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Small Businesses Get a Boost From Nonprofit Lenders

A program created by Uncle Sam is helping firms that can’t otherwise find credit.

Small businesses are finding it a little easier to get loans, thanks to renewed efforts by the federal government and private banks. The credit is coming from community development financial institutions (CDFIs) -- certified nonprofit banks, credit unions, funds and venture capitalists set up to offer loans in low income and underserved urban and rural areas.

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The lenders finance a wide variety of loans, but now more small companies are flocking to CDFIs as traditional lending sources remain wary of risky bets. “Demand for small business loans has gone through the roof,” says Mark Pinsky, president of the Opportunity Finance Network, a CDFI member organization. “We can’t keep up with it.” From the fourth quarter of 2008 to the fourth quarter of 2009, 68% of business CDFIs experienced increased demand and said they expected to continue to see more applications this year.

It helps small businesses that CDFIs can be more flexible than conventional lenders. For example, some lenders have accepted unusual collateral such as a business owner’s car. Once they make a loan, the nonprofit lenders also offer business advice, providing workshops and other training to help borrowers grow their businesses and pay back the loans. As a result, they have proved to be resilient amid the downturn. Last year, net charge-offs at CDFIs were 1.78%, compared with 2.49% at institutions insured by the Federal Deposit Insurance Corporation.

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“Because CDFIs work in broken markets, we are used to the risk,” says Pinsky. “Plus we are creative and innovative.” He says that many CDFIs are now interested in early stage businesses because that is a niche banks can’t fill at the moment. They are also looking at later stage companies that provide valuable jobs or services to a community.

Public and private support for CDFIs is soaring as the overall outlook for credit remains spotty nationwide, with some areas much worse off than others. President Obama wants a 30% hike in the government’s fiscal year 2011 budget for CDFIs. That’s on the heels of a 128% increase from $107 million in 2009 to $245 million in 2010, not counting $100 million more in federal stimulus money.

“Many CDFIs have prime borrowers walking through the doors for the first time,” says William Luecht Jr., manager of legislative and external affairs for the Community Development Financial Institutions Fund at the Treasury Department. “The higher demand means there is more need for capital.”

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Goldman Sachs says it will give the lenders $300 million over the next five years. Bank of America also pledges to keep up support of the institutions, which is significant because it is the nation’s leading CDFI benefactor, with investments of about $1 billion in 120 CDFIs throughout 37 states. Investing in them lets banks boost their small business lending without directly taking on the risks. “The loans take a lot more time to underwrite,” says Dan Letendre, senior vice president at Bank of America. “And in most cases the loans are smaller.”

Bank of America has even started referring applicants it rejects at its traditional branches to local partner CDFIs for financing. That allows the bank to maintain a relationship with the business owner so that it can make a loan once the firm becomes a less risky bet. “It’s good business for us,” says Letendre. “They are being tested in the downturn and are proving to be exceptional stewards of capital.”

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