Stimulating CDFI lending through a new secondary market

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Bank financing for entrepreneurs is harder to come by these days, thanks to rising interest rates and the collapse of Silicon Valley Bank. This is especially problematic for entrepreneurs of color, who generally have more difficulty obtaining financing than their white colleagues. One answer is to help Community Development Financial Institutions (CDFIs) increase their lending, especially to underbanked founders.

That’s true Entrepreneur Backed Asset Fund (EBA). comes in. With the goal of boosting CDFI lending, the non-profit organization is creating a new secondary market for CDFI lending. “The ultimate goal is to drive an industry-wide change that makes funding pools available to CDFIs, enabling them to better manage their balance sheets and growth and do so in a sustainable way over the long term,” says co-founder Brett Simmons .

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Bundling microloans

Many CDFIs target, at least in part, businesses owned by women, people of color, immigrants and other groups that have historically had a hard time getting funding from the traditional financial system. But their resources are typically limited by their own variable sources of funding — philanthropy and the public sector, as well as banks trying to meet their Community Reinvestment Act (CRA) obligations.

To address that problem, EBA Fund is increasing the liquidity of CDFIs through a new secondary market for their microloans. To that end, it bundles loans into packages to sell to banks. That, in turn, accomplishes a number of goals: freeing up CDFIs’ assets to make more loans and helping banks meet their CRA lending tests. “We are changing incentives for lenders,” says Simmons. In addition, the EBA fund returns premiums on loan sales to CDFIs, increasing capital flow.

Simmons estimates that the EBA fund has already unlocked $41.5 million in potential loans for underbanked small businesses.

The launch going up

Simmons and co-founder Jonathan Brereton got the idea for EBA Fund a few years ago, after they were founded Run asset management to facilitate transactions between CDFIs and banks. Their experience highlighted the value of creating a fund that could act as a market maker for these transactions, addressing timing mismatches between when CDFIs want to sell and when banks want to buy, and adding elements such as a third-party risk assessment and backups. – up service that reduces risk for bank buyers. The fund would be managed by Revolve.

In early 2020, Simmons and Brereton, working with the Microfinance Impact Collaborative (MIC) and the Aspen Institute Business Ownership Initiative (BOI), developed their business plan, with the intention of launching later in the year. But after the pandemic hit, they pushed their timeline back to April and started rolling out the service that summer.

The real secret sauce, according to Simmons, comes from that combination of selling CDFI loan packages from banks and charging a premium, of which ERB returns 75% to the CDFIs. “This allows us to generate more revenue for our CDFI partners,” says Simmons — a total of $3.5 million over the past three years. “We’ve really taken our stride over the past six months,” says Simmons.

To date, the ERB Board has vetted and approved 20 CDFIs to be part of the ERB system and has purchased loans from 13 of them. Seventy percent of those loans were made to entrepreneurs of color.

Funding for ERB comes from a variety of sources, including the Citi Foundation, the Bill and Melinda Gates Foundation, and others.

Based in New York City Accendus, which focuses on low-to-middle-income small business owners, began working with EBA Fund about two years ago and has issued approximately $1 million in loans through the program. “We see this as a positive for the field,” said CEO Paul Quintero. “EBA is just getting started. They are going to build an inventory of loans to attract a larger market.”