CDFIs, or, Community Development Financial Institutions, are a cherished resource for underserved markets and populations. They play a crucial role in the financial ecosystem, but what if your community does not have a CDFI? We spoke with Mark Pinsky from CDFI Friendly America for the Small Business Matters podcast this week, to hear all about their mission to help CDFI’s serve bigger markets.
Watch Our Interview
This segment of the episode begins at 9:43.
What follows is a lightly edited transcript of our interview.
[Gary Stockton]: So Mark, could you start by telling us about CDFI Friendly America and what your primary mission is?
[Mark Pinsky]: Absolutely, CDFI Friendly America is a new effort, with a goal to help CDFI’s find market opportunities in communities that are not currently being served all across the country. Big cities, small towns, wherever there’s a need. We’re trying to figure out how to introduce them to each other.
[Gary Stockton]: And there are different kinds of CDFIs. As I researched this story, there’s not just one type. Could you kind of explain the difference?
[Mark Pinsky]: Sure. CDFIs Community Development Financial Institutions is a category of financial institutions. They’re private sector financial institutions; their primary purpose is to create benefits for underserved people in communities. And they do come in four main types. Two of them are insured depositories. So community development banks and community development credit unions, are the insured depositories, and two of them are not community development loan funds, which are the most populous type of CDFI, the most common kind of CFI, and community development venture funds, or equity funds, that do equity financing and small businesses.
[Gary Stockton]: Excellent. So serving underserved small businesses, they really do a great job. How do they reach out and help?
[Mark Pinsky]: Well, the key to what community development financial institutions do is that they stay very close to the market. They know the market, they know the people that they’re working with, or the community that they’re working with, and they try and provide financing that’s organized around what the borrower needs, what the business, what the entrepreneur needs to be successful. And they have a lot of experience now doing that, more than 40 years experience in some instances. And they’re very good at understanding what it takes for new businesses, for businesses that have been unable to get access to financing for some number of years, they’re good at helping businesses get through hard times and help them prepare and be ready and have all the skills that they need to succeed.
[Gary Stockton]: So do they only help small businesses that have been declined or having trouble finding financing through a bank?
[Mark Pinsky]: You know, it’s an interesting thing. Often their borrowers are small businesses that haven’t been able to get financing through a bank, or who perhaps have been approached by predatory, small business lenders, which is an issue that we all worry about and are struggling to figure out what to do. But often they also are, particularly when you’re dealing with Black and Latinx entrepreneurs, they’re often a business or entrepreneurs who are what we call discouraged businesses, right. They haven’t been able to even make the approach to the bank because they just feel like they’re going to get “no,” they’re going to get a negative answer out of it. And so often with CDFIs, it’s business owners like that, as well as those who’ve been turned down. You know, one of the things that’s interesting is many CDFIs, more than ever now, have referral agreements with banks where banks aren’t able to say yes, for some reason or another, it has to do with their regulatory structure or credit structure. And, and CDFI’s are really happy to try and figure out how to make it work. We tend to say in the CFI world, we tell them, we tell the banks, we tell others, don’t say no, say CDFI! And CDFIs tend to say, “don’t say, no, say not yet,” because we’re committed to trying to help those businesses get to the point where they can get access to the financing they need so they can succeed.
[Gary Stockton]: Yeah. Yeah. It’s as I researched this, you know, that there were some really impressive stories. One that I’ve read about in Chicago with a company called The Hatchery, can you give our listeners a little background on what happened there?
[Mark Pinsky]: Sure, absolutely. The Hatchery is about a 67,000 square foot incubator really for food entrepreneurs in a Westfield/West Garfield Park in Chicago. Garfield Park is an overwhelmingly black community. And a couple of CDFI’s got together – IFF is one of the CDFi’s for community businesses, and bundled together some financing. Some of it was through tax credit, some of it was conventional financing. Some of it was CDFI financing. The two, I think, cost about 34 million, some years ago. They put together an all purpose, all service food incubator, where they did business training, they had kitchens, they had access to expertise, everything from bookkeeping to marketing, and it’s been a tremendous success. There’s something; I can’t remember the number of jobs, something like 900 jobs they projected by the end of next year have been created out of this. There are at least 25 businesses that have already been created that have grown out of this. And you know, what they did was they went into a place and took something that was often cultural in communities. And that is their food and what they prepare and what they sell. It may not be prepared food, things that are conventional or familiar to conventional financial institutions, but given a chance, you know, the food entrepreneurs at The Hatchery and in many other places are just; given the chance, given a little bit of support there, they’re driven to succeed. And so there have been something like a hundred food innovations that have come out at this point, have come out of The Hatchery. So it’s not only breeding successful businesses. It’s really strengthening the community and strengthening the culture of the community.
[Gary Stockton]: That’s a wonderful success story.
[Mark Pinsky]: It’s a great success.
[Gary Stockton]: Now talking about childcare; 90% of childcare businesses are women-owned. And we know that childcare as a category was left out of the initial round of the PPP funding, but did CDFIs work with childcare businesses?
[Mark Pinsky]: Yeah. CDFIs. So a little backstory to that. It was in the late 1990s when everyone realized as the financing, the money coming out of Washington and out of the state governments was changing, that the childcare facilities and early care facilities needed to come up with a new sort of business model in some ways. And CDFI has played a really important part. There was a bank no longer around now that approached the CDFI industry and provided a combination of grant funding for innovations and debt financing that really figured out a new way of helping childcare facilities succeed. And so CDFI has played a really critical role in helping rethink the business in a sense, but still the economics of childcare, as you know, I’m sure are really difficult: either have to charge young parents a lot of money, or you’ve got to figure out some way to subsidize the business in some way. And so, yeah, it’s often women that are the entrepreneurs; 90% sounds about right. And you know, so there are examples. I think we had talked about an example in Boise, Idaho, where it was just during COVID, that really was struggling, but a CFI was able to step in and ultimately provide some PPP financing. But then on the other side of that we provide the financing that was intended to help businesses, small businesses recover, including nonprofit businesses recover from the impact of COVID and childcare was really hard hit because people were staying home, couldn’t send their kids to childcare. So the businesses were really hard hit. And then, you know, the access to finance was really limited. So it was a hard thing. I’ll tell you, we’re doing some work now in, in Fort Worth, Texas, where we’ve been meeting with a group called the Childcare Alliance, which has been able to rally a significant amount of funding from both the County, Terran County and from the City of Fort Worth.
[Mark Pinsky]: And now they’re trying to say, how do we work with CDFI’s? And that’s what we’re doing there, trying to help them work with CDFIs. How do we work with CDFI’s to really leverage this investment that the public sector has made so that the private sector (ie; CDFi’s and banks and others) can really sort of bring back to the life of the childcare network that’s there. A really dynamic leader. That’s always the case with entrepreneurs. And I’m really excited about that. I think that’s a great example where CDFIs play a role that that others can’t.
[Gary Stockton]: That’s wonderful. And that’s actually how you and I got engaged in the beginning. I’d read that about the work that you were doing in Fort Worth and your organization, you have worked with several cities, so you go into–I mean, Indiana, you did a number of projects there too, right?
[Mark Pinsky]: That’s right. We’re working now with about 15 different cities. Very different types, very different places. But it started in Bloomington, Indiana where they simply wanted one CDFI financing. The mayor had come out of the CDFI industry, newly elected mayor at the time in 2017, John Hamilton. And they were trying to figure out how do they get CDFI financing there? And the only way to do it was to innovate a new model, which has become CDFI Friendly America. And, but yeah, so Fort Worth is a really interesting example of that. We started out in Bloomington just with the idea that we were going to sort of go to smaller markets that would never be big enough to support a CDFI, that would never be an X sort of an economy of scale that would make it work for CDFIs. And what we figured out was that there was deal flow there, and there was pipeline; therefore for CDFIs, that is. the real small businesses and other opportunities, but they weren’t big enough to support any one CFI.
[Mark Pinsky]: So if we could get multiple CDFIs engaged with the city, as we now have in Bloomington, we could make CDFI financing available without creating sort of the overhead burden of asking a CDFI to be there full time, which wouldn’t have met the needs anyway. So, yeah, we started there, but in Fort Worth moved to a different point, which is that there are major cities, Fort Worth is the 12th largest city in the United States. Most people don’t realize that, but it is likely that it will surpass Dallas in total population in the next 10 years or so. It’s growing at a very fast rate. It’s a very diverse city, it’s a majority minority city. And what we discovered there was that CDFI financing was really lagging for no obvious reason. I mean, you know, we can go back and reconstruct it. But for example, we look at CDFI lending, we can do this any place in the country, but we looked at CDFI lending there over the last 15 years. And it averaged out to be about $39 per person in CDFI financing, just to compare that the national number which is about $235 per person. So not only did Fort Worth lag the national level, it lagged Dallas, which was at $71, and the State of Texas, which was $109. And I don’t think of the State of Texas as being that well served by CDFI’s. So what we discovered was in big cities, there are what I would think of as sort of infill opportunities. There are major needs there. So Fort Worth has been remarkable, and we’re still in the startup phase, but has been a remarkable success, CFI Friendly Fort Worth now has about 18 or 19 CDFI’s who are looking at financing opportunities there. We’ve identified about $125 million in demand. Not all of it’s going to get financed, but there’s a lot of demand there and we think we’re just scratching the surface. And transactions are starting to close, now, we’ve just been at it for about a month. We have three small businesses that have closed deals. We think there will be a lot more. I’ve told the people there that I think we’ll do at least a quarter of a billion dollars over five years. I think we’ll do more than that. But I think that it will do at least a quarter of a billion dollars in financing. And it’s just opened our eyes up to the fact, you know, I live in the city of Philadelphia, and in Philadelphia we have some extraordinary CDFI’s, but we have a huge unmet need for black and Latino entrepreneurs in this city.
[Mark Pinsky]: Banks have struggled to figure out how to try and address it. And I don’t think anybody thinks that that the needs are being met. And so even in a city where we have extraordinary CDFIs working in other areas and serving part of the need, we’ve discovered that there is a tremendous need for CDFI friendly strategies. So, you know, we are, boy, are we busy! We are just a startup ourselves and we’re in that good stage of startup, which is you have way more demand than you can possibly meet. So we’re trying to figure out how to, how to ramp up ourselves.
[Gary Stockton]: That’s wonderful. So what should a small business looking for funding have ready when they go in to meet with their local CDFI? What makes them a good prospect?
[Mark Pinsky]: Sure. Well, obviously, everybody’s looking for entrepreneurs who are passionate about what they do and to be a small business owner, you have to be passionate about what you do. It’s the only way to get going, right? So we’re looking for that. We want to understand their story. We want to understand their vision, what they hope to create, we want to create some income for the micro entrepreneur; even if it’s a one-person business and we just need to be able to create some steady income. But we want them to come up with their story. We want them to come in with whatever financial information they have. If they have bank account information, we want to see that. If they have tax returns, we want to see that. We don’t expect people to come in, and be ready to push the button and apply for financing.
[Mark Pinsky]: We understand that we’re going to work. We’re going to help understand where they are, where they need to be. Whether there are things need to look for before they apply for financing, or whether there are things that can be part of the financing as they apply for financing, or even after they receive financing. We often see that it’s not unusual for CDFI’s with small businesses to provide post credit technical assistance, particularly in things like bookkeeping, reporting, that kind of thing, which is hard.
Well, one of the big banks did some research. A number of years ago, they found out that most small businesses, most entrepreneurs spend no more than three hours a year thinking about their credit needs. And just because they’re busy, they’re working 18 hours a day to make it go right. And we have to figure out a way to make it work for them, particularly when you’re dealing with underserved or discouraged entrepreneurs. Because they’re not used to this. They’re not used to being in financing mode. And so, you know, we have to meet them where they are and make sure that we’re providing the support that they need, the scaffolding that they need to add to what they’re doing. That’s not to take away anything from their efforts, but to make their business successful. You know, most entrepreneurs are not finance people. And so we’re happy to go in and take a look at whatever they can bring to the table and figure out how to help them get where they want to get.
[Gary Stockton]: It really does sound like your CDFI, they’re a partner. They’re helping you. They want you to succeed. And in a lot of cases that I’ve read about, it isn’t a lot of money for some of these small micro businesses. You know, it could literally be maybe $5,000. I don’t know, maybe less, if it’s a gardening business, it’s tools, you know, maybe a truck that gets better mileage.
[Mark Pinsky]: And CDFI’s will do for micro businesses, we’ll do loans as small as $500, sometimes less, in order to help somebody get started. And there are CDFIs that do small business financing that sort of mezzanine financing for growth companies. That’s $10 million, right? So there’s a whole range. The challenge, and this is one of the things to do with CFI Friendly America, the challenge is finding the right CDFI for the entrepreneur, right? Not every small business lender is the same, just like not every small business is the same. We’re in the business of finding the right match, the right introduction. And generally then we can get out of the way because the CDFI and entrepreneurs, you know, they find a way to work together and they’re off and running. But one thing that’s important to understand is that technical assistance that we provide is core to our business model. And what we’re willing to do is give up a little bit of margin in order to provide the assistance that in the long-term is going to help the business succeed or the borrower succeed. But that technical assistance also becomes a risk mitigant, and CDFIs for small business or affordable housing or commercial real estate have a tremendous track record of performance over about 40 years where the net charge offs in our business are a little bit higher, but within 10 basis points of what banks have, banks achieve in conventional markets. So we specialize in managing risk and non-conventional markets, and we’re very good at it. Part of the key to that is the partnership as you described it that we have with our borrowers.
[Gary Stockton]: Awesome stuff. Well, Mark, this has been such an informative discussion on CDFI’s for me, where can our listeners find out more information?
[Mark Pinsky]: So if they want to find out about CDFI Friendly America, they can go to our site, which is cdfifriendlyamerica.com. If they want to find CDFI that are already working, where they are, there are two good sources. One is, there’s a program in the federal government called the CDFI Fund. And the department of treasury that’s cdfifund.gov. And there, you can find a list of all the CDFIs that are working. And then the organization that I led for many years Opportunity Finance Network, which does, which is sort of the industry trade, go to ofn.org. And it has a member locator for those CDFIs that are member of OFN. You can get a lot of information about them there. So, at this point, in fact, I would say that CDFis have become well enough known that if you were to go in and do a search, whether you’re using Google or Duck Duck Go and look for “CDFI [name of the city],” there’s a good chance you’ll find it that way too, which wasn’t true 20 years ago, I promise you! But it’s kind of good that it is now. So it makes it easier for people to find the resources they need to succeed for entrepreneurs to do it efficiently.
[Gary Stockton]: It’s been a pleasure speaking with you today on Small Business Matters. Thank You.
[Mark Pinsky]: Thank you.