer, CU Strategic Planning
Mary Houghton, Project Manager, Expanding Black Business Credit Network
Lynne Cutler, President and Founder, Women’s Opportunity Resource Center
Kevin Smith, President and CEO, Carolina Small Business Development Fund
Steve Storkan, Executive Director, Employee Ownership Expansion Network
Anna Beth Gorman, Executive Director, Women’s Foundation of Arkansas
Shaolee Sen, Chief Executive Officer, Hot Bread Kitchen
Gary Cunningham, President & CEO, Prosperity Now
Marla Bilonick, Executive Director and CEO, Latino Economic Development Center
Justine Zinkin, CEO, Neighborhood Trust Financial Partners
Pam Porter, Managing Partner, Stepping Stone Partners, LLC
Kerwin V. Brown, Executive Director, UPI Loan Fund
Linda Fales, Community Development Officer, Suncoast Credit Union
Daniel Betancourt, President and Chief Executive Officer, Community First Fund
Inez Long, President/CEO, BBIF Florida
Barbara Eckblad, Principal, The Eckblad Group
Nicolas Gunkel, Vice President, Ecosystem Impacts, Forward Cities
Andy Posner, Founder & CEO, Capital Good Fund
Catherine Howard, Senior Vice President of Programs, Community Vision
Yuliya Tarasava, Co-Founder & COO, CNote
Chris Linder, CEO, MaineStream Finance
Steve Storkan, Executive Director, Employee Ownership Expansion Network
Clint Gwin, President and CEO, Pathway Lending
Richard Romero, CEO, Seattle Credit Union
Jim Morrell, President/CEO, Peninsula Community Federal Credit Union
Elissa Sangalli, Senior Vice President, Northern Initiatives

About the Authors

Bill Bynum is the Founder and CEO of HOPE Credit Union, and a Trustee of the Aspen Institute

Joyce Klein is the Director of the Business Ownership Initiative at the Aspen Institute Economic Opportunities Program

Timothy Ogden is the Managing Director of the Financial Access Initiative at NYU-Wagner, and a Senior Fellow of the Aspen Institute’s Economic Opportunities and Financial Security Programs.