Capital Idea

The Economic Opportunities Program ramps up lending to entrepreneurs of color.

Give NowBusinesses launched and owned by entrepreneurs of color tend to be smaller and in less profitable industries because of systemic inequality and racism. These entrepreneurs cannot rely on personal or familial wealth, nor can they get the external financing that is often secured by personal assets. They must start small and slowly work their way up. That means when they do apply for financing, they tend to be looking for smaller amounts of capital—the vast majority apply for less than $100,000, and many seek less than $25,000. Finding, underwriting, and supporting those businesses just costs too much compared with the interest earned: it is very difficult to make loans under $100,000 at affordable rates and turn a meaningful profit. Bank lending to small businesses in amounts less than $100,000 has been dropping for decades and is expected to decline more as a result of the pandemic.

Announced in December 2020, the Entrepreneur Backed Assets Fund will allow these lenders to extend more capital to hard-hit businesses and communities by buying existing loans from lenders. This new nonprofit, launched out of the work of the Business Ownership Initiative, part of the Institute’s Economic Opportunities Program, will allow Community Development Financial Institutions that are already active lenders to entrepreneurs of color to provide more capital and support to those communities. The fund puts capital back into the hands of the lenders, which they can turn around and give to other businesses instead of waiting for repayment on their existing loans. Positioning CDFIs to extend capital to small businesses will be critical to ensure an equitable recovery from the pandemic. Meanwhile, the fund will sell the loans it buys to commercial banks who are interested in the Community Reinvestment Act credits that lending to low-income communities can provide. The fund will continue to raise more capital—with a goal of $50 million—to buy more loans from more lenders, so that more money gets into the hands of entrepreneurs of color. Everyone deserves to dream bigger.