COMMUNITY DEVELOPMENT
MICRO LOAN FUNDS
Community Economic Development Manual
Disclaimer
This fact sheet was produced by the California Community Economic Development Association, in
partnership with the Community Action Partnership National Office, as part of the U.S. Department of Health
and Human Services, Office of Community Services. The “Community Economic Development” publication
series is designed to increase the knowledge of processes for community economic development projects
nationwide. The contents of this manual are presented as a matter of information only. Nothing herein should
be construed as providing legal, tax, or financial advice. The materials referenced and the opinions expressed
in this product do not necessarily reflect the position of the U.S. Department of Health and Human Services,
Office of Community Services, and no official endorsements by that agency should be inferred.
Support for the Community Economic Development project and this toolkit is provided by the
Department of Health and Human Services Administration for Children and Families,
Office of Community Services (OCS), grant award number: 90ET0426/01.
Entire contents copyright © 2011 Community Action Partnership. All rights reserved.
CommunityDevelopmentMicroLoanFunds 1
COMMUNITYDEVELOPMENTMICROLOANFUNDSUseofthisGuideTheCommunityDevelopmentMicroLoanFundGuideisintendedforusebycommunitydevelopmentorganizationsforthefollowingpurposes:
1. OrganizationswantingtolearnaboutMicroLoanFunds2. Organizationscreatingalternativelendingandinvestmentprograms3. OrganizationsseekingservicesandcapitalfromMicroLoanFunds
NOTE:Forpurposesofthisguide,focuswillbeonbusinesslending(tostart,expandorinvestinbusinessdevelopment)andtoalesserdegreeonpersonalloans(home,autooreducationalloans).Thisguideisoneoffiveguidesdiscussingthefollowingcategoriesoflendingandinvestmentactivities:
1. CommunityDevelopmentLoanFunds(CDLFs):ThisbroadcategoryincludesallloanfundsthatarenotCreditUnionsorEquityInvestmentfunds.Theinformationinthissectionincludesthestepsandconsiderationsforstartingaloanfund.
2. MicroloanFunds:Thisisasubcategorytypeofloanthatfundfocusesonsmallerloans,primarilyforstartupfinancing.
3. CreditUnions:Thisisafederal/statedesignationforalendinginstitutionthatmeetscertaincapitalrequirements,operatingguidelinesandmanagementsystems.
4. EquityInvestmentFunds:Fundsthatprovideequityinvestment(versusloans)intocommunitydevelopmentactivities.
5. CommunityDevelopmentFinancialInstitutions(CDFIs):ThisisaFederalUSTreasurydesignationbasedonorganizationalandlendingstandardsthatallowsloanfundsaccesstoUSTreasurygrantsthroughtheCDFIFund(includesmostCDLFs,MicroloanfundsandCreditUnions).
Organizationsinterestedinexpandingaccesstocapitalforunderservedcommunitieshavefocusedonvariousformsofloanandinvestmentfunds.Microloanfundsareaspecifictypeoffundwhichtargetssmallloanstoentrepreneursandindividuals.Loanfundscanspecializeandfocuslendingforvariousproductsandmarkets(homeorautoloans,businessstartupsorexpansion)inspecificneighborhoodsorregions.
AlloftheseformsofloanandinvestmentfundsareeligibletobecomecertifiedCommunityDevelopmentFinancialInstitutions.Thisfederalcertificationallowsloanandinvestmentaccessawidermenuofgrantsandprogramsdesignedtobringcapitaltolowincomeandunderservedcommunities.
CommunityDevelopmentFinancialInstitutions(CDFIs)isbecomingthestandardnomenclaturecategorizingallcommunitydevelopmentlendingandinvestmententities(albeitnotallsuchentitieshaveobtainedtheofficialUSTreasurydesignation,mosthaveandwillapplyfortheCDFIdesignationbecauseitrepresentsarecognizableindustrystandard).TheOpportunityFinanceNetworkistheassociationrepresentingalltypesoflendinginstitutionsandhasbroadly
CommunityDevelopmentMicroLoanFunds 2
categorizedalllendinginstitutionsasCDFIsandsubcategorizedlendingandinvestmentinstitutionsasfollows:1
“Aswithmainstreamlenders,avarietyofinstitutionshasemergedtoservethebroadrangeofneedsinemergingdomesticmarkets.Althoughtheyshareacommonvisionofexpandingeconomicopportunityandimprovingthequalityoflifeforlowincomepeopleandcommunities,thefourCDFIsectors—banks,creditunions,loanfunds,andventurecapital(VC)funds—arecharacterizedbydifferentbusinessmodelsandlegalstructures”:
1. CommunityDevelopmentBanks:Communitydevelopmentbanksprovidecapitaltorebuild
economicallydistressedcommunitiesthroughtargetedlendingandinvesting.Theyareforprofitcorporationswithcommunityrepresentationontheirboardsofdirectors.Dependingontheirindividualcharter,suchbanksareregulatedbysomecombinationoftheFederalDepositInsuranceCorporation(FDIC),theFederalReserve,theOfficeoftheComptrolleroftheCurrency,theOfficeofThriftSupervision,andstatebankingagencies.TheirdepositsareinsuredbyFDIC.
2. CommunityDevelopmentCreditUnions:Communitydevelopmentcreditunions(CDCUs)promoteownershipofassetsandsavingsandprovideaffordablecreditandretailfinancialservicestolowincomepeople,oftenwithspecialoutreachtominoritycommunities.Theyarenonprofitfinancialcooperativesownedbytheirmembers.CreditunionsareregulatedbytheNationalCreditUnionAdministration(NCUA),anindependentfederalagency,bystateagencies,orboth.Inmostinstitutions,depositsarealsoinsuredbyNCUA.
3. CommunityDevelopmentLoanFunds:Communitydevelopmentloanfunds(CDLFs)providefinancinganddevelopmentservicestobusinesses,organizations,andindividualsinlowincomecommunities.Therearefourmaintypesofloanfunds:microenterprise,smallbusiness,housing,andcommunityserviceorganizations.Eachisdefinedbytheclientserved,thoughmanyloanfundsservemorethanonetypeofclientinasingleinstitution.CDLFstendtobenonprofitandgovernedbyboardsofdirectorswithcommunityrepresentation.
4. CommunityDevelopmentVentureCapitalFunds:Communitydevelopmentventurecapital(CDVC)fundsprovideequityanddebtwithequityfeaturesforsmallandmediumsizedbusinessesindistressedcommunities.Theycanbeeitherforprofitornonprofitandincludecommunityrepresentation.
Thecompanion“CommunityDevelopmentFinancialInstitutions(CDFI)Guide”alsotouchesonmanyaspectsofloanfundsandshouldalsobereviewed.TheCDFIGuidehoweverisusuallythe“nextstep”forestablishedloanfunds.Wewouldalsorecommendreviewingthe“BusinessTechnicalAssistanceGuide”sincethetwocommunitydevelopmentactivitiesworkhandinhand.Duetorecenteconomicandfinancialturmoil,commerciallendersandinvestorshavetightenedlendingrequirements,resultingina“creditcrunch”wherecreditneedsaregreaterthanresources.Thiseconomiclandscapehasresultedincommercialfinancialinstitutionsrelyingmoreoncommunityloanfundsasthemechanismtobetterservenichemarketneeds.Financialinstitutionsnowinvestandlendmoreaggressivelytofinanciallysoundandstableloanfunds.Loanfundshavebuiltastrongreputationbyunderstandinglocalcreditnuancesandneedsresultinginsoundlendingandstrongloanportfolios
1 Opportunity Finance Network, website: www.opportunityfinance.net
CommunityDevelopmentMicroLoanFunds 3
Loanfundscomeinmanysizesandfocusonamyriadofcommunitydevelopmentcreditneeds.Communitybasedloanfundsareintegratedwithtrainingandbusinesstechnicalassistanceprograms.Togethertheseresourcesenhanceandsupportthesmallbusinessindustry,averyimportantpartofcommunitydevelopmentandstabilization.Businessprograms,servicesandloanfundsareusuallymanagedbythesameorganizationthatprovidescomprehensivebusinessassistance.Loanfunds,howevercanstandaloneandbecomeacentralizedfundingmechanisminpartnershipwithotherlocalandregionalbusinesssupportprogramsandorganizations.Forsuccessfulloanfunds,theCDFIdesignationisveryimportantandallowslendingprogramstogrowdramatically.MostfoundationandcorporategrantsandinvestmentsfromfinancialinstitutionslookfortheCDFIdesignationbeforegrantorinvestmentdiscussionsbegin.Overthelastthreeyears,financialinstitutionshavebeenveryactivelyseekingsoundCDFIstoinvestin.CDFIshavebeenaverysuccessfulmechanismforfinancialinstitutionstomeetlendingandinvestmentmeasuresrequiredbytheCommunityReinvestmentAct(CRA)andenforcedbybankingregulators.AhighCRAratingisneededifthefinancialinstitutionhasplanstoexpandinthefuture.TheCDFIdesignationisdeterminedthroughacertificationprocessconferredbytheCDFIFundoftheDepartmentofTreasury.Thedesignationisforfinancialinstitutions(andlendingprogramsincludingcommunityloanfunds)andallowsaccesstoTreasuryprogramsandinvestments.NOTE:BecausetheCDFIdesignationissoimportant,itwillbereferredtothroughoutthisguideandwillbesummarizedattheend.The“CommunityDevelopmentFinancialInstitutionsGuide”shouldbereferredtofordetailsontheCDFIFundanditsprograms.Loanandinvestmentfundsplayanintegralroleinacommunityeconomicdevelopmentstrategy.Loanfundsbringcapitaltounderservedmarketsthatincludebusinessfinance(startup,micro,non‐profit,smallandbusinessexpansion),realestatedevelopmentfinance(affordablehousing,commercialandoffice,communityfacilitiesandindustrial)andpersonalfinance(auto,homeorpersonal).Capitalenhanceseconomicstabilitywhilecreatingjobsandopportunitiesforcommunityresidents.Creationofpersonalandcommunityassetsisakeystoneinbuildingandstrengtheningcommunities.Loanfundsalsobringcommunitiesahigherleveloftechnicalexpertiseinbusinessandfinance,increasingthepotentialforsustainedcommunitystabilityandgrowth.Financialinstitutionshavebecomemoreeffectiveinmeetingcustomerdemandsinlowincomeanddisadvantagedcommunitiesthroughchannelscreatedbyloanfunds.Financiallysuccessfulfundsgenerateincometocoverorganizationaloperatingandoverheadexpensesandcanbringadditionalincometosupportothercommunitycreditneeds,suchasbusinesstechnicalassistanceprogramsandexpansionoflendingservices(suchasautoloans,microloans,homeorbusinessloans).Astrongerandfinanciallyviablelendingbusinessenhancestheoverallsuccessandlongevityofyourcommunitydevelopmentorganizationwhilesupportingcommunitycreditneeds.Loanfundsplayaveryimportantroleincommunitydevelopment(revitalizationandstabilization).Theeffectsaresubstantialandinclude:FortheOrganization:
1. Generatesadditionalincomefortheprogram2. Supportsandallowsforthecreationofcomplementaryprograms,servicesandprojects3. Expandsstaffcapacityandcapabilitiesbyattractingandretainingexperienced
professionalsinbusinessfinanceanddevelopment
CommunityDevelopmentMicroLoanFunds 4
Forthecommunity:
1. Increasesaccesstocapital2. Increasedaccess‐relatedresourcessuchastrainingandtechnicalassistanceintheareasof
financeandbusinessdevelopment3. Createspersonalandcommunityassets4. Enhancesthelocaleconomybysupportingimportantsegmentsoftheeconomic
infrastructureincludingbusiness,residentialandindustrialsectors5. Effectivemeansofsupportingentrepreneurialdevelopmentinneighborhoodsandcreating
neededcommunitygoodsandservices.Successfullendingefforts(andancillaryfinancialprograms)resultsineconomicallystrongercommunities,strongerworkforces,moreinformedandcapablebusinessesandtenants,andultimatelyastrongerandmoreinclusiveeconomy.
CommunityDevelopmentMicroLoanFunds 5
COMMUNITYDEVELOPMENTMICROLOANFUNDS
Microloanfundsareaspecificcategoryofcommunitydevelopmentloanfunds.AccordingtotheOpportunityFinanceNetwork,“Communitydevelopmentloanfunds(CDLFs)providefinancinganddevelopmentservicestobusinesses,organizations,andindividualsinlow‐incomecommunities.[Loanandinvestmentfunds]aredefinedbytheclientserved,thoughmanyloanfundsservemorethanonetypeofclientinasingleinstitution.CDLFstendtobenonprofitandgovernedbyboardsofdirectorswithcommunityrepresentation.”2
CDLFsarenotregulatedentitiesanddepositsorinvestmentsintofundsarenotguaranteed;howevermostadheretoastandardcreatedbytwomajorentities.ThefirstisafederalprogramthroughtheCommunityDevelopmentFinancialInstitution(CDFI)Fund.TheFundhasestablishedguidelinestobecomeaCDFI(andbeeligibleforprogramgrants).ThesecondhasbeenestablishedbytheOpportunityFinanceNetwork(OFN).OFNisanon‐profitassociationwhosemembershiprequiresthatprospectivemembersmeetperformancestandardsthatareappropriatefortheirparticularoperatingcontext.OFNstandardsarebasedon:
1. MissionandImpact:Primarymissionto“striveandtohaveapositiveimpactonlowincome.Low‐wealthandotherdisadvantagedpeopleandcommunities”3
2. FinanceLedStrategy:Lendingactivityhistoryofovertwoyears,beanon‐governmentalentityandprovideaffordable,responsiblefinancialproductsandprovidefinancialservices.
3. CommitmenttoPerformance:Meetcertainloanandriskmanagementpoliciesandprocedures,haveauditedstatementsandmeetcertaincapitalandportfolioratiosandrequirements.
4. SupportOFN’sMissionOFNalsoprovidesextensivetechnicalassistanceandaccesstoinformationanddatatoassistinthestart‐up,operationandmanagementloanfunds.LendingandInvestmentProgramFeasibilityConcepts:Operatingaloanfundisabusiness.Loanfundscangenerateincomefororganizationsiftheyareoperatedproperlyandhavetherightlevelofactivity.Keymanagementtermsandconceptsinclude:
1. CostofFunds:Yourloanpoolmayincludevarioussourcesofgrantsandinvestmentfunds.Somewillcomeinatdifferentinterestrates.Theblendedrateistheaveragerateforyourloanpool.Ifyoureceivedallgrantstheratewouldbe“0”butifyoureceivedaninvestmentorloan,theratemightbe2‐5%.
2. InterestRateSpread:Thespreadisthedifferentialbetweencostoffundsandwhattherateofreturnisforyourfunds(averageinterestrateyouarecharging).
3. Breakeven:Thisistheminimumrate(abovethecostoffunds)youneedtochargetocoveryourexpenses.
4. FundExpensesandOverhead:Expensesincludebusinessoperations(loanandportfoliomanagement),businessmanagementandmarketing,officeandstaffcosts.Theseareexpensesthatshouldbepaidfromtheincomederivedfromthe“interestratespread”.If
2 Opportunity Finance Network, Website: www.opportunityfinance.net 3 Ibid
CommunityDevelopmentMicroLoanFunds 6
yourincomedoesnotcoverexpenses,youwillneedtosecureongoingfundingforoperations.
5. LoanLoss:Thisistheexpectedrateoflossesinbadloans.Allfundshaveprovisionsforloanlossesandthemoreaggressivethefundis(willingtotakemorelendingrisks),thegreaterthelossescouldbe.Successfulfundsestimateloanlosseswellbelow5%(whichatonetimewasastandardcommerciallendinglossexpectation).
6. LoanLossReserve:Loanlossreservesarefundssetasidethatmaybeneededtorepayanyloansorinvestmentsmadetoyourfund.Ifyourfundconsistsofamixofloansinvestmentsandgrants,andaportion(ormajority)ofthebadloanneededtoberepaidtoalenderorinvestor,youwoulddrawthefundsfromaloanlossreserve.Ifoneloanwentbadandyourfundlost$25,000.,youwouldneedtotapintothereservetorepaythelenderorinvestor.Theriskieryourlendingisorifyouhavehadhistoricallyhighloanlosses,youwouldneedahigherloanlossreserve.Highloanlossreservesdonotbenefityourfundsincetheyaredollarsthataresetasideandarenot“working”asoutstandingloansorgeneratinginterestincome.
Infinancialinstitutionsandinlargerfunds,loansinportfolioarerated.Thosewithgreaterriskorinvariousstagesofdistress(latepayments)willhaveahigherpercentagesetasideforpotentialloanlosses.
7. Feasibility:Incomeneedstoexceedexpenses.Thelargerthelendingpool(andleveloffundingyouhaveouttoborrowers)thegreateryourpotentialreturnsare.Similarly,smallersizedfundshaveamoredifficulttimegeneratingincometocoverexpenses.Smallerloanshavegreaterrelativeoperatingcostsbecausehandlingandprocessingcostsforeachtransactionisaboutthesamewhethertheloanisfor$500or$5,000,000.
StartuporExpansion/BecomingaMicroLoanFundThefollowingsectionwilldiscussvariousstrategiesandstepsthatshouldbeconsideredifyouareastartuploanfundorifyouareexpandingtogainCDFIdesignation.Wewilllookatthefollowing:
1. Start‐uploanfund:A. AsanewfundB. Throughapartnership
2. Existing,slightlyexperiencedloanfund3. Existing,experiencedloanfund
StartupFund:Startingaloanfundisverydifficultduetocosts.Fundingisneededforbusinessoperationsandfortheloanfund.AlendingtrackrecordisneededtoattractfinancingortobecomeeligibleforatechnicalassistancegrantthroughtheCDFIFund.Thefollowingisasuggestedguidefororganizationsthathaveclearlyidentifiedneedsandstrongsupporttocreateafund.Supportfromyourorganizationandboardiscritical.Thefundshouldbetargetedtoaspecificmarketsegment:microbusinesses,smallbusinesses,affordablehousingorconsumerfinancing.TherearetwopotentialwaysofbecomingaCDLF,onestartingfromscratchandonethroughpartnerships.Strategy1:NewFund(Ifyourplanscallforthecreationofanewfundorstartup).Asignificantamountoffundingandpredevelopmentworkisneededfordevelopingthebusinessplan,marketingandmanagementplans.ConsiderapplyingforaCDFITechnicalAssistanceGrant.Youwillalsoneedfundingforoperationsandfortheloanfund.Ifthisisthecase,considerthefollowingsteps:
CommunityDevelopmentMicroLoanFunds 7
1. FundInitiation:Secureseedfundstoallowforstafforconsultantassistanceforthe
following:(fundingcouldbelowerifyourstaffhasthetimetoconductthepreliminaryresearch)
A. ConceptPaper:Creationofaonetotwopagesummarythatincludesasummarydescriptionofyourorganization,needs,size,management,andpotentialresourcesavailableforthebusinessandfund.
B. CommunitySupport:Obtainsupportfromentitiesthatrepresentyourtargetmarket
C. PublicandPrivateSectorSupport:Identifysupportfromentitiesthatrepresentsyourtargetmarket
D. IdentifypotentialsourcesforpredevelopmentfundsE. Seekgrants(orplantoself‐finance)
2. GO/NOGO:Theinformationresearchedabovewillallowyoutodeveloptheconceptpaper.Thiswillallowyourorganizationtodecideifthecreationofaloanfundmakessenseandisfeasible.Securingpredevelopmentfundswillbeessentialespeciallyifyouaretryingtocreatealargefund.Theconceptpaperwillbethebasisofthebusinessandmarketingplan.
Determinationofthescope,size,anddirectionofyourloanfundshouldprovideagoodindicationoffeasibility.Sourcesofinitialcapitalaresecuredthroughfoundationandcorporategrantsand,insomeinstances,fromlocalgovernmentprograms,especiallyifthereisatargetedmarketwithtremendousneeds.
Financialinstitutionsoftenprovidecorporategrantstopenetratemarketsbyeffectivelypartneringwithcommunityorganizationsthatrepresentandservethesecommunities.Youmustmakethecase,presentneed,andindicatehowyourorganization’srolewillenhancetheeffort.(SeeDevelopmentTipsattheendoftheGuide)
YourorganizationmustassesshowtheproposedprogramcostswillbenefittheoveralleconomicdevelopmentstrategyofthecommunityandorganizationwhileassessingimpactstoindividualCEDprojectsandprograms.Thecreationofaloanfundofferssubstantialbenefitstothecommunityanditseconomicwellbeing.
3. Pre‐developmentActivities:A. BusinessPlan/MarketAnalysis:Conductamarketanalysisanddevelopabusiness
planforthefund.B. ManagementPlan:
1.) FundManagement:Includedarethedocumentsthatdefinelendingparameters,lendingguidelines,requirementstheapplicationprocess.
2.) LoanManagement:Includedaretheloanmanagementfunctions(loanapprovalprocess,closing,documentation,andloanmanagement(billing/collections)process).
3.) PortfolioManagement:Guidelinesandstandardsonriskmanagement(loanlosstolerance,reservesandriskratingofloans).
4. Board:CreationoftheBoardofDirectorsisaveryimportantstepthatbuildsthefoundationforasuccessfulloanfund.
A. Properbalancebetweenmission(helpingimprovedistressedcommunities)andrisk(lendingguidelinesandrequirements)ismaintainedbyboardrepresentation.
B. Fundraising:Fundraisingisacriticalneedforloanfundsandhavingrepresentativesfromentitiesthateitherfunds/investsinloanfundsorareinpeerindustriesthatcansupportloanfundactivitiesiscritical.
C. Management:Expertiseinlending,businessorlawprovidesthenecessaryinputandoversightoflendingactivitiesandoverallsuccess.
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5. LoanCommittee:Theloancommitteeshouldinmanywaysmirrorthebalanceoftheboardofdirectorsbuthavefocusonmanagementissues.Thecommitteemusthavemembersversedinunderstandingofthelendingguidelinesandpoliciesofthefund.Experiencedlenderscantypicallyberecruitedfromfinancialinstitutionsthatinvestorlendintothefund.
6. StartUpLendingActivities7. ApplicationforaCDFIcertification.Onceyoureceivecertificationyouareeligibletoapply
foraTechnicalAssistanceGrant(toconductorupgradeyourbusinessplan)orforaFinancialAssistanceAward(grantforyourloanpool).NOTE:YoucanapplyforaTechnicalAssistanceGranttostartaCDFIandloanpoolfromscratch,buttheseareinveryhighdemandandareverydifficulttoobtain.Themoreexperienceyouhave,thegreaterthepossibilityofreceivingagrant.
Strategy2:Partnership:IfthereareotherloanfundsorCDFIsoperatinginyourarea(ornearby),youmaywanttoconsiderpartnershipsthatwillleveragetheirexpertisewithyourunderstandingoflocalneeds.Thisstrategyallowsyoutobuildcapacityandexpertiseandmaintainagoalofcreatingyourownloanfund(andpotentiallyobtainCDFIcertificationatalaterdate).Someofthestrategiesinclude:
1. ExpansionofServiceArea:Ifitispossible,anexistingloanfundorCDFIcouldexpanditscoverageareatoincludeyourgeography.Youcouldbecomeamarketingarmfortheirproductsandservicesandpossiblyprovidespace,coordinatemeetingsorprovidelanguageservices.
2. CreationofaDedicatedFund:Ifthereissignificantinterestandresourcesforcreatingafund,youmaywanttoconsidercreatingoneandhavingtheCDFIorneighboringloanfundmanageit.Therearesignificantongoingexpensesforoperationsandall“back‐room”operations(loanservicingandmanagement).Yourorganizationcouldparticipateindevelopingthelendingguidelinesandstandards,orpossiblybeontheloancommitteeforthefund.Thisintermediarystepallowsyoutogainexperiencethatyouwillneedifyoucreateyourownfund.
Thepartnershipstructureisimportantifyouareconsideringoperatingasmallloanfundorprovidesmallerloans.Remember,themanagementandhandlingcostsforasmallloanarethesameasforlargerloans.Inaddition,thelargertheloanpool(andthegreatertheamountoffundedloans)generatesmoreinterestincomeusedforoperationsandmanagement.Forthesesmallerpools,itmayfinanciallywisetohaveanotherinstitutionserviceandmanageyourloanfund.Anotherstrategytoloweringoperatingcostsistopartnerwithotherorganizationsthatcouldhandlemarketing,trainingandtechnicalassistance.Existingslightlyexperiencedloanfund:Ifyourorganizationhassomeexperienceinlendingorwantstobuildalendingtrackrecord,youcanimmediatelyapplytobecomeaCertifiedDevelopmentEntity(CDE)throughtheUSTreasury’sCDFIFund.AlthoughthedefinitionfocusesonNewMarketsTaxCredits,aCDE’sactivitiesmeetCDFIstandardsandprovideanestablishedcertifiedlendingtrackrecordfororganizations.AsaCDEyouwillbeabletoapplyforCDFIcertificationandaTechnicalAssistanceAward.TheprocesstobecomeaCDEisstraightforwardandrelativelysimple.
AsdefinedontheCDFIwebsite,“aCDEisadomesticcorporationorpartnershipthatisanintermediaryvehiclefortheprovisionofloans,investments,orfinancialcounselinginLow‐Income
CommunityDevelopmentMicroLoanFunds 9
Communities(LICs).BenefitsofbeingcertifiedasaCDEincludebeingabletoapplytotheCDFIFundtoreceiveaNewMarketsTaxCredit(NMTC)allocationtoofferitsinvestorsinexchangeforequityinvestmentsintheCDEand/oritssubsidiaries;ortoreceiveloansorinvestmentsfromotherCDEsthathavereceivedNMTCallocations.”4
Existingorexperiencedloanfund:Ifyouarecurrentlyoperatingaloanfund,youshouldconsiderapplyingtotheCDFIFundforcertification.Thecertificationprocessisstraightforward(checkatwww.CDFIfund.gov).Onceyoureceivecertification,youareeligibletoapplyforaTechnicalAssistanceAward(toallowyoutocreatethebusiness,marketingandmanagementplans)foryourCDFI.YoucanalsoapplyforaFinancialAssistanceAwardthatprovidescapitalforyourneworexpandedloanfund.DevelopmentTip:ManageExpenses:Managingyourincomeandexpensesisessentialforyourlongtermsurvival.
1. Partnershipswithotherrelatedlendingentitiesallowyoutoexpandyourmarketandcutdownonyourownexpensesintheareasofmarketing,loanprocessingandloanmanagement.
2. Loanlossesdecreasethesizeofyourloanpoolandloweryourpotentialincome3. Reservesimpactyourbusinesssuccess.Thesearefundssetasidethatdonotgenerate
income.4. Yourlendingguidelinesandapprovalsalsoimpactyoursuccess.Thegreaterrisksyour
fundincurs;thegreaterthepotentiallosses.5. Theexpensesformarketing,processingandmanagingasmallloanarethesameas
expensesforalargerloan.6. Partneringandsharingofloanmanagementandportfoliomanagementfunctionsarean
excellentmeansofmanagingandreducingexpenses.7. Ifyoualreadyhaveloanprocessingandmanagementexperience,youmaywanttomarket
thiscapacityandgenerateadditionalincomebymanagingfundsforpartnerorganizations.
4 CDFI Fund Website, Op Cit
CommunityDevelopmentMicroLoanFunds 10
MICROENTERPRISELOANFUNDSMicroenterprisedevelopmentisaneconomicdevelopmentstrategythattracesitsrootsfromsuccessfultraditionalcreditandsavingsprogramsestablishedbyruralandurbanpoorcommunitiesinmanycountriesthroughouttheworld.Overthelast20years,thisstrategyhasbeenrefinedandtargetedtodisadvantagedcommunitieslackingaccesstotraditionallendingandsavingsresources.Keytraitsofthis“sub‐market”includepoorsaversandborrowerswithoutaverifiableincomeandalackofsavingsorothertangiblecollateral,inanenvironmentwithnoorverylittleaccesstocredit.Microenterprisedevelopmentisanimportantstrategybecauseitgeneratesincomethroughthecreationofbusinesses(jobs)atthegrassrootslevel.Theultimatebeneficiaryisthecommunitywheretypicallyboththeentrepreneurandtheserviceprovideddirectlysupportthestabilizationandgrowthofdistressedcommunities.Microenterpriseprogramsprovideaccesstocapitalinsub‐marketstraditionallyoverlookedbyconventionalfinancialmarkets.Whethertheprogramprovides$100or$35,000loans,capitalisneededtoinitiatesuccessfulbusinessenterprisesandensuresstartupandoperationsareadequatelyfundedthroughthemosttenuouspartofthebusinesscycle.ManyofthebasicstrategiesofmicrocreditareattributedtoNobelLaureateMuhammadYunuswhofoundedtheGrameenBankin1976.ManyinstitutionsincountriesthroughouttheworldincorporatedsuccessfulstrategiesdevelopedbytheGrameenBankthatdeliveredcredit(smallloans)toindividualsinpoorcommunities.Besidesdeliveringcreditandsavingsprograms,microcreditandlendingisaneconomicdevelopmentstrategythat:
1. “Fosterssmallbusinesscreationandgrowthamongdisadvantagedpopulationswithoutaccesstoconventionalresourcesand,
2. Increasedeconomicself‐sufficiencyoflowandmoderate‐incomepeoplethoughself‐employment”5
Internationaldevelopingcountriesmeasuremicroloansin“hundredsofdollarsorevenless”6whiletheUnitedStatesdefinedbusinessloansupto$35,000.Thescalemaybedifferentbut,thefocusonimpoverishedcommunitiesisthesameMicroloanactivityintheUnitedStatesissubstantial.FIELD,amicroenterprisepolicyprojectofthenonprofitAspenInstitute,conductsperiodicsurveysofgroupsthatservemicroenterprises,calledmicroenterprisedevelopmentorganizations(MDOs).“MDOsarenonprofitorganizationsthatserveasbanks,privateequityfunds,andfinancialplanners,suchaslending,capitalinvestments,budgeting,andfinancialadvisoryservices.Inaddition,theyprovidearangeofbusiness‐specifictechnicaltraining,coachingandmentoring,counseling,legalassistance,andothertypesofnonfinancialservices.SomeMDOsexistsolelytoconductmicroenterprisedevelopmentactivities,andsomearepartoflargerorganizationswithbroadermissions.”7TheFIELDsurveyconductedin2009,usingdataasof2008estimatedthescopeofmicroenterprisedevelopment.
5 Shorebank Advisory Services, “Microenterprise Loan Funds”, May 1996, page 1 6 FDIC, “Microenterprise Development: A Primer” FDIC Quarterly, Vol 5, No. 1, 2011, page 36 7 Ibid, Page 37 www.fidc.org
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• 696MDOsintheUnitedStatesservedmorethan274,000individuals.(NOTE:In1995theestimateofMDO’swasalittleover200)8
• Morethan300oftheseMDOsengagedinmicrolendingandoriginatedover9,000loanstotalingmorethan$100million.
• MDOsheldanestimated$174millioninoutstandingloansand$235millioninmicroenterprisecapital.
• ThemostcommonservicesprovidedbyMDOswere“microloans,”businessloansof$35,000orless,andgeneraltechnicalassistance;morethan90percentofMDOsprovidetheseservices.9
“Overafive‐yearperiod,clientsofMDOshavereportedthattheirbusinesseshavehadpositiveeffectsonhouseholdincomeandtheircommunities,suchasthefollowing:
• Themedianrevenueforbusinessownersincreased60percent,fromabout$50,000atprogramintaketojustover$82,000.
• Themedian“draw”ortheamountbusinessownerstakeforpersonalcompensation,morethandoubled,fromabout$11,000to$25,000.
• Themediancontributionofdrawtohouseholdincomeincreasedfrom52percentto71percent.
• Fortheapproximately40percentofbusinessownerswhoemployedworkersotherthantheowner,thenumberofpaidworkersmorethandoubled,from2.1workersperbusinessto5.6.10
Theaveragecosttoserviceamicroenterpriseisabout$2,700,andMDOsrecouponlyapproximatelyone‐fifthoftheircoststhroughinterestandfeesonloansandotherincomesources.MDOsderivetheremainderoftheirannualfundingfromamixofpublicandprivatesources.”11Microlendingisanichebusiness.MDOstargetspecificdemographicprofilesorthegeographicnicheofasegmentofthenon‐bankablemarket.Accesshasbeendeniedforvariousreasonsincluding:12
• Smallcreditneeds• Poorornocredithistory• Limitedornocollateral• Insufficientcashequity• Inadequatebusinessexperience• Socio‐economic,ethnic,culturalorgenderobstacles
Nichesofmicroloanbusinessactivitiesinclude:13
• Povertyalleviationprogramsusecreditasoneofmanytoolstoassistpoorandlow‐incomeborrowerstoovercomesocialandfinancialhurdlesandgenerateadditionalsourcesofincomethroughfullorpart‐timemicrobusinesses.
• Self‐employmentprogramshelpearlystageentrepreneursstabilizetheirbusinessesandestablishasteadysourceofemploymentforthemselvesand/ortheirfamilies
8 Shorebank Advisory Services, Op. Cit. 9 FIELD, “Microenterprise Census Highlights FY 2008 Data”, July 13, 2010 10 FIELD, “Microtest Measures 2008 Data” www.fieldus.org 11 FDIC, op. cit.,page 37, www.fdic.gov 12 Ibid, Shorebank Advisory Services 13 Ibid, Shorebank
CommunityDevelopmentMicroLoanFunds 12
• Growthandemergingmicrobusinessprogramshelpmicrobusinessestoincreasesalesandemploymentandtotransitionintobeingsmallbusinesseswithaccesstootherfinancingresources.
Microloanfundsandlendingaretypicallynotstandaloneactivities.Aloanfundcanbeaprogramorserviceofanon‐profitorganizationoraseparateorganization,butitseffectivenessdependsoncomplementaryservicesneededtoprepareandteachindividualsthestepstosaveandusethecapitaltheynowhaveaccessto.TheAspenInstitute(FIELD)presentedinformationaspartoftheirMicroenterpriseFundforInnovation,Effectiveness,LearningandDisseminationtitled“FinancialLiteracyandCreditBuildingServicesinMicroenterprise”.14Thepresentationincludedinformationoneffectivecomprehensiveservicesthatsupportandenhancemicrolendingactivities.ComprehensiveServices:
• Financialliteracytraining/financialeducation:classesorworkshopsthatprovideinformationonbudgeting,savings,personalfinancialmanagement,financialproducts,etc.
• Financialcoaching/advising:one‐on‐oneassistanceonbudgeting,savings,personalfinancialmanagement,financialproducts,etc.
• Creditcounseling:one‐on‐oneassistancefocusedondealingwithacrisisand/oranindividual’sdebtsituation,typicallyprovidedbylicensedcreditcounselors.
• Credit‐buildingloans/financialproducts:financialproducts,includingcheckingandsavingsaccounts,prepaidaccounts,termloansorcreditcards,offeredbytheorganizationorwithafinancialinstitution,thatseektohelpanindividualtomanagecash,debtand/orimprovetheircreditprofile.
• Crediteducation/creditcoaching:one‐on‐onecounselingortechnicalassistancefocusedonbuildingbasiccreditknowledgeandhelpingindividualsbuildpositiveskillsandbehaviors.
InadditiontheirsurveyshowedthepercentageofMDOsprovidingspecificservices:
• 15%Creditbuildingproductsinpartnership• 25%Linkstocheckingorsavingsaccounts• 33%Creditcounseling• 46%CreditReporting• 52%IDA’s• 52%Directcreditbuildingprojects’• 58%Financialeducationinformation• 75%Financialcoaching/advising• 77%Crediteducation/coaching• 87%Financialliteracytraining/financialeducation
OrganizationalStructure:Althoughmostmicroloanfundsareoperatedbynon‐profitorganizations,theycanalsobepartofmunicipalgovernments.Theymayvaryinsizefromseveralthousandtoseveralmilliondollars.
14 FIELD, “Financial Literacy and Credit Building Services in Microenterprise”, Aspen Institute, September 2010, www.fieldus.org
CommunityDevelopmentMicroLoanFunds 13
Fundingcomesprimarilyfromphilanthropicsourcesandfromthepublicsector.Theseresourcesareveryimportantbecausemostmicroloanfundsdonotgenerateadequateincometosupporttheextensiveservices(businessmanagement,marketing,accounting,taxreporting,etc.)neededtosupportthesuccessofentrepreneurs.TheFIELDstudyreportnotedthatonlyone‐fifthofprogramexpensesarederivedfromprogramrevenue(interestincomeandfees),thereforeongoingorganizationalsupport(funding)isessential.Microfundsgenerallydonothavetheloanfundsizeneededtogeneratethehigherrevenueneededtosupportandmanagethegreaternumberofsmallerlendingtransactions.OrganizationalandProgramConsiderations:1. OperationsandManagement:Thefollowingaresystems,tasks,responsibilitiesneededtobe
resolvedpriortoinitiatingafund:a. MarketAnalysis:Analysisofthemarketyouareservingb. BusinessPlan:Summaryofthebusiness,includingalloftheitemsmentionedinthis
outlinec. ManagementPlan:Rolesandresponsibilitiesofstaffd. Personnel:Analysisoftechnicalcapacityandstaffneedse. Fundraising:Sourcesforstartup,loanfundcapitalandoperatingcostsf. InvestmentPolicy:Whereandhowunusedfundsareusedg. Marketing:Whoisbeingmarketed,howandwhereh. Outreach:Partnerstobeenlistedtoassistinmarketingi. LoanApplicationReview:Whowillreviewtheapplicationtomakesuretheinformation
iscompletej. LoanAnalysis/Underwriting:Whowillreview,underwriteandpreparethecredit
memorandumforreview,andwhatarethestandardsthatapplytotheanalysisk. CreditReview:Whowillbeontheloancommittee?Careshouldbetakento“balance”
thecommitteewithexperiencedlendersandcommunityrepresentatives.l. TechnicalAssistance:Wherewillbusinesstechnicalassistanceresourcescomefromif
borrowersencounterproblems?m. LoanManagement:Whowillconductandmonitorbilling?n. PortfolioManagement:Whowillmanagetheportfolio,andwhatstandardsand
requirementswillbeappliedtotheportfolio?2. KeyLoanConsiderations:
a. Loans:Dependingoncommunityneeds,smallbusinessloanscanrangefrom$100to$35,000.
b. UseofFunds:Workingcapital,equipmentorotherassetacquisitionsc. Terms:Dependsonthesizeanduseoffunds,butusuallyhaveashorttermthatcan
rangefrommonthsto5yearsd. Rate:Mostmicrolendershaveratesaboveconventionalmarketratese. Collateral:Usuallyrequired,butistypicallynotasecondarysourceofrepayment
3. ProgramConsiderations:a. Pre‐assessment:Assessingtheneedfortrainingand/ortechnicalassistanceb. Pre‐qualification:Manyprogramsrequireparticipantstoattendclassesorobtain
technicalassistanceforissuesidentifiedinthepreassessmentc. BusinessPlans:Thisistypicallyapre‐qualificationrequirementandaveryimportant
exercisetomeasurebusinessprogressandsuccess.Organizationsprovidingthis
CommunityDevelopmentMicroLoanFunds 14
trainingortechnicalassistancewillhaveabetterunderstandingofthebusinessandhigherlikelihoodofsuccess.
d. LoanMonitoring:Requirementsforbusinessoperationsandfinancialreporting(monthly,quarterlyorsemi‐annually).Frequentmonitoringandmaintainingcontactwiththeborrowerisimportanttospotearlyissuesthatcanpotentiallyberectified.
e. Collateral:Levelofcollateraltoberequiredandanimportantmeasureofthecommitmentoftheborrower.
f. Character:Inlieuofaguarantor,co‐signerorreference,somesuccessfulprogramsrequireapplicantstoidentifyindividualstovouchfortheapplicant
CommunityDevelopmentMicroLoanFunds 15
COMMUNITYDEVELOPMENTFINANCIALINSTITUTIONS(CDFIs)
Microlendingprograms,mostCDLFsandcreditunionsareeligibleentitiesundertheCDFIprogram.NOTE:(PleaserefertotheCommunityDevelopmentFinancialInstitution(CDFIs)Guideforspecificdetails).
ThekeyprogramsincludeCDFICertification,TechnicalAssistance(TA)AwardsandtheFinancialAssistance(FA)Awards.TheseprogramsaredesignedtoenableCDFIstoleverageprivatecapitaltomeetthedemandforaffordablefinancialproductsandservicesineconomicallydistressedcommunities.
ThemissionoftheCommunityDevelopmentFinancialInstitutionsFundisto“expandthecapacityoffinancialinstitutionstoprovidecredit,capitalandfinancialservicestounderservedpopulationsandcommunitiesintheUnitedStates”15TheCDFIFundhasseveralprogramsthatenhancesaccesstocapital.Uponreceivingcertification,CDFI’sareeligibletocompetefortechnicalassistancegrants,capitalgrants,NewMarketsTaxCreditsaswellasothertargetedincentiveprograms.TheCDFIdesignationallowslendingprogramsaccesstocompeteforCDFIresources,buttheseresourcesareinveryhighdemand.Sincethestartoftheprogramin1994,thecompetitivebarhasrisendramaticallyandorganizationsreceivinggrantshavesignificantexperienceinoperatingasuccessfulloanfundorconductinglendingactivities.Therefore,wehighlyrecommendthatorganizationscloselystudytheapplicationguidelinesfoundatwww.cdfifund.gov.
CDFIPROGRAMBENEFITS
TheCDFIcertificationisarequirementthatwillallowyoutoaccessCDFIprogramfunds.Theseprogramsinclude:Note:SourcematerialforthissectionisfromtheCDFIwebsiteat:www.cdfifund.gov.Thewebsiteincludesannualchangesintheprogramorspecialprograms,forexamplethe2011applicationprocessincludedtheHealthyFoodFinancingInitiativethatmade12awardsfor$25million.ThegoalofthisprogramistouseCDFIcapacitytomakeinvestmentsinarangeofhealthfoodprojectsservingfooddesertsincludinggrocerystores,mobilefoodretailers.Farmersmarkets,cooperatives,cornerstores,bodegasorotherfoodrelateditems(includinghealthfoods).
CDFIFinancialAssistanceandTechnicalAssistance:TobeeligibleforanFAaward,aCDFImustbecertifiedbytheCDFIFundbeforeitappliesfortheaward.ProspectiveapplicantsthatarenotyetcertifiedmustsubmitaseparatecertificationapplicationtobeconsideredforFAduringafundinground.
Bothcertifiedandnon‐certifiedCDFIsareeligibletoapplyforTAawards.However,non‐certifiedorganizationsmustbeabletobecomecertifiedwithintwoyearsafterreceivingaTAaward.TheTAawardswillcoverexpensesneededtobuildthecapacityoforganizationstobecomeeligibleforCDFIdesignation.
15 Community Development Financial Institutions Fund “CDFI Certification Application”, Department of Treasury, June 2007, pg 4
CommunityDevelopmentMicroLoanFunds 16
2011CDFIAwardCategories:1. FinancialAssistance:CertifiedCDFIsmayreceiveawardsintheformofgrants,loans,equity
investments,depositsandinsuredcreditunionshares2. TechnicalAssistance:Non‐certifiedCDFI’smayapplyforTA(notboth)tobuild
organizationalcapacity.Ifyouhavenotbeencertified,TAcouldhelpyougetcertified.Thesefundsdonotrequirematchingfunds.
3. HealthyFoodsFinancingInitiative:AwardstoCDFIstoaddresstheneedforhealthyfoodsintheirmarkets(USDAandHHSsupport)
CDFIApplicationforTechnicalAssistanceAwards:ThisawardsupportsyourorganizationtowardsbuildingsystemsandcapacitytoapplyfortheFinancialAssistanceAwards.CDFIApplicationforFinancialAssistanceAwards:Thisawardisagrantthatcanbeusedtoimproveorganizationalsystemsandasseedcapital(orexpansioncapital)foryourloanfund.Thisisagrantandcanbeusedforyourloanfundat0%interest.SummaryStepstoBecomingaCDFI:TogainCDFIdesignationthestepsarerelativelysimple.Theworkisintheplanningandapplicationprocess.Process:
1. TechnicalAssistancetodevelopingtheorganizationandprogramstructure2. ObtainCommunityDevelopmentEntity(CDE)designation3. Financingparticipation/partnership(strategytogainexperience)4. ApplicationforTechnicalAssistanceAwards5. DevelopingtheCDFIorganizationalandprogramstructure6. ApplyforCDFIstatus7. RequestforCDFIfunding8. Otherinvestmentsandmatches9. Makeloans10. Manageloans
OTHERNOTES:ServiceGaps:OnecriticismofCDFIlendingprogramshasbeenthe“unevenlandscape”thatresultsingapsinservice.MosteffectiveCDFIsoperateinsmallgeographies(communities,citiesandcounties)whilelargerentitiesmightservestatesormulti‐stateareas.Someofthelargerlendinginstitutionsmaybenationalbuttheymaynotserveallcommunitieswiththesamelendingproducts.CommunitiescouldbeservedbyCDFIswithlendingproductsthatdonotmeetlocalneeds.ManyCDFIsserveonlyonesegmentoflendingactivitysuchasbusinesses,realestateorpersonal,whichmaynotmatchwithneededcreditserviceinagivenarea.ThisissuepresentsanopportunityforaCDFItoexpandorforanewCDFItoemerge,especiallyifthereisneedandinterestamongsttheresidentsandconstituencyaffectedbythelackofcapital.
CommunityDevelopmentMicroLoanFunds 17
SOURCESOFFUNDS:
1. Federal,StateandLocal
a. SmallBusinessAdministrationi. MicroloanProgram:Fundstononprofitcommunity‐basedMDOswithloans
cappedat$35,000recentlyincreasedto$50,000pursuanttotheJobsAct.Theaverageloanis$13,000.ForFY2010,$25millionwasallocatedtotheprogram.
ii. ProgramforInvestmentinMicro‐entrepreneurs(PRIME):In2010therewere92grantsmadefroma$8milliondollarpool.Grantsupto$250,000canbeawardedtoMDOstofunddirectassistancetocustomersoffundsortobuildtheMDOsownresourcesorcapabilities.
b. DepartmentofTreasury:CDFIFundi. CDFICertification:CertificationProgramforloanfundstobecomeeligibleto
applyforCDFIprogramsii. TechnicalAssistance:GrantsallowcertifiedCDFIsandestablishedentities
seekingtobecomecertifiedtobuildtheircapacitytoprovideaffordablefinancialproductsandservicestolow‐incomecommunitiesandfamilies.Grantsmaybeusedforawiderangeofpurposesincludingequipment,materials,orsupplies;forconsultingorcontractingservices;topaythesalariesandbenefitsofcertainpersonnel;and/ortotrainstafforboardmembers.TheCDFIFundmakesawardsofupto$100,000
iii. FinancialAssistance:Awardsofupto$2millionaremadetocertifiedCDFIsundertheFAcomponentoftheCDFIProgram.ACDFImayusetheawardforfinancingcapital,loanlossreserves,capitalreserves,oroperations.FAawardsaremadeintheformofequityinvestments,loans,deposits,orgrants,andtheCDFIisrequiredtomatchitsFAawarddollar‐for‐dollarwithnon‐federalfundsofthesametypeastheawarditself.
iv. OtherPrograms:OtherCDFIFundprogramsinclude:1. BankEnterpriseAward(BEA):Thisprogramprovidesfinancial
incentivestoinstitutionstoexpandinvestmentsinCDFIsandtoincreaselending,investment,andserviceactivitieswithineconomicallydistressedcommunitiesoveraspecifictimeperiod.
2. CapitalMagnetFund(CMF):providecompetitivelyawardedgrantstoCDFIsandqualifiednonprofithousingorganizations.CMFawardscanbeusedtofinanceaffordablehousingactivitiesaswellasrelatedeconomicdevelopmentactivitiesandcommunityservicefacilities.Awardeeswillbeabletoutilizefinancingtoolssuchasloanlossreserves,loanfunds,risk‐sharingloans,andloanguaranteestoproduceeligibleactivitieswhoseaggregatecostsareatleasttentimesthesizeoftheawardamount.
3. FinancialEducationandCounseling(FEC):ThroughtheFECPilotProgram,theCDFIFundprovidesgrantstoeligibleorganizationstoenablethemtoprovidearangeoffinancialeducationandcounselingservicestoprospectivehomebuyers
4. NewMarketsTaxCredits:TheNMTCProgramattractsinvestmentcapitaltolow‐incomecommunitiesbypermittingindividualandcorporateinvestorstoreceiveataxcreditagainsttheirFederalincometaxreturn.Thisisinexchangeformakingequityinvestmentsin
CommunityDevelopmentMicroLoanFunds 18
businessesandcommercialprojectsthatcreatesjobsinlowincomecommunities.NOTE:TheNMTCprogramhasbecomeaveryimportanttoolforCommunityEconomicDevelopment.PleasereviewtheseparateGuideonNewMarketsTaxCreditsformoredetails.
5. NativeAmericanCDFIAssistanceProgram(NACA):FocusedprogramsupportingactivitiesforNativeAmericancommunities
6. CertificationforCommunityDevelopmentEntities(CDE):BenefitsofbeingcertifiedasaCDEincludebeingabletoapplytotheCDFIFundtoreceiveaNewMarketsTaxCredit(NMTC)allocation.
c. UnitedStatesDepartmentofAgriculture:i. RuralMicroenterepreneurAssistanceProgram(RMAP):Maximumloan:
$500,000.Lowinterest,20yearloanswith2‐yeardeferralofpayments,tocapitalizearevolvingmicroloanfund.Themicrolendermustestablish&maintaina5%lossreservefromtheirownfunds.Loanproceedsaretobeusedforrelendingasfixedratemicroloans(≤$50,000)toruralmicroentrepreneurs.
ii. RMAPEnhancementGrants($25,000maximumsize)toallowamicrolendertoincreaseitscapacitytoserveruralmicroenterprises.EnhancementgrantawardsarenottiedtotheoperationofanestablishedRMAPloanfund.RMAPgrantscannotprovidemorethan75%ofthecostoftheproject.
d. HealthandHumanServices,OfficeofCommunityServices,CommunityEconomicDevelopment:CommunityEconomicDevelopmentGrants:discretionarygrantfundstoCommunityDevelopmentCorporations(CDC)forwell‐planned,financiallyviable,andinnovativeprojectstoenhancejobcreationandbusinessdevelopmentforlow‐incomeindividuals.Upto$800,000isavailableforprojectsthatincluderevolvingloanfunds,realestatedevelopmentandbusinessstartupandexpansion.
e. DepartmentofHousingandUrbanDevelopment:i. CommunityDevelopmentBlockGrants(CDBG):Microloanfundingisaneligible
activityundertheCDBGprogam.UseoffundsisdeterminedbycitizensinputintotheCDBGprocessbytheparticipatingjurisdiction(localorstategovernment).ManyjurisdictionshaveallocatedfundsforMDOsupportandalltypesofsmallbusinessactivities.
ii. CommunityServiceBlockGrants(CSBG):LoanfundsarealsosupportedthoughCSBGfundingthrougheligiblestateandlocaljurisdictions.MostofthelocaljurisdictionsarecommunityactionagenciesoralocalgovernmentaffiliatethatdeterminesuseofCSBGfunds.
2. FoundationsandPrivateSector:a. Grants:Foundationshavebeenastrongsupporterofmicroenterpriselendingand
development.Mostofthesupportisconductedonarelationshipbasis.
CommunityDevelopmentMicroLoanFunds 19
DEVELOPMENTTIPS:
Considerwhatcommunityneedsareanddesignthelendingorinvestmentactivityappropriately.Considerwhatresourcesyouhaveorcanaccesstohelpdeterminesizeandscopeofyourprogram.Somekeydevelopmenttipstorememberinclude:1. Ifyouarestartinganewfund,dotheinitialinvestigativeresearchandconceptpaperto
determineiftheprojectisfeasible.Theconceptpaperwillalsobeyourbasetooltopresenttopotentialfundingandresourcepartnersandbecomesthebasisforyourbusinessplan.Asyougatherdata,yourconceptpapershouldbecontinuallyupdated.Thisinformationwillbecomethebasisofyourbusinessplan.
2. Insteadofstartingyourownfund,considerpartnershipstobringtheresourcetoyourcommunityortocreateaspecializedfundthatcanbemanagedbyanexistingCDFIorloanfund.Thismaybeanintermediarystepforyoutogainexperienceifyoulaterwanttocreateandmanageyourownfund.
3. BecomeaCommunityDevelopmentEntity(CDE)andgetCDFICertification.Thisisespeciallytrueifyourorganizationhasalendingprogram.
4. TheCDFIdesignationonlyallowsyoutoapplyforCDFIFundresources.Theyareverycompetitive.Itisimportanttobuildyourcapacityandtrackrecord.
5. OnceyougetaCDFIdesignationmakesureconventionallendinginstitutionsarepartofyourplanning/developmentprocess.Enlistthemassupporters(onyourboard,advisoryboardorprojectcommittee).Remember,conventionalfinancialmarketshaverealizedtheimportanceandsuccessesofCDFIsandseekCDFIstoplaceinvestments.
6. Yourboardofdirectorsandloancommitteeareveryimportanttothegrowthandsuccessofyourloanfund.
a. Board:CreationoftheBoardofDirectorsisaveryimportantstepthatbuildsthefoundationforasuccessfulloanfund.
i. Properbalancebetweenmission(helpingimprovedistressedcommunities)andrisk(lendingguidelinesandrequirements)ismaintainedbyboardrepresentation.
ii. Fundraising:Fundraisingisacriticalneedforloanfundsandhavingrepresentativesfromentitiesthateitherfunds/investsinloanfundsorareinpeerindustriesthatcansupportloanfundactivitiesiscritical.
iii. Management:Expertiseinlending,businessorlawprovidesthenecessaryinputandoversightoflendingactivitiesandoverallsuccess.
b. LoanCommittee:Theloancommitteeshouldinmanywaysmirrorthebalanceoftheboardofdirectorsbuthavefocusonmanagementissues.Thecommitteemusthavemembersversedinunderstandingofthelendingguidelinesandpoliciesofthefund.Experiencedlenderscantypicallyberecruitedfromfinancialinstitutionsthatinvestorlendintothefund.
7. ManageExpenses:Managingyourincomeandexpensesisessentialforyourlongtermsurvival.a. Partnershipswithotherrelatedlendingentitiesallowyoutoexpandyourmarketand
cutdownonyourownexpensesintheareasofmarketing,loanprocessingandloanmanagement.
b. Loanlossesdecreasethesizeofyourloanpoolandloweryourpotentialincomec. Reservesimpactyourbusinesssuccess.Thesearefundssetasidethatdonotgenerate
income.
CommunityDevelopmentMicroLoanFunds 20
d. Yourlendingguidelinesandapprovalsalsoimpactyoursuccess…thegreaterrisksyourfundincurs;thegreaterthepotentialisforlosses.
e. Theexpensesformarketing,processingandmanagingasmallloanarethesameasexpensesforalargerloan.
f. Partneringandsharingofloanmanagementandportfoliomanagementfunctionsareanexcellentmeansofmanagingandreducingexpenses.
g. Ifyoualreadyhaveloanprocessingandmanagementexperience,youmaywanttomarketthiscapacityandgenerateadditionalincomebymanagingfundsforpartnerorganizations.
8. AdditionalCapital:TheCDFIFinancialAssistanceAwardisagrantthatcanstartyourlendingprogram,butyoushouldlookatitasanopportunitytolocateadditionalmatchingfundstoexpandyourloanpool.
Itisimportanttodeterminewhointhemarketplace,hasinterestinsupportingyourlendingactivities.
Yourboard,advisoryboard,orprojectcommitteeshouldhavememberswhorepresentfinancialinstitutions,localbusinessesandcorporations,andlocalgovernmentandcommunityleaders.Theycanbecomeyourspokesperson(s)andcanconvenemeetingswiththeirpeerstomarketinterestinyourfund.
Engagementanddiscussionswiththebankingregulators;FederalDepositInsuranceCorporation(FDIC),OfficeoftheComptrollerofCurrency(OCC)andFederalReserveBank(FRB)regardingyourfundareaveryimportantactivity.Theseinstitutionscanbeanimportantresourceforknowingwhomightbeinterestedinsupportinglendingactivitiesorareinterestedinyourcommunity.Theyarealsogreatresourcesforconveningmeetingswithfinancialleaderstogenerateinterestinyourfund.
CommunityDevelopmentMicroLoanFunds 21
FinalNote:
Communitydevelopmentloanfundscanspecializeinitsmarketandservices.Microloanfundstargetsmallloansforentrepreneurs.Becomingaloanfundisnoteasyandrequiresastrongcommitmentfromtheorganizationandthemembersofthedevelopmentteam.WithexperiencethenaturalprogressionistogainCDFIcertificationandaccessitsmanyresources.Withthisaddedcapacity,organizationscanbecomeequityinvestorsorcanexpandtheirservicestotheentirecommunitybycreatingacreditunion.Thegoalcanbeaccomplishedwiththesupportofthecommunity,localgovernmentandinterestedfinancialinstitutions.Itismostimportanttohavestaffdedicatedtotheprojectandiftheydonothavetheexpertise,locateresourcestosupportandguidetheeffort.Thisdocumentisintendedtobeaguidethatoutlinessomeofthekeyissuesandidentifiespossiblesolutionsandsteps.Itisnotintendedtobeyoursourcesinceeveryprojecthasitsownissues,concernsandpeculiaritiesanditsownuniquesolutions.Thedocumentisnotintendedtoencourageanyorganizationintoprojectdevelopmentbutonlytolayoutsomeofthekeystepsandissuesoncethedecisionismadetoproceed.
CommunityDevelopmentMicroLoanFunds 22
APPENDIXAFORMOREINFORMATION:ResourcesWebsites:
OpportunityFinanceNetwork:(www.ofn.org)“OpportunityFinanceNetwork(OFN)isanationalnetworkofcommunitydevelopmentfinancialinstitutions(CDFIs)investinginopportunitiesthatbenefitlow‐income,low‐wealth,andotherdisadvantagedcommunitiesacrossAmerica.
OFNMembersareperformance‐oriented,responsibleinvestorsthatfinancecommunitybusinesses,sparkingjobgrowthintheareasthatneeditmost,anddeliveringbothsoundfinancialreturnsandrealchangesforpeopleandcommunities.
OurNetworkhasoriginatedmorethan$23.2billioninfinancinginurban,rural,andNativecommunitiesthrough2009.Withcumulativenetcharge‐offratesoflessthan1.4%,wehavedemonstratedourabilitytolendprudentlyandproductivelyinunconventionalmarketsoftenoverlookedbyconventionalfinancialinstitutions.”
CoalitionofCommunityDevelopmentFinancialInstitutions(CDFICoalition):(www.CDFI.org)“Formedin1992asanad‐hocpolicydevelopmentandadvocacyinitiative,theCoalitionofCommunityDevelopmentFinancialInstitutions(CDFICoalition)istheleadnationalorganizationintheUnitedStatespromotingtheworkofcommunitydevelopmentfinancialinstitutions(CDFIs).Throughitsmemberorganizations,theCoalitionrepresentsCDFIsworkinginall50statesandtheDistrictofColumbia.ThisnationalnetworkofCDFIsincludescommunitydevelopmentloanfunds,communitydevelopmentbanks,communitydevelopmentcreditunions,microenterpriselenders,communitydevelopmentcorporationsandcommunitydevelopmentventurecapitalfunds.TheCDFICoalitioncoordinatesindustrywideinitiativestoincreasetheavailabilityofcapital,creditandfinancialservicestolow‐incomecommunitiesacrossthenation.”
CommunityDevelopmentFinancialInstitutionsFund:(www.cdfifund.gov)“Throughmonetaryawardsandtheallocationoftaxcredits,theCDFIFundhelpspromoteaccesstocapitalandlocaleconomicgrowthinurbanandrurallow‐incomecommunitiesacrossthenation.
Throughitsvariousprograms,theCDFIFundenableslocallybasedorganizationstofurthergoalssuchas:economicdevelopment(jobcreation,businessdevelopment,andcommercialrealestatedevelopment);affordablehousing(housingdevelopmentandhomeownership);andcommunitydevelopmentfinancialservices(provisionofbasicbankingservicestounderservedcommunitiesandfinancialliteracytraining).
CaliforniaAssociationforMicroEnterpriseOpportunity(CAMEO):(www.microbiz.org)“CAMEO’smissionistopromoteeconomicopportunityandcommunitywell‐beingthroughMicroEnterprisedevelopment.
Ourmemberorganizationsprovideentrepreneurswithsmallbusinessfinancingsuchasloansandcredit,technicalassistanceandbusinessmanagementtraining.
AsCalifornia’sstatewideMicroEnterpriseassociation,CAMEOisthevoiceforMicroEnterpriseinCalifornia.Weexpandresourcesandbuildingcapacityforitsmemberorganizations–over160lenders,trainingprograms,jobcreators,agenciesandindividualsdedicatedtofurtheringMicroEnterprisedevelopmentinCalifornia
CommunityDevelopmentMicroLoanFunds 23
NationalCommunityReinvestmentFund(CRF,USA):(www.crfusa.com):“CommunityReinvestmentFund,USA(CRF)helpschangethelivesofpeoplelivingineconomicallydistressedcommunitiesacrossthecountry.Wesupplycapitaltolocalcommunitydevelopmentlenderssotheycanmeetgoalslikethese:
• Growsmallbusinesses• Increaseaffordablehousing• Createandpreservejobs• Buildchildcarecenters• Developcommunityfacilities
Atthesametime,weenablefinancialinstitutions,socially‐motivatedinvestors,andaccreditedindividualstoreachtheirsocialinvestmentgoals.CRFoperatestheleadingnationalsecondarymarketforcommunityandeconomicdevelopmentloans—amarketCRFpioneered.Wepurchaseeconomicdevelopmentandaffordablehousingloansfromcommunitydevelopmentlenders.Wethenpoolthemintoasset‐backeddebtsecuritiesandNewMarketsTaxCredit(NMTC)investmentfunds,whichweprivatelyplacewithinstitutionalinvestors”