Partnerships, policy & platforms: How the community development finance sector is supporting historic entrepreneurship growth in the U.S.

New technologies, a surge in federal funding, and strategic partnerships are driving rapid growth of the community development finance sector and bolstering resilience at a time of record small business creation — but there’s still a pressing need for further action to fully realize this critical moment.

When entrepreneur Ahriana Edwards was seeking a loan to scale her start-up brand, Vaila Shoes, she found an unexpected partner in CDC Small Business Finance and Capital Impact Partners — two mission-driven nonprofit lenders that are part of the Momentus Capital branded family of organizations. Momentus Capital is dedicated to closing wealth gaps and eliminating systemic barriers faced by diverse-owned and underrepresented businesses.

Ahriana had already been rejected by dozens of lenders, despite having a purchase order in hand from a large national brand and an excellent credit score — the combination still wasn’t enough for a traditional lender to take a chance on a burgeoning brand. However, Momentus Capital’s loan teams immediately saw Ahriana’s talent and drive, providing a $75,000 loan so she could fulfill her big-break order.

“As entrepreneurs, we’re constantly doing multiple things and trying to reach out to start conversations,” Ahriana said. “But the biggest thing that made me successful was leaning into those who got it. When you find a group of people who understand who you are as a person and the potential of what you’re building, the strength of that community can take you to more places than you can ever imagine.”

Community Development Finance Institutions (CDFIs) like Capital Impact Partners — which is supported by Mastercard’s small-business initiative, Strive USA, and part of the Momentus Capital family of organizations — have experienced significant growth in recent years, particularly after demonstrating their critical role as “financial first responders” during the pandemic, when they successfully dispersed federal relief Paycheck Protection Program (PPP) funds to small businesses that traditional banks could not reach. CDFI total assets under management are now more than $452 billion, three times as large as five years ago, and there are also more than 1,400 CDFIs operating today in the United States.

The recent rise isn’t without its challenges, however. Most notably, the demand for the services that CDFIs provide is still much higher than supply. Case in point: Only 31 percent of small businesses in the U.S. that applied for a loan in 2021 received their full request for financing, and this gap is even more pronounced for small businesses led by women, people of color, and entrepreneurs operating in rural areas.

Moreover, if we apply current failure rates of small businesses to the 5.4 million new businesses that were started in 2021, half will shut down in the next few years (if they haven’t already), many needlessly because they will not have access to capital, critical digital tools, knowledge sharing, or network support that CDFIs can provide.

Fortunately, a number of emerging trends are helping CDFIs not only grow to fill these gaps, but also diversify their funding to become more resilient.

Making it easier for impact investors to support CDFIs

One such trend is the growth of new technology tools and platforms that connect CDFIs to different types of investors for the explicit purpose of increasing the amount of cash they have available to lend to low-income communities.

These innovations include new matchmaking tools that align impact investors with CDFIs such as Strive USA grantee CNote and their Impact Cash product. Impact Cash is a cash management solution that provides corporate and foundation clients the opportunity to place fully FDIC-insured deposits with CDFI banks and credit unions. Its latest platform holds the ability to diversify millions in deposits from a single access point, streamlines data acquisition, validation, and underwriting — and administers impact and financial assessment frameworks digitally so they’re less onerous on the investor. CDFI banks and credit unions can then more readily access cash sitting on the corporate balance sheet to help scale their community lending initiatives.

The CNote platform has played a pivotal role in helping corporations like Netflix, Mastercard, and PayPal continue building on their economic justice initiatives by turning their corporate contributions into small business loans that support entrepreneurs aligned with causes they want to champion.

New platforms that connect small businesses with financial providers and advisors

Technology platforms that connect more lenders and borrowers to each other, like those developed by Strive USA grantees Next Street and CRF USA, focus on providing small businesses with multiple financing options to help them find the specific support they need for their business.

CRF Connect, for example, uses an algorithm to match small businesses with CDFIs and other business support organizations, helping businesses find the specific resources they need at that specific moment in time. This matching reduces the time and effort business owners need to spend researching programs, and creates a more efficient way for community lenders and business advisors to reach new potential customers.

Next Street’s program, NXST Scale, provides white label tools that can be fully customized to best benefit communities. As one example, the New York City government used the Next Street Scale platform to launch NYC Funds Finder, featuring a customized small business onboarding experience allowing entrepreneurs to directly connect with responsible capital and engage with financial advisors.

Emerging secondary markets for CDFI loans

Technology platforms and partnerships that bundle and/or re-sell small business loans are emerging, creating secondary markets that drive greater efficiency and tap into new sources of capital.

Strive USA Innovation Fund recipient, Scale Link, for example, was founded by leaders from the CDFI sector to help build a secondary market for small business loans. Today, Scale Link is focused on purchasing and bundling loans from CDFI loan funds and then selling them to investors who have not invested in CDFIs before. To date, they have sold more than $35 million in CDFI loans to their bank partners.

Inclusiv, a CDFI and membership organization for community development credit unions supported by Strive USA, is building a loan participation marketplace where Inclusiv credit union members can buy and sell loans to and from other members.

And with a view of the sector writ large, Aeris, another Innovation Fund grantee, is developing the technology to collect transaction-level data from CDFIs which will, among other benefits, help enable the eventual securitization of CDFI loan portfolios, similar to how banks sell home mortgages they originate.

New federal programs and multi-sector partnerships

New federal programs which support small businesses are also helping CDFIs to strengthen their balance sheets and thereby do more lending. For example, the Department of Treasury’s State Small Business Credit Initiative (SSBCI) has made $10 billion available to states for small business support, and since those funds will be combined 10:1 with private sector funding, this program alone is bringing more than $100 billion into the small business ecosystem. These programs are also helping establish new partnerships and infrastructure that extend well beyond the specific program itself.

To help ensure the influx of new capital reaches the entrepreneurs who need it most, organizations such as Hyphen, another Strive USA grantee, are working across the public, private, and philanthropic sectors on the implementation of federal policies designed to support small businesses such as the State Small Business Credit Initiative (SSBCI). Hyphen incubates the Inclusive Entrepreneurship Initiative, a national pilot program to expand access to capital for small businesses owned by people of color. Announced by Vice President Harris, the initiative harnesses public-private partnerships to implement SSBCI — 40 percent of which is designated for socially and economically disadvantaged individuals, and taps CDFIs, diverse venture capital manager funds, and high-impact credit funds to solve the need for more inclusive lending vehicles. Alongside the Mastercard Center for Inclusive Growth, IIE investors include financial heavyweights like JP Morgan Chase and Wells Fargo.

CRF, as mentioned above, developed an innovative technology platform to connect small businesses, CDFIs, and business support organizations, but they are also using it to streamline administration, compliance, and reporting for SSBCI participants. CRF is working with a range of partners today to launch and implement SSBCI across all 50 states, US territories, and tribal nations. CRF’s technology helps CDFIs get access to SSBCI funds, simplifies the process for reporting and compliance, and collects critical loan performance data.

Scaling innovation to drive more inclusive growth

The ecosystem that supports CDFIs is continuing to grow and evolve at a rapid pace, but more needs to be done to help ensure these emerging trends can scale and touch the lives of all entrepreneurs, not just those who are already well-connected. It’s a movement Strive USA is helping to build with the goal of connecting millions of small business owners with the support they need to thrive, and thereby creating a more inclusive U.S. economy.

Put simply, there are still too many entrepreneurs like Ahriana Edwards who can help break down the systemic barriers that have historically hindered the success of business leaders from underbanked and underserved communities, but cannot get there entirely on their own.

The underwriter for Ahriana’s loan, Nick Miluso, spoke to the broader challenge and opportunity in the small business sector when he summarized her application, saying, “It was clear from our first conversation that Ahriana has the talent and drive to succeed. She just needed someone to make that investment to let her take her company to the next step.”

You can read more about Ahriana Edwards and her business journey on the CDC Small Business Finance Web site.