Building an Inclusive Economy Through Community-Based Financial Institutions: A Conversation with Joyce Klein and Janie Barrera

February 3, 2021 • Daniel R. Porterfield

The Aspen Institute and the Microfinance Impact Collaborative recently announced the creation of the Entrepreneur Backed Assets (EBA) Fund, which will strengthen the capacity of community-based financial institutions to lend to small businesses in low-income communities and those owned by people of color. The fund, which will create a secondary market for loans originated by community-based microlenders, has been launched with initial grant funding from the Citi Foundation, the Bill & Melinda Gates Foundation, and the Robert Wood Johnson Foundation. Microsoft Corporation and Woodforest National Bank are making the first capital investments in the Fund.

I spoke with Joyce Klein, Director of the Business Ownership Initiative at the Aspen Institute, and Janie Barrera, President and CEO of LiftFund, one of the nation’s largest nonprofit microlenders, about this work.

This conversation has been edited for clarity and length.

Dan Porterfield: How did you first get involved in this work?

Joyce Klein: I come from a family with a history of working at the intersection of business and social justice. I also come from the Catholic tradition. My grandfather’s cousin was a priest who was a labor organizer in Pittsburgh. He organized with Dorothy Day and created a local version in Pittsburgh of the Catholic Worker Movement. My dad was a college professor who taught in business schools at Catholic universities. His focus was on business ethics and social responsibility.

When I was in graduate school, I was interested in the issues of poverty and through that became aware of organizations like the one that Janie leads, and some of the earlier ones in the microenterprise field that were working with women and people in poverty to help them start and grow businesses. These folks had incredible talent, drive, and ideas, but struggled to access opportunity and resources. I tried to utilize my policy and research skills in service of the work of organizations like LiftFund. That has been my life’s work ever since.

Janie Barrera: It’s incredible that providence brings us together, as Joyce describes. My dad had a fourth-grade education and my mom had an eighth-grade education, but they were great entrepreneurs. I grew up in a small town in Corpus Christi, Texas on the Gulf Coast and they owned a Mexican restaurant for 20 years. My first job at 14 was serving as a waitress at our restaurant. My parents were great at customer service but terrible at financials. After 20 years of hard work, they ended up on social security at $1,000 a month. It was a story of the need for financial education and its importance in the sustainability of small businesses.

After high school, I joined a convent and was an Incarnate Word Sister for 15 years, which led to my passion for social justice. After I left the convent, I went and got an MBA. For the last 26 years, I’ve led LiftFund, where we work to bring together the social justice and business worlds to eliminate poverty. There is the saying “You give somebody a fish; they eat for a day. You teach somebody how to fish; they eat for a lifetime.” The work that we do at CDFIs is helping people buy the pond in which to fish—to break the cycles of poverty by acquiring assets.

In 1994, we started LiftFund in San Antonio with a few employees and a great board. Today, we are in 14 states and have more than 100 employees. In the last 26 years, we have disbursed about $400 million, have a 96 percent repayment rate, and an average loan size of $25,000. The average FICO credit score of our customers is 580. We help small businesses not only with access to capital but with technical assistance.

Dan: Joyce, you are leading the Business Ownership Initiative, which is part of the Aspen Institute’s Economic Opportunities Program. In your work, you focus on how business ownership can address the racial wealth gap by creating opportunity for low-income people and communities. It requires a lot to start and grow a small business, including the structural challenge of access to capital for people of color in this country. What have you seen that works to address that?

Joyce: I am glad you mentioned this structural question. One of the critical challenges in accessing capital is that a set of structural and systemic factors have prevented Black, Latino, and Native people from building wealth. Most people who start their own businesses invest their own money or leverage their own assets. If you don’t have assets, you start behind others.

To help with this, we have created a set of organizations called Community Development Financial Institutions (CDFIs). LiftFund is an example of one of those institutions. Its goal is not to maximize profit, but to build and develop communities. CDFIs flexibly do small-business lending, like making unsecured loans and making loans that are higher risk or not profitable.

Dan: Tell me more about the history and impact of CDFIs.

Joyce: CDFIs were formally recognized in the Clinton administration following the creation of the CDFI Fund, which is a part of the Treasury Department. Many organizations were around before this, including Janie’s organization, but the rate of growth has been significant since then. However, while there are more than a thousand of them across the country, there are certainly people and communities that are not being reached. One of the main reasons for that is that there simply have not been the financial resources to enable growth.

Janie: I still think that CDFIs are the best-kept secret. In 2020, we started to get recognized. Traditionally, LiftFund has lent $25-29 million every year. In 2020, we lent $25 million strictly in Paycheck Protection Program (PPP) loans as a part of the COVID-19 economic relief effort and suddenly, we were put on the radar as a community service organization. Since we opened our doors in 1994, we have been open to anybody who institutions may not see as bankable: minorities, women-owned businesses, start-ups, service-oriented businesses, and those at low-to-moderate income levels.

We want to lose our best customers. That is our mission: to transform lives so that they leave us and go on beyond our services.

Dan: You have built real knowledge about who to lend to and how to lend successfully. What insights do you have regarding this process and how you have made it work?

Janie: While there is a lot of microlending across the globe, for the first 10 years, we were in a laboratory stage because small businesses and small business lending in the United States is more regulated. Lenders have usury laws and legal parameters that we must follow, which are different than some developing countries. And in other countries, you can see entrepreneurs on the street selling blouses and hats, candy, or tacos. Here, you get a fine from the city if you do that without the right permits.

One of the lessons learned is that the customer must have skin in the game, or they will not pay the loan back. When they are invested in their own business, they won’t let it die as they hold collateral. Business cannot exist without collateral.

We try to use intelligence and data like fintech companies are doing. While we are not necessarily as fast as them, we do not need to be. We have been learning and putting those lessons into practice. We can be nimble and observe life lessons with out-of-the-box solutions, all in pursuit of helping people and communities.

Dan: Joyce, you lead the Microfinance Impact Collaborative, which was instrumental in the creation of the Entrepreneur Backed Assets Fund, which was just announced. Could you explain those entities, and how they contribute to the goal of expanding access to capital?

Joyce: The Microfinance Impact Collaborative is operated by the Business Ownership Initiative at the Aspen Institute and is a group of six of the largest CDFI microlenders in the US. It includes LiftFund and five other organizations that are focused on making very small business loans and growing the scale of this kind of lending. We use our convening power to help these organizations collaborate and increase their impact.

When the pandemic hit, it was apparent to these six organizations that small businesses were going to be deeply impacted. And that they were going to do all they could to support small businesses. As a collaborative, we started to transition from in-person meetings to Zoom and talked about which of them were going to make PPP loans and what that would mean, how they were partnering with state and local governments and philanthropy to support small businesses, and the technologies and strategies they were using to work in a fully remote way.

We also created the Entrepreneur Backed Assets Fund, a fund designed with the collaborative to help address the financial challenges nonprofits face as lending organizations. The fund purchases loans from organizations like LiftFund and works to create a secondary market by selling the loans to banks. To the extent that we are able, we sell those loans at a profit and push those profits back to Janie’s organization and others.

Dan: When the pandemic hit, it was widely reported over the first few months that the rate of business closures was much higher among Latinx, Asian, and Black firms. How does the EBA Fund work to address that problem?

Joyce: We address it by financially supporting the work of CDFIs that make smaller loans to small businesses. They take on the challenging financial model where they are not profiting from the loans. We knew, based on data from the Federal Reserve, that 76 percent of Black business owners were looking for loans less than $100,000. About half of them were looking for loans less than $25,000. These small loans meet a key need, but to really scale it we needed to help CDFIs to improve the economics of those loans, and that’s what the fund aims to do.

Because we’re focused on racial equity, our focus in growing EBA Fund is on working with CDFIs that are serving high percentages of entrepreneurs of color, and on those led by people of color because we know they have a strong record of serving people of color in their communities.

Dan: Janie, what have you seen firsthand related to the challenges of business owners of color that have led to closures being disproportionately high in these communities?

Janie: The bottom line is that there is a lack of assets. If you are not prepared for something like this, where do you even go? What we have done in our portfolio has been a combination of giving people time through deferrals and then seeking funding for payments to get them through these times. We are also looking internally at what kind of policies we can implement to ensure we are good stewards of the work that we do, the dollars that we receive, and the follow-through with the customer. Most of our customers are service-oriented and therefore have had to close during the lockdowns. It is not their fault. We have to be there and support them.

Dan: What goals do you have for the work that you are doing for the year to come? In this country and moment, we hope to reconstruct our economy and change our business practices, investment policies, and government services to recognize the needs of small businesses. What do you hope happens?

Joyce: In our work of raising awareness of the value of CDFIs, we also want to focus on the importance of small businesses and the challenges people of color are facing. There has been a lot of focus on CDFIs in the most recently passed stimulus bill. The bill will provide more resources to help CDFIs to grow—money that has not been available in the past. So, there is now an opportunity to grow these organizations.

While the pandemic has been a moment, the issue of access to capital for small businesses, and for business owners of color especially, was an issue before the pandemic began and will continue after it is over. We are already seeing increased inequality in how deeply people are being affected by the pandemic. And even as the pandemic ends, there will be a recession. When our country experienced the Great Recession, banks tightened their lending criteria, moving away from the very markets that we are speaking about serving. We know that low-income communities and people of color are disproportionally affected by the pandemic and are the most excluded from access to financial markets, which implies they will have a longer and harder economic recovery. We need to help them to recover and grow, and CDFIs will be critical.

So, our big vision is: How do we use the knowledge that we have accumulated through our research and work over the last 25 years to help CDFIs meet the needs of small businesses?? How do we share the expertise to help them build their organizations? How do we play a convening role with organizations, policymakers, and leaders at all levels to help this work?

Janie: I think we will continue to see the resilience of small entrepreneurs. It is in their blood and their DNA. While they may not be in the same business in 2021 as they were in 2020, they will survive. These people want to leave a legacy for their children. They want to be able to leave something in the form of generational wealth and assets that they have not received in the past. We want to partner with them to make that possible.