How CDFIs Can Drive Small Business Lending In Their Communities

In the U.S., small businesses generate nearly 1.5 million jobs per year and account for about 44% of the country’s GDP. As such, small businesses are the backbone of the US economy, yet they continue to face adversities stemming from the residual effects of the pandemic, rising inflation, labor shortages, and ongoing recessionary concerns in the general economy. 

These challenges have resulted in a current national SMB closure rate of approximately 38% with many cases being attributed to a lack of access to capital. The pandemic in particular revealed the necessity for financial institutions to have the ability to accelerate SMB lending to help these businesses during adverse circumstances. There was a lot of focus from the federal government on these small businesses in the pandemic with multiple loan and grant programs to help them sustain themselves through trying times.  The U.S. Treasury’s Community Development Financial Institutions (CDFI) program is aimed at furthering the growth of these small businesses in need.

In April of this year, the U.S. Treasury awarded over $1.73 Billion to 604 registered CDFIs through the CDFI Equitable Recovery Program (ERP). This represents the largest CDFI grant program in history and should enable community financial institutions to expand their lending, grant making, and investment activity to aid the long-term prosperity of low and moderate-income communities.  

These CDFI’s are in a great position to promote growth and opportunity in communities that most need them. They have made it their mission to help economically challenged communities with a variety of programs. This grant is welcome news to small businesses in these communities who are in need of capital.

Successfully Scaling ERP Programs

In recent years, innovative fintechs have led the charge in leveraging modern lending-as-a-service (LaaS) technology to streamline the application process and allocation of funds to SMBs, forcing many community banks and credit unions to play catch up. With an LaaS strategy in place, community financial institutions are now able to optimize their lending process to make it transparent, modern and faster for their customers. Additionally, financial institutions that effectively leverage data of their own -- or from a network of providers -- are able to make better informed decisions and build healthier portfolios.

For CDFIs in particular, this type of intelligent automation of origination and underwriting enables them to establish an SMB lending program that is optimized and efficient -- positioning them to quickly deploy ERP funds to small businesses in a more cost-effective way while ensuring compliance with CDFI program requirements and banking regulations. 

Some keys to a successful ERP program include:

A Seamless and Transparent Experience to Borrowers

In this highly digital world customers expect to be provided a seamless modern experience. They want to know where their application is and how they can expedite the process to access capital quickly, so the need for efficiency and speed is critical now more than ever.

Leveraging Rules and Automation to Make Better Informed Decisions 

This allows CDFIs to get the necessary capital in the hands of small businesses sooner. With automated verification and validation, CDFIs can minimize risk and ensure higher return from their portfolio while increasing productivity and allowing their business banking staff to focus on building customer relationships and connections.

Robust KYB Capabilities

Fraud prevention is critical in digital onboarding, so leveraging the right tools to perform a robust KYB is essential. Platforms that provide alternate data sources and leverage their lending network to validate and identify businesses and their historical operating patterns are essential.

Assess Financial Health of the Customer

When offering financing to SMBs, it is important to analyze business revenue and spread-projected financial data to get a clearer picture of the applicant’s true ability to re-pay the loan, helping CDFIs better ensure timely repayment of the loan.

As the ERP Application process draws closer, participating community financial institutions should reimagine the small business lending experience, both for their business borrowers and for the institution itself. To accomplish the ambitious goals that the ERP program is designed to meet, CDFIs need to have an infrastructure in place to direct funds into their local communities in a way that is both operationally manageable -- and risk responsible -- for the institution.

About Author:
Will Tumulty serves as CEO of Rapid Finance, a financial technology company and the one of the largest providers of working capital to small businesses in the United States.  

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