Community Development Finance: Plugging the Capital Gaps in American Communities
Updated: Nov 24, 2021
During this election cycle, there already has been, and surely there will continue to be, political rhetoric thrown around about the importance of small businesses to the economy and how vital it is to support them as a vehicle for opportunity for American families and communities.
However, not all communities have symmetrical resources available to be able to support a diverse and growing culture of entrepreneurship and innovation. Low-income communities struggle to draw in the financial and institutional support necessary to maintain and build adequate infrastructure, to incentivize businesses to either move to their community, and to incentivize them to stay and grow and invest there. Federal grants to support business incubation, seed funding, and competitive incentives are disproportionately awarded to communities that have a strong and proven track record of healthy business investment and growth.
Access to capital through financial institutions, the banks that so many of us are used to seeing on every street corner, is low because there are hardly any banks serving in these low-income communities. This lowers the number of options that firms and individuals have available to them to get credit to have basic checking and savings accounts, receive a mortgage, or start a business, which reduces their access to the resources that can help financial stability, growth, and mobility. This shortage of available financial institutions in a community or region reinforces its uphill battle to be competitive with those in which credit is easily accessible to all and anyone who wants to start a business has adequate resources available to them. Especially after the Great Recession, banks have settled into a very strict box of lending requirements, where, if your loan application did not have strong collateral or you have a weak credit score because of circumstances outside of your control, they won’t even entertain the idea of extending credit to you.
This has created pockets of communities around the country that are not receiving adequate capital to support entrepreneurship and new business development in their regions, which is not only hurting the economies of those regions, but the American economy, as well. If we want to see the type of shared economic prosperity and universal growth that we hear about in the political arena, we need to smartly and strongly invest in low-income communities around the country so that firms and individuals in them have access to the capital they require to succeed and flourish.
They’re not often talked about, nor do many people know about them, but there are over 800 certified Community Development Financial Institutions (CDFIs), nonprofit organizations supported by the U.S. Treasury serving low-income communities all around this country by “connecting capital to communities and people that need it…[providing] financial education, technical assistance, and capacity-building support to the organizations, businesses, and individuals they serve.” Together, they comprise the opportunity finance industry, which has “provided more than $42 billion in responsible, affordable lending across the country” in low-income communities since 1985.
There are four different types of CDFIs that serve different capital purposes: community development banks, community development credit unions, community development loan funds, and community development venture capital funds. In their own unique ways, each type of CDFI provides capital to under-served people and communities, many of which lie outside of the reach of traditional credit avenues and are demographics that are historically under-represented by these avenues. 48 percent of CDFI beneficiaries are people of color, 73 percent are low-income, 27 percent are in rural communities, and 48 percent are women.
They’ve received money to follow their dreams and start a business that not only provides them and their families with a fruitful and healthy living, but also brings some strength and stability to low-income neighborhoods and communities that can build momentum off of this new investment to build a better future.
They’ve received money to provide essential funding for community organizations that build affordable housing that is accessible and respectable, run homeless shelters in inner cities, and provide education for at-risk children and technical support to local business owners so they can be more successful, to name some of the incredible impact CDFIs have had throughout the past thirty years.
“I couldn’t have been able to do this without the help of the local CDFI,” you’ll hear many of them say. “
“No one believed in me. I was turned away from all of the banks and was feeling hopeless about starting my dream business of opening up a barber shop. But, thankfully, [the CDFI] believed in me and now I’m actually living my dream.”
Every day, CDFIs make high impact loans in low-income communities that are reaping benefits not just for the party to the loan, but for the entire community, region, and for the whole country. Every day, they’re plugging the capital gaps left open and untouched by the mainstream financial institutions. Every day, they’re “helping disinvested people and communities join the economic mainstream” by “aligning capital with justice.”
The CDFI Fund, an agency of the U.S. Department of the Treasury directly charged with funding and overseeing the opportunity finance industry, disclosed in its fiscal year 2014 annual report that it awarded grants to CDFIs totaling over $195 million. To put that into perspective, that was only 0.05% of the Treasury’s total allocation under the 2014 federal budget.
However, support for or increasing funding for CDFIs around the country was absent from the 2012 GOP and Democratic platforms, as well as the 2016 Democratic platform and it’s not expected to be included in the Republican platform this year. There has been no acknowledgement in the public political arena of the tremendous impact CDFIs are having in communities all across this country, nor has any candidate advocated for increasing financial or logistical support for these organizations. Media outlets, especially business- and economically-focused platforms such as CNBC, Bloomberg, and others have given CDFIs very little attention for the important role they are fulfilling by filling in the “blind spots” of the more mainstream financial markets that those organizations cover primarily.
If we’re really serious this election cycle about economic reforms that address inequality and poverty in America, we need to include strong support and adequate funding for CDFIs and truly champion the cause of entrepreneurship and opportunity for all in America.