CDFIs have untapped potential as game changers for minority-owned businesses

As the coronavirus pandemic worsens with policymakers unable to reach a deal to extend relief for vulnerable Americans, low-income communities nationwide are suffering the most.

Now more than ever, there is a need for smart solutions that foster inclusive and equitable growth in American cities.

Small-business ownership has long created generational wealth, especially within communities of color. Thus, supporting underserved entrepreneurs is a key pillar of developing successful, equitable communities.

However, one of the biggest challenges facing small businesses and entrepreneurs is access to capital. For a country that has one of the most vibrant capital markets in the world, the challenge remains in getting the right kind of investment to those who need it most.

There is a $4.5 trillion investment need in over 50 community and economic development models in the United States, according to research conducted by Next Street and Capital Impact Partners. Meanwhile, there are $11.6 trillion of U.S. assets that incorporate the kind of environmental, social and governance (ESG) factors that cater to these development models. The gap between the demand and supply of this impact capital needs to tighten.

That’s where Community Development Financial Institutions (CDFIs) have a critical role to play. Long before the pandemic began, but especially since this economic fallout has severely hit small-businesses entrepreneurs, CDFIs have offered a path forward on delivering transformative change to underserved communities.

For example, Next Street recently partnered with New York-based National Development Council through their Grow America Fund to help launch an initiative that directed Paycheck Protection Program loans to low- and moderate-income communities in New York City. This initiative was in partnership with the City of New York, Amalgamated Bank and the Inherent Foundation. Together, we helped deploy more than $23 million in loans to 232 businesses that are owned by low-income entrepreneurs or people of color who would have otherwise been left behind.

But in order to get impact capital into the hands of small-businesses entrepreneurs more effectively, CDFIs need to become market makers; reach new levels of scale; establish a financial and social risk/return profile; provide integrated capital; and seek new technology and talent.

A promising step in that direction was a partnership announced in August between lender, Community Development Corporation Small Business Finance, and a CDFI, Capital Impact Partners. The alliance is meant to combine the organizations’ full suite of lending products and programs to move capital into communities that need it most.

The agreement’s focus on three pilot cities (Los Angeles, Detroit and Washington) is a strategy to take note since the organizations will use technology to test and scale new products that expand credit specific to those communities.

It’s known that neither community development or economic development alone will solve for inequity, and one without the other can lead to gentrification and displacement. But alliances like the example provided represents an opportunity to deliver community-led solutions that allows for intergenerational wealth without displacement.

Now facing an economic downturn unlike what many Americans have experienced in their lifetime, there should be no illusion that an alliance of this kind is a silver bullet. That said, it has never been more important for those with access to capital to redouble their efforts to support positive change in disinvested communities.

In order to ensure small businesses and entrepreneurs of color across the country are able to weather the current storm, and ultimately to enable the most impacted communities to emerge from this crisis stronger than before, we need to revolutionize the way capital is delivered.

Policymakers, philanthropic institutions and other CDFIs can look to the alliance between Community Development Corporation Small Business Finance and Capital Impact as a new channel being developed to connect capital to communities more effectively and with greater impact.

Editor’s note: Next Street participated in the agreement between Community Development Corporation Small Business Finance and Capital Impact Partners.