coom u n c community development micro …about micro loan funds 2. organizations creating...
TRANSCRIPT
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TOOLKIT
Community Economic
Development Toolkit
COMMUNITY DEVELOPMENT MICRO LOAN FUNDS
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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.
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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
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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
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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
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CommunityDevelopmentMicroLoanFunds 4
Forthecommunity:
1. Increasesaccesstocapital2. Increasedaccess‐relatedresourcessuchastrainingandtechnicalassistanceintheareasof
financeandbusinessdevelopment3. Createspersonalandcommunityassets4. Enhancesthelocaleconomybysupportingimportantsegmentsoftheeconomic
infrastructureincludingbusiness,residentialandindustrialsectors5. Effectivemeansofsupportingentrepreneurialdevelopmentinneighborhoodsandcreating
neededcommunitygoodsandservices.Successfullendingefforts(andancillaryfinancialprograms)resultsineconomicallystrongercommunities,strongerworkforces,moreinformedandcapablebusinessesandtenants,andultimatelyastrongerandmoreinclusiveeconomy.
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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
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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:
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CommunityDevelopmentMicroLoanFunds 7
1. FundInitiation:Secureseedfundstoallowforstafforconsultantassistanceforthe
following:(fundingcouldbelowerifyourstaffhasthetimetoconductthepreliminaryresearch)
A. ConceptPaper:Creationofaonetotwopagesummarythatincludesasummarydescriptionofyourorganization,needs,size,management,andpotentialresourcesavailableforthebusinessandfund.
B. CommunitySupport:Obtainsupportfromentitiesthatrepresentyourtargetmarket
C. PublicandPrivateSectorSupport:Identifysupportfromentitiesthatrepresentsyourtargetmarket
D. IdentifypotentialsourcesforpredevelopmentfundsE. Seekgrants(orplantoself‐finance)
2. GO/NOGO:Theinformationresearchedabovewillallowyoutodeveloptheconceptpaper.Thiswillallowyourorganizationtodecideifthecreationofaloanfundmakessenseandisfeasible.Securingpredevelopmentfundswillbeessentialespeciallyifyouaretryingtocreatealargefund.Theconceptpaperwillbethebasisofthebusinessandmarketingplan.
Determinationofthescope,size,anddirectionofyourloanfundshouldprovideagoodindicationoffeasibility.Sourcesofinitialcapitalaresecuredthroughfoundationandcorporategrantsand,insomeinstances,fromlocalgovernmentprograms,especiallyifthereisatargetedmarketwithtremendousneeds.
Financialinstitutionsoftenprovidecorporategrantstopenetratemarketsbyeffectivelypartneringwithcommunityorganizationsthatrepresentandservethesecommunities.Youmustmakethecase,presentneed,andindicatehowyourorganization’srolewillenhancetheeffort.(SeeDevelopmentTipsattheendoftheGuide)
YourorganizationmustassesshowtheproposedprogramcostswillbenefittheoveralleconomicdevelopmentstrategyofthecommunityandorganizationwhileassessingimpactstoindividualCEDprojectsandprograms.Thecreationofaloanfundofferssubstantialbenefitstothecommunityanditseconomicwellbeing.
3. Pre‐developmentActivities:A. BusinessPlan/MarketAnalysis:Conductamarketanalysisanddevelopabusiness
planforthefund.B. ManagementPlan:
1.) FundManagement:Includedarethedocumentsthatdefinelendingparameters,lendingguidelines,requirementstheapplicationprocess.
2.) LoanManagement:Includedaretheloanmanagementfunctions(loanapprovalprocess,closing,documentation,andloanmanagement(billing/collections)process).
3.) PortfolioManagement:Guidelinesandstandardsonriskmanagement(loanlosstolerance,reservesandriskratingofloans).
4. Board:CreationoftheBoardofDirectorsisaveryimportantstepthatbuildsthefoundationforasuccessfulloanfund.
A. Properbalancebetweenmission(helpingimprovedistressedcommunities)andrisk(lendingguidelinesandrequirements)ismaintainedbyboardrepresentation.
B. Fundraising:Fundraisingisacriticalneedforloanfundsandhavingrepresentativesfromentitiesthateitherfunds/investsinloanfundsorareinpeerindustriesthatcansupportloanfundactivitiesiscritical.
C. Management:Expertiseinlending,businessorlawprovidesthenecessaryinputandoversightoflendingactivitiesandoverallsuccess.
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5. LoanCommittee:Theloancommitteeshouldinmanywaysmirrorthebalanceoftheboardofdirectorsbuthavefocusonmanagementissues.Thecommitteemusthavemembersversedinunderstandingofthelendingguidelinesandpoliciesofthefund.Experiencedlenderscantypicallyberecruitedfromfinancialinstitutionsthatinvestorlendintothefund.
6. StartUpLendingActivities7. ApplicationforaCDFIcertification.Onceyoureceivecertificationyouareeligibletoapply
foraTechnicalAssistanceGrant(toconductorupgradeyourbusinessplan)orforaFinancialAssistanceAward(grantforyourloanpool).NOTE:YoucanapplyforaTechnicalAssistanceGranttostartaCDFIandloanpoolfromscratch,buttheseareinveryhighdemandandareverydifficulttoobtain.Themoreexperienceyouhave,thegreaterthepossibilityofreceivingagrant.
Strategy2:Partnership:IfthereareotherloanfundsorCDFIsoperatinginyourarea(ornearby),youmaywanttoconsiderpartnershipsthatwillleveragetheirexpertisewithyourunderstandingoflocalneeds.Thisstrategyallowsyoutobuildcapacityandexpertiseandmaintainagoalofcreatingyourownloanfund(andpotentiallyobtainCDFIcertificationatalaterdate).Someofthestrategiesinclude:
1. ExpansionofServiceArea:Ifitispossible,anexistingloanfundorCDFIcouldexpanditscoverageareatoincludeyourgeography.Youcouldbecomeamarketingarmfortheirproductsandservicesandpossiblyprovidespace,coordinatemeetingsorprovidelanguageservices.
2. CreationofaDedicatedFund:Ifthereissignificantinterestandresourcesforcreatingafund,youmaywanttoconsidercreatingoneandhavingtheCDFIorneighboringloanfundmanageit.Therearesignificantongoingexpensesforoperationsandall“back‐room”operations(loanservicingandmanagement).Yourorganizationcouldparticipateindevelopingthelendingguidelinesandstandards,orpossiblybeontheloancommitteeforthefund.Thisintermediarystepallowsyoutogainexperiencethatyouwillneedifyoucreateyourownfund.
Thepartnershipstructureisimportantifyouareconsideringoperatingasmallloanfundorprovidesmallerloans.Remember,themanagementandhandlingcostsforasmallloanarethesameasforlargerloans.Inaddition,thelargertheloanpool(andthegreatertheamountoffundedloans)generatesmoreinterestincomeusedforoperationsandmanagement.Forthesesmallerpools,itmayfinanciallywisetohaveanotherinstitutionserviceandmanageyourloanfund.Anotherstrategytoloweringoperatingcostsistopartnerwithotherorganizationsthatcouldhandlemarketing,trainingandtechnicalassistance.Existingslightlyexperiencedloanfund:Ifyourorganizationhassomeexperienceinlendingorwantstobuildalendingtrackrecord,youcanimmediatelyapplytobecomeaCertifiedDevelopmentEntity(CDE)throughtheUSTreasury’sCDFIFund.AlthoughthedefinitionfocusesonNewMarketsTaxCredits,aCDE’sactivitiesmeetCDFIstandardsandprovideanestablishedcertifiedlendingtrackrecordfororganizations.AsaCDEyouwillbeabletoapplyforCDFIcertificationandaTechnicalAssistanceAward.TheprocesstobecomeaCDEisstraightforwardandrelativelysimple.
AsdefinedontheCDFIwebsite,“aCDEisadomesticcorporationorpartnershipthatisanintermediaryvehiclefortheprovisionofloans,investments,orfinancialcounselinginLow‐Income
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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
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MICROENTERPRISELOANFUNDSMicroenterprisedevelopmentisaneconomicdevelopmentstrategythattracesitsrootsfromsuccessfultraditionalcreditandsavingsprogramsestablishedbyruralandurbanpoorcommunitiesinmanycountriesthroughouttheworld.Overthelast20years,thisstrategyhasbeenrefinedandtargetedtodisadvantagedcommunitieslackingaccesstotraditionallendingandsavingsresources.Keytraitsofthis“sub‐market”includepoorsaversandborrowerswithoutaverifiableincomeandalackofsavingsorothertangiblecollateral,inanenvironmentwithnoorverylittleaccesstocredit.Microenterprisedevelopmentisanimportantstrategybecauseitgeneratesincomethroughthecreationofbusinesses(jobs)atthegrassrootslevel.Theultimatebeneficiaryisthecommunitywheretypicallyboththeentrepreneurandtheserviceprovideddirectlysupportthestabilizationandgrowthofdistressedcommunities.Microenterpriseprogramsprovideaccesstocapitalinsub‐marketstraditionallyoverlookedbyconventionalfinancialmarkets.Whethertheprogramprovides$100or$35,000loans,capitalisneededtoinitiatesuccessfulbusinessenterprisesandensuresstartupandoperationsareadequatelyfundedthroughthemosttenuouspartofthebusinesscycle.ManyofthebasicstrategiesofmicrocreditareattributedtoNobelLaureateMuhammadYunuswhofoundedtheGrameenBankin1976.ManyinstitutionsincountriesthroughouttheworldincorporatedsuccessfulstrategiesdevelopedbytheGrameenBankthatdeliveredcredit(smallloans)toindividualsinpoorcommunities.Besidesdeliveringcreditandsavingsprograms,microcreditandlendingisaneconomicdevelopmentstrategythat:
1. “Fosterssmallbusinesscreationandgrowthamongdisadvantagedpopulationswithoutaccesstoconventionalresourcesand,
2. Increasedeconomicself‐sufficiencyoflowandmoderate‐incomepeoplethoughself‐employment”5
Internationaldevelopingcountriesmeasuremicroloansin“hundredsofdollarsorevenless”6whiletheUnitedStatesdefinedbusinessloansupto$35,000.Thescalemaybedifferentbut,thefocusonimpoverishedcommunitiesisthesameMicroloanactivityintheUnitedStatesissubstantial.FIELD,amicroenterprisepolicyprojectofthenonprofitAspenInstitute,conductsperiodicsurveysofgroupsthatservemicroenterprises,calledmicroenterprisedevelopmentorganizations(MDOs).“MDOsarenonprofitorganizationsthatserveasbanks,privateequityfunds,andfinancialplanners,suchaslending,capitalinvestments,budgeting,andfinancialadvisoryservices.Inaddition,theyprovidearangeofbusiness‐specifictechnicaltraining,coachingandmentoring,counseling,legalassistance,andothertypesofnonfinancialservices.SomeMDOsexistsolelytoconductmicroenterprisedevelopmentactivities,andsomearepartoflargerorganizationswithbroadermissions.”7TheFIELDsurveyconductedin2009,usingdataasof2008estimatedthescopeofmicroenterprisedevelopment.
5 Shorebank Advisory Services, “Microenterprise Loan Funds”, May 1996, page 1 6 FDIC, “Microenterprise Development: A Primer” FDIC Quarterly, Vol 5, No. 1, 2011, page 36 7 Ibid, Page 37 www.fidc.org
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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
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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
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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
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CommunityDevelopmentMicroLoanFunds 14
trainingortechnicalassistancewillhaveabetterunderstandingofthebusinessandhigherlikelihoodofsuccess.
d. LoanMonitoring:Requirementsforbusinessoperationsandfinancialreporting(monthly,quarterlyorsemi‐annually).Frequentmonitoringandmaintainingcontactwiththeborrowerisimportanttospotearlyissuesthatcanpotentiallyberectified.
e. Collateral:Levelofcollateraltoberequiredandanimportantmeasureofthecommitmentoftheborrower.
f. Character:Inlieuofaguarantor,co‐signerorreference,somesuccessfulprogramsrequireapplicantstoidentifyindividualstovouchfortheapplicant
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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
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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.
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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
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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.
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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.
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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.
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CommunityDevelopmentMicroLoanFunds 21
FinalNote:
Communitydevelopmentloanfundscanspecializeinitsmarketandservices.Microloanfundstargetsmallloansforentrepreneurs.Becomingaloanfundisnoteasyandrequiresastrongcommitmentfromtheorganizationandthemembersofthedevelopmentteam.WithexperiencethenaturalprogressionistogainCDFIcertificationandaccessitsmanyresources.Withthisaddedcapacity,organizationscanbecomeequityinvestorsorcanexpandtheirservicestotheentirecommunitybycreatingacreditunion.Thegoalcanbeaccomplishedwiththesupportofthecommunity,localgovernmentandinterestedfinancialinstitutions.Itismostimportanttohavestaffdedicatedtotheprojectandiftheydonothavetheexpertise,locateresourcestosupportandguidetheeffort.Thisdocumentisintendedtobeaguidethatoutlinessomeofthekeyissuesandidentifiespossiblesolutionsandsteps.Itisnotintendedtobeyoursourcesinceeveryprojecthasitsownissues,concernsandpeculiaritiesanditsownuniquesolutions.Thedocumentisnotintendedtoencourageanyorganizationintoprojectdevelopmentbutonlytolayoutsomeofthekeystepsandissuesoncethedecisionismadetoproceed.
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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
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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”