Dashboard: The Best Kept Secret in Business Lending

[Music] Welcome to another 21 Hats dashboard. I'm Lauren Feldman and I'm here with Sara Halpern who is CEO of the Business Consortium Fund which is a CDFI or community development financial institution. Welcome Sara. Thanks Lauren. It's great to be here. It's great to have you here. Uh I appreciate you taking the time. Let's let's start with a couple of basics. What's a CDFI? A CDFI as you mentioned is a community development financial institution and we are lenders that are not banks. There have been nonprofit loan funds for many many years and CDFIs exist to fund either affordable housing or small business loans or nonprofit facilities. and uh we exist really to fill a community need that is not currently filled by banks. We will look at small loan sizes. We'll look at uh organizations or businesses that maybe aren't ready for a bank loan. And we also do a lot of work around the affordable housing um and preservation world where we um we support nonprofits that build housing to uh to house members of the community that that can't afford your typical uh typical housing. So CDFIS are institutions that support community econom economic development needs. Many of us are nonprofits like BCF. Uh some of us are forprofits. There are about 1,200 of us across the country and about half of us support affordable housing whereas half of us support small businesses. And how do you define your the community that you serve? Is that geographic or the the type of uh borrower you're supporting? Yeah, absolutely. So for the CDFI community overall, we exist to serve underserved populations. And throughout the history of CDFIs, that's meant a couple of different things. It means supporting um uh lowincome and moderate income individuals and geographies. So for for example, you it's and it's it's very data driven. So you have your area median income that is uh designated by the by the government and anybody who makes less than 80% of that area median income is considered a low to moderate income person. And then geographies that are low to moderate income are where know the majority of people are making 80% or lower than that area median income. and CDFIs exist to serve that population. But we also exist to serve what what are called other targeted populations. A bit of jargon and other targeted populations might be people who are um who are uh racial minorities who are veterans um and generally people who are what you would what you would say are outside the mainstream uh uh financial services industry. So do you lend to businesses around throughout the entire country or just in a particular area with that that community you just mentioned in mind? BCF we are a national CDFI and so we ser particular to BCF we serve borrowers that are lowincome or who are racial minorities or who are underserved in another way throughout the country. And you see me you hear me hedging a little bit here. And the reason I'm hedging a bit here is because the world has changed so much in the past um five months with um uh potentially our ability to serve racial minorities as other targeted populations as you know something that's going to go away. So we and I think other CDFIs as well who have historically served this population are broadening our services so that we're serving lowincome people in general uh throughout uh throughout our geographies. Some CDFIs are very place-based. BCF happens to be a national CDFI. Got it. And what percentage of your lending goes to business owners? 100%. 100%. Yeah. 100% of our of our lending is to small business owners and our focus is on the small business owner who has a contract with a government or a corporate entity because we see these supply chain contracts as a really fantastic way for a small business to grow. when you have a contract with an uh Amazon or a Walmart or a local jurisdiction like the a city or a county, you really can predict your income, your uh your cash inflows uh from month to month. So, we see this as a fantastic way to build wealth, although perhaps a challenging one at the moment with the tariff situation and so much uncertainty. H how does that affect your your lending to businesses that are dealing with supply chains? It certainly is a concern right now. What we see for our clients, however, is that most of our clients are in the services industry. So, they're doing logistics or they're doing legal services or accounting, um, HR because the majority of our businesses are in in these sectors, we're seeing less of an impact there. But the uncert uncertainty is I mean there's no doubt about it right the uncertainty is uh increas uh um impacting people to the point where they're they have a bit of more of a wait and see attitude not a let's seize this opportunity attitude. So it is putting a damp uh it is dampening uh activity for sure. Could you uh tell us a little bit more about why one of those businesses you just described would borrow from you as opposed to from uh a traditional bank? Yeah, businesses who we serve typically have not been orienting themselves towards taking on external capital for one reason or another. Historically, BCF has served business owners of color. And what what we see is that business owners of color are often wary of of finan of the uh the financial system for a lot of you know for for any number of reasons. Um there are higher turndown rates. um there seem to be stricter conditions and when you when you compare this to similarly situated other businesses, business owners of color seem to receive the brunt of that. So over time they've not oriented themselves towards taking on capital and we find that people are reaching into their own pockets to um to to provide financing for their startup costs. And that really has a a weaken weakening effect on their personal balance sheets. When they come to us, they have an expansion opportunity, but their balance sheet often isn't capital ready, meaning maybe they've taken out more cash from their business than they should have. They don't have a strong enough cash position. M maybe um they don't have a diverse source of income. And so when you have these conditions, banks are even less likely to lend. So it's a it's a um it's an effect that it's like a pile on effect. For firsttime borrowers who need a a small size loan, a bank may not even look at them. If they do look at them and they get turned down, they may not know the reasons they were turned down. What we offer is a completely different um experience. When you come to BCF, we will underwrite your smaller size loan, meaning a loan under $250,000. That's not our limit, but many borrowers come to us a small size loan. We if there is weakness in your balance sheet or weakness from an underwriting perspective, we we don't just say no. We say this isn't working right now. Here are the reasons why. Here's what you can do to strengthen your balance sheet. and to become more capital ready and we will work with you to get there. That's what sets apart CDFIS and really BCF specifically from other banks or from other from banks in in general. That's responding to a frustration I hear often from business owners that they can apply for a bank loan and it can take forever in their uh opinion and then it's an up or down with no explanation. Are you able to move quicker than banks traditionally do as well? It really depends. I will say that. And the reason is because so many, like I said, so many of our clients are first-time borrowers. So, walking them through the underwriting process may take a little bit longer because we need to look at tax statements, personal financial statements. If there's collateral involved, that may uh require it to take a bit longer. But we are with the client all the way. So you're not going to uh you know um submit all your documents then not hear from us for four months and then finally hear no. You will get regular communication. We will be asking you for more information if you need it. We will be advising you on um uh additional steps you can take to improve your cap your uh your balance sheet to make you more capital ready. So it's a different experience alto together. Got it. I I hear what you're saying. You uh a lot of the people you work with are less inclined to go to banks and they may be looking for smaller loans that would preclude a bank from even talking to them. But do do you also make loans that banks wouldn't make because you're willing to take risks that banks wouldn't take? Absolutely. We are. And and you know, if we were if we were just another bank, we would not be doing our job. As a CDFI, part of our objective is this community development objective, right? We want to have more small business owners, um, grow their businesses, create new jobs, create new opportunities, drive more dollars into their communities, better tax base, more infrastructure. You know, I can go on and on and on about why it's so important for us to get our dollars out there. So, um, you know, without without doing, um, and gosh, Lauren, I just actually I lost you're gonna edit this part out. I lost that um the the point of your question. I got so into saying why we do this. I was just asking if you were willing to take risks that banks wouldn't take. Of course. Yes, we must take risks that uh that that banks aren't willing to take. So for example, we will um we'll if a client has a concentration of their contracts or concentration of their revenue, we'll work with them and on top of it, we'll introduce them to other corporations and other buyers of their products or their services to help them diversify. That's one thing we do. Um if you have a lower credit score than a bank would take, we don't say no to that either. We look at the actual reasons why your credit score might be lower and we decide is this a is this a risk that we can take and if it's not well can you get a co-signer? We are so motivated to get loans done to get capital in communities that we're going to we're going to um pursue many many more avenues than a bank would to um uh to reduce the risk if we see it right to mitigate the risk if we see it. But even if there is uh excess risk uh in uh in comparison to a bank, that's why that's why uh business would come to a CDFI. We actually have a lot of bank partners as well. And so one thing we do is we help clients become bank ready, right? Bank ready. So if you do, if you're able to go to a bank, then that may be better. You may be able to get a bigger loan. they may be able to offer um lower interest rates than we do because you're in a less risky position. So, we have many bank partners where after you've successfully taken on a loan from BCF, repaid it, grown, we would love to introduce you to our bank partners to have a bigger bank relationship. So, it sounds like you typically would uh have to charge a higher rate for giving a a riskier loan. We do. we do have to charge um a higher rate than than banks do. Um and we try to reduce that for clients in uh in all the ways that we can. One thing that we do is we offer a closing cost grant to LMI or low to moderate income clients. So so that reduces their cost. We work with banks to help buy down interest rates. We do try to uh to lower the rate so that more clients can access our products and services. And what kind of impact does this have on the failure rate of the loans that you make? How do your clients tend to do? Overall, our clients do really really well. Um our our delinquency rate is low. If you look at the CDFI industry overall, uh, delinquency rates are low and that we can attribute to the fact that we work with our clients, uh, on a month to, you know, every month. If we see a weakness, we're going to proactively reach out to the client. We're not going to just let them, you know, we're not going to not going to just let it let it slide and, oh no, you didn't pay now and now you're in trouble. It's more of a relationship, more of a conversation. So we even though we do lend to generally higher risk clients and higher risk means they they're less experienced with taking on capital. They have a smaller business. They may not have as diverse of a revenue stream. Higher risk doesn't mean you're not an incredible business owner with a lot of business savvy. I just want to make that really clear. Um but smaller businesses are they the impact on adverse economics uh uh situations is higher on them. So for a smaller business there is more risk but because we work so closely with the clients we see very good outcomes on in our portfolio. Got it. So, you mentioned that traditionally you've lent to underrepresented uh entrepreneurs, business owners, um often uh racial minorities. Obviously, this is an interesting time for that. What has that meant for you? What are you having to change given the current climate? A couple of things. one, we are becoming prepared for the uh the government agency that oversees CDFIs, which is the Department of the Treasury. We're getting prepared for them to remove that other targeted population, meaning um racial minorities, remove that from their certification um uh objectives. And to do that, we're focusing more on these uh lower inome communities and lower income borrowers. So that is that's one response that we have. But Warren, we remain so committed to the clients that we serve and we continue to proactively reach out to business owners of color through ethnic chambers of commerce, through the National Minor Minority Supplier Development Council. Um and just in our in our marketing and in our presence, we what we really um what we really believe is that belonging is so key in so many aspects of business ownership. And belonging actually when you come to a financial institution is really important because when you're opening up your books to um to an underwriter, it's it it feels kind of personal, right? It feels it feels pretty vulnerable. And we want to be a really welcoming place for all all small business owners, but really in particular people who fel have not felt a sense of belonging, h feel like they have not been seen either by you know a financial institution um or you know by uh the business community. We want to provide that place here at BCF. So, we're continuing to do what we've always done, even as we've expanded our products and services to be eligible for all small business owners who walk in our door. You know, a change in thinking that's coming from Washington on this issue is based on the premise that favoring underrepresented or minority business owners or or people in area any area is a form of reverse discrimination. Um, from what you're saying, it sounds like you're trying to continue to do what you've been doing, but but you're still kind of using similar language. Is that going to work? That's a great question. In a time of so much uncertainty, right? Is it going to work? And at a time like this, we don't know. We don't know what's going to happen. We we don't know what's going to happen. And you know, I I want to just double click on the reverse discrimination. And for us, it's not about that. It's about visibility. And we see that so many of the business owners we serve have not they don't have visibility. And that's what we want to help them achieve. We want to help them achieve visibility through scale. We want to help them achieve visibility through relationships, access to networks. And those are the things that the business owners we serve, we've served historically have struggled with and that's what we're here to help them with. Is it going to work? We we we you know, we don't know. We don't know if it's going to work, but but we what what we're doing to keep our doors open is to offer our services uh to all small businesses. What we do find that it though is that um we are known in this community and you know we're embraced by this community and we we embrace this community back and I can't see anything wrong with that. It does sound though as as if you're moving in the direction of basing your decisions less on demographics and and more on need and opening up what you do to a wider circle of potential borrowers. That's right. And what can I say and you know what could be wrong with that? Right. Right. Right. So we are I I'll give you an example. Yesterday I uh was at the Women's Capital Summit here in New York City and I met an array of extraordinary women business owners. And the women business owners that I talked to, many of them experienced the same. They experienced that lack of of visibility. They experienced being the only woman in the room. and they were very excited that I was there as the first woman CEO of BCF and that we've expanded our services. So, people who need us will come to us and people who don't need us will go to banks. And what we still continue to see in our country is that when you're looking at communities that are struggling financially, they are disproportionately communities of color. And so as we expand and as we look at the lens of lower inome communities, we're still going to capture so many of these smaller businesses that really do need our products and services. I have a sort of a vague sense that many business owners don't necessarily know what a CDFI is. Am I wrong about that? You are not wrong about that. No, you are not wrong about that. I feel like CDFIs need a rebranding first. a CDFI is just saying it is a mouthful, right? It's probably not the best term. Uh the fact that we are nonprofits and the fact that we provide so much s so much uh so many services, it just puts us in a different position than banks with their, you know, with their giant marketing budgets and their billboards. We don't have that same capability to put ourselves, you know, front and center in so many communities. Uh, I hate that we're the best kept secret. Not enough business owners know about us. And so I'm very excited to be here and hopefully more business owners over time will learn about the role that CDFIs play in supporting the small business community because it's significant. I wonder if it's also an issue for you. you're kind of lumped in with a group uh that's known as alternative lenders, but but that includes online lenders who can tend toward the predatory side. Um places that will give you put money in your checking account in 20 minutes but charge you we won't tell you what your what your annual rate is. Uh but it's way more than you would pay at a for a traditional loan. Um, is that an issue for you? I don't think about us as an alter I I suppose we are we're an alternative to a bank. Um, I think that the spectrum of alternative lenders can be pretty scary, you know, especially when you give an example like you just did. Um, we what I would say is that we are responsible lenders. We are responsive lenders. We are real people. you know, we are who are looking at your um at your balance sheet, at your ability as opposed to an algorithm. We're not an algorithm and that really sets us apart from uh the type of business that you just mentioned. So, I you know, alternative can it can have pretty scary connotations. Do you find yourself competing with those kinds of lenders? I'll tell you this. Um, a lot of times when we see a cl when a client comes to us and we are shocked to see loans with an 18, 20, 25% interest rate on their books and we are so happy to be able to refinance those loans and save the client so much money that they they can get then put into their businesses. So, we see it. It's an issue but and to the extent that there are competitors I don't know but we do solve that problem for many businesses who come to us. Interesting. Um can you share a a a success story? Can you give me an example of a business that was able to borrow from you and then go on and grow and develop and evolve? Yeah, I would love to. Um we have we have so many great borrower success stories. Um I will share one of them actually uh who who who I was able to share on LinkedIn so I can share the the business name publicly. We have a business called Django Facilities and in 2022 they came to us uh needing a loan for their IT expansion. They're uh they're a business that um that does real estate logistics in the Southwest. It's a it's a um a husband and wife duo. They came to us, they asked for a tiny loan. We gave them a $15,000 loan to improve their IT infrastructure. They repaid it and then they came back to us a year later and they asked for a typical small business loan. They were doing great. We underwrote that and they just received uh uh an accolade by Inc. magazine as one of the fastest growing businesses in the Southwest recently. So, we are so proud to be able to support that business. Um, another wonderful business is a small business owner uh in California. She inherited the business from her parents and it was a janitorial services business. She had a contract with the city and county of San Diego and she won a contract from Walmart, but she didn't have enough people to be able to deliver. She came to us. She said, "Look, I have this. It's going to bring in x amount of dollars and I need a line of credit in order to hire people." And we provided that to her and she created you know so many jobs uh from with this business business loan was able to grow her business and we were just speaking to her and she has two more new contracts uh with other with other companies. So what we see is businesses growing, diversifying, improving their foundational infrastructure and creating jobs. And uh we just love our clients. We love our client success stories. Do you know if the the woman you just described tried to get a bank loan before coming to you? Cuz you'd think somebody with a uh an offer from Walmart would qualify for a bank loan. She was unable to get a bank loan. She did have credit weaknesses and we were able to work work with her through those credit weaknesses. And I'll tell you what they were. uh she didn't have the kind of collateral that a bank would accept and we are willing to piece together various pieces of collateral to to you know to um create um um a sufficient stack whereas a bank may just look at it and say that's too complicated. I'm not doing that. I'm not sure what you mean by piecing together pieces of Yeah. So like a bank may need um one you know like one piece of real estate. They may need x amount of cash. they may need one, you know, sturdy piece, so to speak, of collateral. Whereas your house in many cases, your house, a lot of times it doesn't. Yeah. A lot of time it is is your house. And we're willing to look at more smaller pieces of collateral. For example, you know, vehicles. We'll put we'll put vehicles into the stack. We'll put your we'll look at your contracts and we'll look at your receivables. We'll put that into the stack. So, we're more flexible than a bank would be in that way. Got it. Is there anything else you'd like businesses to know about what you guys do? Yeah, I w I would, you know, I I I want businesses to know that we are here for them. We are on their side. We want our We want our small businesses to grow. We want to be their capital partner. And as they grow, we want to introduce them to new sources of contracts, potentially bank partners, and we really we, you know, we we want to be a um a support system. One of our clients said, uh when it rains, BCF is the umbrella, and that's really how we want to be known. There are many other CDFIs that also provide small business loans throughout the country. And in the CDFI world, we want you to come to us, of course, but we also want you to be well aware of all the offerings of CDFIs across the country. So, I encourage people to understand more about them. Um, if you go to our industry website, which is um opportunity finance network, you'll see all the CDFIs across the country. And if you're interested in learning more about BCF, we are at bcfc capitalap.com and we are always happy to have a one-on-one conversation to kick things off with a potential client. So come to us and let us support you. Sara Halpern is CEO of the Business Consortium Fund. Thank you for taking the time, Sarah. Lauren, this was fantastic. Thank you for um for highlighting us, for reaching out, and for um for the conversation as well. Happy to let businesses, more businesses know that this option exists. Fantastic. Have a great week, everybody.