Coom u n C COMMUNITY DEVELOPMENT MICRO …about Micro Loan Funds 2. Organizations creating...

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TOOLKIT

Community Economic

Development Toolkit

COMMUNITY DEVELOPMENT MICRO LOAN FUNDS

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.

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

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

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

Forthecommunity:

1. Increasesaccesstocapital2. Increasedaccess‐relatedresourcessuchastrainingandtechnicalassistanceintheareasof

financeandbusinessdevelopment3. Createspersonalandcommunityassets4. Enhancesthelocaleconomybysupportingimportantsegmentsoftheeconomic

infrastructureincludingbusiness,residentialandindustrialsectors5. Effectivemeansofsupportingentrepreneurialdevelopmentinneighborhoodsandcreating

neededcommunitygoodsandservices.Successfullendingefforts(andancillaryfinancialprograms)resultsineconomicallystrongercommunities,strongerworkforces,moreinformedandcapablebusinessesandtenants,andultimatelyastrongerandmoreinclusiveeconomy.

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

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:

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.

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

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

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

• 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

• 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

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

trainingortechnicalassistancewillhaveabetterunderstandingofthebusinessandhigherlikelihoodofsuccess.

d. LoanMonitoring:Requirementsforbusinessoperationsandfinancialreporting(monthly,quarterlyorsemi‐annually).Frequentmonitoringandmaintainingcontactwiththeborrowerisimportanttospotearlyissuesthatcanpotentiallyberectified.

e. Collateral:Levelofcollateraltoberequiredandanimportantmeasureofthecommitmentoftheborrower.

f. Character:Inlieuofaguarantor,co‐signerorreference,somesuccessfulprogramsrequireapplicantstoidentifyindividualstovouchfortheapplicant

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

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.

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

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.

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.

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.

FinalNote:

Communitydevelopmentloanfundscanspecializeinitsmarketandservices.Microloanfundstargetsmallloansforentrepreneurs.Becomingaloanfundisnoteasyandrequiresastrongcommitmentfromtheorganizationandthemembersofthedevelopmentteam.WithexperiencethenaturalprogressionistogainCDFIcertificationandaccessitsmanyresources.Withthisaddedcapacity,organizationscanbecomeequityinvestorsorcanexpandtheirservicestotheentirecommunitybycreatingacreditunion.Thegoalcanbeaccomplishedwiththesupportofthecommunity,localgovernmentandinterestedfinancialinstitutions.Itismostimportanttohavestaffdedicatedtotheprojectandiftheydonothavetheexpertise,locateresourcestosupportandguidetheeffort.Thisdocumentisintendedtobeaguidethatoutlinessomeofthekeyissuesandidentifiespossiblesolutionsandsteps.Itisnotintendedtobeyoursourcesinceeveryprojecthasitsownissues,concernsandpeculiaritiesanditsownuniquesolutions.Thedocumentisnotintendedtoencourageanyorganizationintoprojectdevelopmentbutonlytolayoutsomeofthekeystepsandissuesoncethedecisionismadetoproceed.

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

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”

Coom u n C COMMUNITY DEVELOPMENT MICRO …about Micro Loan Funds 2. Organizations creating...

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