On July 12 the Federal Reserve Board of Governors invited a national audience of bankers, small-business trade groups, government agencies and leaders of community development financial institutions to address the immediate and longer-term credit needs of small businesses.
Fed Chairman Ben Bernanke led off by asserting that 60% of job creation is coming from small businesses, and that to stimulate both the formation and growth of new enterprises, "Lenders must do all they can to meet the needs of creditworthy borrowers."
However, both Mr. Bernanke and the Fed's economist, Robin Praeger, acknowledged that creditworthy businesses are not accessing capital and that small firms are reporting a worsening of borrowing conditions. Karen Mills, chief of the Small Business Administration, said in her keynote speech that 40% of 27 million small businesses can't get their credit needs met — "even healthy ones with purchase orders."
Both bankers featured on the Private Sector Small Business Finance Panel reported that demand was down. These bankers believe that they are doing all they can to reach borrowers, but that there are very few creditworthy business customers in their communities.
On the other hand, several leaders of nonbank CDFIs reported a huge increase in demand by a mix of creditworthy businesses, businesses suffering from poor sales and new businesses started by the until-recently unemployed. The question for all panelists at this conference was how to deploy more capital into distressed communities and revitalize not only Main Street, but the backstreet and sidestreet businesses.
CDFIs have proven that they can move capital because they know the needs of their communities and are providing the needed technical assistance to help borrowers improve their business operations and become loan-ready. Fortunately, the Treasury's CDFI Fund has ramped up its awards and is looking toward putting another $300 million in capital into grants to nonprofit lenders for small lending and microlending. And, the SBA and the Department of Agriculture have increased capital outlays for microloans under $50,000. However, there are notable gaps that keep this capital from being deployed by CDFIs.
Unlike depository institutions, CDFIs need the following to mitigate risk, attract new investment and keep interest rates affordable for their borrowers:
Loan-loss reserves: Fifteen percent of a CDFI's loan portfolio needs to be reserved for losses. Banks and private philanthropy could fill this gap with small grants. Furthermore, the Fed needs to increase the CRA value of such grants to give banks more incentives to make them.
Loan guarantees: The SBA should extend its loan guarantees to CDFIs by expanding the 7(a) and Community Express programs.
Technical assistance support: These services are critical for a variety of purposes: they help the unemployed start new firms; they help existing Main Street firms retool and stabilize their operations; they create the pipeline of loan-ready customers; they work with the borrower after the loan to improve management and weather a bumpy economy.
Technical assistance services were cited by many participants of the Capstone Conference as the key to the economic renewal of distressed communities through small- and microbusiness development.
Yet as Selma Taylor, CEO of California Resources and Training, pointed out, there is minimal government funding and fewer banks are making grants to CDFIs to cover the costs of these services.
For example, the SBA's Program for Investment in Microentrepreneurs allocates less than $5 million nationally for technical assistance programs. In California alone, an additional $75 million is needed to reach just 100,000 of the estimated 2 million small businesses and microbusinesses that could benefit.
The Fed will soon hold hearings on how to better implement the CRA. First it needs to recognize that we have undergone a seismic shift in our financial services sector and that CDFIs are playing, and will continue to play for the foreseeable future, a significant role in communities abandoned or underserved by banks.