Innovations in Lending: How Three CDFIs Are Deepening Their Commitment to Latino Entrepreneurs

Innovations in Lending: How Three CDFIs Are Deepening Their Commitment to Latino Entrepreneurs

Co-authored by:
Chief Credit Officer Nelly Rojas-Moreno, LiftFund
Chief Credit Officer and Head of Small Business Programs Oswaldo Acosta, Latino Economic Development Center
Director of Fondo Adelante, Nathanial Owen, MEDA

Lending to Latino entrepreneurs is a strong business model for any CDFI.

That is the fundamental message being put forth by a trio of nonprofit lenders at the Opportunity Finance Network (OFN) “CDFI’s Agents of Change” Conference in Chicago October 8-11.

And that statement is not just theoretical — it’s backed up in practice by the experiences of three Community Development Financial Institutions (CDFIs) serving Latino entrepreneurs in significantly different contexts: LiftFund, Latino Economic Development Center (LEDC) and Fondo Adelante.

Industry changes. A community looking to grow.
There is concern in the industry that CDFIs have increasingly moved upmarket to find borrowers, running the risk of leaving behind many of the communities these CDFIs were originally intended to serve. This trend certainly impacts access to affordable capital in Latino communities. Such challenges of access to capital go beyond just CDFIs. A recent study by Geoscape indicated that Latino-owned businesses make up 12 percent (or 4.2 million) of all U.S. small businesses; however, despite that sizable market segment, Latino business owners make up less than 6 percent of SBA 7A Loans, one of the most popular small-business loan programs in the country.

In recent years, perhaps in response to these trends, there has been an increased CDFI focus on whether their staffing is reflective of the communities being served. This focus should include not only frontline lending staff, but also management staff who are able to make decisions about new products, allocation of resources and strategic direction for their CDFIs.

Three stories. One outcome.
Latino entrepreneurs face nationwide systemic barriers to accessing capital and business support. Given the community development mission of CDFIs, these nonprofit lenders have a particular responsibility to address these barriers.

Understandably, there are questions that must be answered to allay concerns about lending to various Latino communities so that these endemic obstacles are eliminated.

How can lenders develop criteria to evaluate borrowers who do not have extensive credit history in the U.S.?
What biases must the CDFI industry shed to competently serve Latino entrepreneurs?
How can CDFIs take better advantage of the opportunity to lend to undocumented entrepreneurs?

LiftFund, LEDC and Fondo Adelante believe they can offer data and experience to address these questions. These three CDFIs are deeply committed to deploying capital and providing business support to meet the needs of Latino entrepreneurs in their communities:

  1. LiftFund started almost 25 years ago in San Antonio, a city that is about two-thirds Latino. LiftFund has scaled to become a 13-state lender, primarily serving businesses in the South and Southwest.
    Lending since 1994: 20,355 loans for $287M (of which $118M has gone to Latino-owned businesses).
    Demographics/heritage: Majority from Texas, with significant minority of Latino borrowers immigrants, mostly from Mexico.
    Technical assistance: Low touch.
  2. Latino Economic Development Center (LEDC) started in the Washington, DC Metro region, including Baltimore.
    Lending since 1997: More than 1,200 loans for over $15 million.
    Demographics/heritage: 60 percent from Central America and South America.
    Technical assistance: High touch.
  3. Fondo Adelante, the community lending arm of the Mission Economic Development Agency (MEDA), focused on San Francisco’s Mission District, long a welcoming hub for Latino immigrants (although Fondo Adelante lending takes places across the nine-county Bay Area).
    Lending October 2014 to now: 70 loans for $2,168,190.
    Demographics/heritage: Mix of Mexico, Central America and South America (30 percent undocumented).
    Technical assistance: High touch.

Despite the aforementioned variances  — years of lending, clients’ country of emigration/documentation status, depth of technical assistance provided — the history of experiences with the Latino community are aligned for these lenders. Of note is that Latino borrowers exhibit lower education levels. The same for household wealth and credit scores (e.g., half of LEDC borrowers have less than $50,000 in revenue; 48 percent have a credit score below 650 compared to 41 percent for non-Latinos).

Despite such perceived barriers, Latino clients repay at a higher percentage than their non-Latino counterparts (e.g., LiftFund has an overall 10 percent default rate, but it is just 8 percent for Latinos; Fondo Adelante has an almost zero percent default rate in its four years of lending to mostly Latinos.)

Conclusion
Based on the experiences of LiftFund, LEDC and Fondo Adelante, business lending to Latinos represents a win-win: This is a stable business model, and such lending abets the thriving of these communities of color.

With Latinos the fastest-growing group in the U.S., CDFIs should position themselves to serve this market, both in urban centers experiencing gentrification and in rural communities where access to affordable capital is often scarce. To do so, CDFIs must invest in staffing – at all levels of their organizations – that reflect the Latino communities being served. Additionally, marketing collateral, loan applications and all points of engagement need to be offered in Spanish. By doing so, CDFIs can position themselves to be the lenders of choice for Latino entrepreneurs in their communities. It’s about providing equity of opportunity.

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