The Solution for Saving Mom-and-Pop Businesses

The COVID-19 pandemic has upended the U.S. economy, leaving every community facing tremendous uncertainty. One thing is clear, however: low- and moderate-income communities and the small businesses they support will suffer the most if we do not move quickly to address their needs.

Although Congress passed a $310 billion Paycheck Protection Program in April, many small businesses and nonprofits were left out. And the program has yet to reach many of the most marginalized in our communities, especially small businesses owned by people of color. Indeed, according to the Center for Responsible Lending, 95 percent of African American-owned businesses and 91 percent of Latinx-owned businesses likely will not be able to access the program. 

To help remedy the problem, the federal government has allocated $30 billion through the program to "community financial institutions" to enable them to be more inclusive in their lending to businesses that have been ignored.  But even with a portion of PPP funds set aside for institutions like community development financial institutions (CDFIs), minority-owned banks, and credit unions, the level of funding earmarked for those lenders is insufficient to meet the scale of the problem.  

To save mom-and-pop businesses — including local farms and food producers, as well as small manufacturing businesses — it is imperative that we mobilize private capital to address the problem. But more capital is only part of the solution. Capital, whatever its source, must be applied with precision and a thorough understanding of the businesses receiving funds to ensure that the amount, type, and timing of the capital are well-matched to the business and its goals. 

This is not the time to search for shiny new investable ideas. More than a thousand community development institutions across the United States already are working to fill  gaps in the capital markets without regard to a borrower's color, gender, or ethnicity.

In this time of anxiety and uncertainty, impact investors — private investors who seek to create social impact — should look to CDFIs as a bridge to low-income communities. Not only do we have a forty-year record of working in those communities, we also provide relationship-based technical assistance — advice that is especially valued as small business owners look to reinvent themselves for a post-pandemic economy. 

Over thirty-six years, our CDFI, the New Hampshire Community Loan Fund, has built a strong, resilient community business. In part through a relationship-based, community-organizing approach, we have grown our ability to lend the right capital at the right time to make a difference. In this time of trouble, this is what we bring to the table to help small businesses weather the storm: 

We know how to stabilize a business. Many businesses have teams that possess skills and local knowledge accumulated over years. By providing capital to such businesses when they hit a rough patch, we make it possible for them to keep those skills and knowledge in-house, thereby reducing local economic disruption over the longer term. 

We work collaboratively. CDFIs fill capital gaps created by the business models of mainstream lenders and investors. For instance, our CDFI focuses on providing growth capital, a type of higher-risk financing that allows for the greater uncertainty inherent in the small business economy that is especially well-suited to this uncertain economic environment. What's more, the loans we underwrite are based on cash flow and the strength of the management team, as opposed to collateral. Our strong track record (i.e., minimal defaults) isn't because we're quick to say "no," but rather is the result of our focus on helping the borrower succeed. And the strong relationships our business advisors have built with our borrowers give us confidence that when borrowers see trouble ahead, they will ask for help sooner rather than later, knowing that we'll be patient and work with them to resolve the problem. 

We're creative. Like growth capital, pivot financing allows us the flexibility needed to shape financing to the needs of each particular business. Relying on unrestricted community-sourced capital allows us to structure deals creatively, using all the tools in our financial toolbox, including grants, debt, sub debt, revenue-based financing, and equity. The greater the mission alignment, the more willing we are to stretch, accepting a greater share of the risk so as to keep costs low for the borrower. Our backstops are our knowledge of the business and the trust we have earned — both of which are priceless as we and our borrowers navigate our way through this crisis.

In this moment, impact investors and funders don't need to spend valuable time searching for new ideas. They can invest in the existing CDFI infrastructure, an infrastructure uniquely positioned to stabilize and pivot local businesses for whatever lies ahead. By focusing our relationship-based efforts on businesses led by women and people of color, as well as businesses that are creating better jobs for low-income workers, we are doing our part to ensure that fewer people will be permanently harmed by the fallout from the virus. In doing so, we also are actively working to enlist new allies to this critical work. The challenge is immense; the time to act is now. 

John Hamilton is vice president of economic opportunity at the New Hampshire Community Loan Fund.

Comments

[Cal Vinal]

Thanks for the "pivot financing" conversation, John. It's a critical one as small businesses, and especially customer-facing services, now need flexible, patient and low-cost capital that aligns with the business' cash flow needs over this next year or longer as customer behavior evolves, and cash flows reflect, that new normal, while being senstive to the needs of existing debt structures.

[Paul Bradley]

John is 100% right. CDFIs are immediately invest-able, most are AERIS rated and are trusted in the very communities most impacted by the consequences of Covid-19.
Readers, please ask yourself: Am I a bottle-neck to the flow of capital to communities in need? This is no time for impact funds to be idle.

[Aaliya]

I run a small business in the U.S. It is a sigh of relief for me as the U.S government has released funds for restoring the economy. It is the right time to come up with creative business ideas to keep our businesses alive. Thanks for the useful post.