+ All Categories
Home > Documents > Coom u n C COMMUNITY DEVELOPMENT MICRO …about Micro Loan Funds 2. Organizations creating...

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

Date post: 27-Jul-2020
Category:
Upload: others
View: 0 times
Download: 0 times
Share this document with a friend
25
T O O L K I T Community Economic Development Toolkit COMMUNITY DEVELOPMENT MICRO LOAN FUNDS
Transcript
Page 1: Coom u n C COMMUNITY DEVELOPMENT MICRO …about Micro Loan Funds 2. Organizations creating alternative lending and investment programs 3. Organizations seeking services and capital

TOOLKIT

Community Economic

Development Toolkit

COMMUNITY DEVELOPMENT MICRO LOAN FUNDS

Page 2: Coom u n C COMMUNITY DEVELOPMENT MICRO …about Micro Loan Funds 2. Organizations creating alternative lending and investment programs 3. Organizations seeking services and capital

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 © 2012 Community Action Partnership. All rights reserved.

Page 3: Coom u n C COMMUNITY DEVELOPMENT MICRO …about Micro Loan Funds 2. Organizations creating alternative lending and investment programs 3. Organizations seeking services and capital

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

Page 4: Coom u n C COMMUNITY DEVELOPMENT MICRO …about Micro Loan Funds 2. Organizations creating alternative lending and investment programs 3. Organizations seeking services and capital

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

Page 5: Coom u n C COMMUNITY DEVELOPMENT MICRO …about Micro Loan Funds 2. Organizations creating alternative lending and investment programs 3. Organizations seeking services and capital

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

Page 6: Coom u n C COMMUNITY DEVELOPMENT MICRO …about Micro Loan Funds 2. Organizations creating alternative lending and investment programs 3. Organizations seeking services and capital

CommunityDevelopmentMicroLoanFunds 4

Forthecommunity:

1. Increasesaccesstocapital2. Increasedaccess‐relatedresourcessuchastrainingandtechnicalassistanceintheareasof

financeandbusinessdevelopment3. Createspersonalandcommunityassets4. Enhancesthelocaleconomybysupportingimportantsegmentsoftheeconomic

infrastructureincludingbusiness,residentialandindustrialsectors5. Effectivemeansofsupportingentrepreneurialdevelopmentinneighborhoodsandcreating

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

Page 7: Coom u n C COMMUNITY DEVELOPMENT MICRO …about Micro Loan Funds 2. Organizations creating alternative lending and investment programs 3. Organizations seeking services and capital

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

Page 8: Coom u n C COMMUNITY DEVELOPMENT MICRO …about Micro Loan Funds 2. Organizations creating alternative lending and investment programs 3. Organizations seeking services and capital

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:

Page 9: Coom u n C COMMUNITY DEVELOPMENT MICRO …about Micro Loan Funds 2. Organizations creating alternative lending and investment programs 3. Organizations seeking services and capital

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.

Page 10: Coom u n C COMMUNITY DEVELOPMENT MICRO …about Micro Loan Funds 2. Organizations creating alternative lending and investment programs 3. Organizations seeking services and capital

CommunityDevelopmentMicroLoanFunds 8

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

Page 11: Coom u n C COMMUNITY DEVELOPMENT MICRO …about Micro Loan Funds 2. Organizations creating alternative lending and investment programs 3. Organizations seeking services and capital

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

Page 12: Coom u n C COMMUNITY DEVELOPMENT MICRO …about Micro Loan Funds 2. Organizations creating alternative lending and investment programs 3. Organizations seeking services and capital

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

Page 13: Coom u n C COMMUNITY DEVELOPMENT MICRO …about Micro Loan Funds 2. Organizations creating alternative lending and investment programs 3. Organizations seeking services and capital

CommunityDevelopmentMicroLoanFunds 11

• 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

Page 14: Coom u n C COMMUNITY DEVELOPMENT MICRO …about Micro Loan Funds 2. Organizations creating alternative lending and investment programs 3. Organizations seeking services and capital

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

Page 15: Coom u n C COMMUNITY DEVELOPMENT MICRO …about Micro Loan Funds 2. Organizations creating alternative lending and investment programs 3. Organizations seeking services and capital

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

Page 16: Coom u n C COMMUNITY DEVELOPMENT MICRO …about Micro Loan Funds 2. Organizations creating alternative lending and investment programs 3. Organizations seeking services and capital

CommunityDevelopmentMicroLoanFunds 14

trainingortechnicalassistancewillhaveabetterunderstandingofthebusinessandhigherlikelihoodofsuccess.

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

e. Collateral:Levelofcollateraltoberequiredandanimportantmeasureofthecommitmentoftheborrower.

f. Character:Inlieuofaguarantor,co‐signerorreference,somesuccessfulprogramsrequireapplicantstoidentifyindividualstovouchfortheapplicant

Page 17: Coom u n C COMMUNITY DEVELOPMENT MICRO …about Micro Loan Funds 2. Organizations creating alternative lending and investment programs 3. Organizations seeking services and capital

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

Page 18: Coom u n C COMMUNITY DEVELOPMENT MICRO …about Micro Loan Funds 2. Organizations creating alternative lending and investment programs 3. Organizations seeking services and capital

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.

Page 19: Coom u n C COMMUNITY DEVELOPMENT MICRO …about Micro Loan Funds 2. Organizations creating alternative lending and investment programs 3. Organizations seeking services and capital

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

Page 20: Coom u n C COMMUNITY DEVELOPMENT MICRO …about Micro Loan Funds 2. Organizations creating alternative lending and investment programs 3. Organizations seeking services and capital

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.

Page 21: Coom u n C COMMUNITY DEVELOPMENT MICRO …about Micro Loan Funds 2. Organizations creating alternative lending and investment programs 3. Organizations seeking services and capital

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.

Page 22: Coom u n C COMMUNITY DEVELOPMENT MICRO …about Micro Loan Funds 2. Organizations creating alternative lending and investment programs 3. Organizations seeking services and capital

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.

Page 23: Coom u n C COMMUNITY DEVELOPMENT MICRO …about Micro Loan Funds 2. Organizations creating alternative lending and investment programs 3. Organizations seeking services and capital

CommunityDevelopmentMicroLoanFunds 21

FinalNote:

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

Page 24: Coom u n C COMMUNITY DEVELOPMENT MICRO …about Micro Loan Funds 2. Organizations creating alternative lending and investment programs 3. Organizations seeking services and capital

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

Page 25: Coom u n C COMMUNITY DEVELOPMENT MICRO …about Micro Loan Funds 2. Organizations creating alternative lending and investment programs 3. Organizations seeking services and capital

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”


Recommended