Over the next three years, a group of the nation's leading small business finance CDFIs (the 'Community Advantage Century Group' or the 'Group') commits to significantly scale up their small business lending in the 'missing middle' range of ,000 to ,000. Supported by philanthropic grants, loan capital, business referrals and technical assistance offered by Bank of America, as well as loan guarantees and streamlined procedures from the SBA, the Community Advantage Century Group is committing to reach a lending volume of million per year within three years. Lending at this annual level and more by 2017 (and going forward) will be a demonstration of success necessary to make the Community Advantage Loan Program a permanent resource for small businesses nationwide for decades to come.
These eight original CDFIs in the Group have existing infrastructure and experience to serve small businesses but require additional resources to achieve a greater scale. Specifically through this commitment, Bank of America will provide philanthropic support totaling million for all participating CDFIs for operating expenses and start-up costs of lending to the 'missing middle' segment; access to low-cost capital (less than 2.5% interest) sufficient to fund million in loans per year; and technical assistance on operating the program from marketing through underwriting, closing, servicing, and full loan repayment. Bank of America has arranged million in term and revolving loan financing to the Group members. These credit commitments will be increased as the program scale grows.
This effort will also introduce a new loan referral process. In each market served by the Group members, Bank of America will connect the participating CDFI with the 'best match' banker, whose role will be coordinating the referral flow and turning potential declinations into viable small business loan closings. Each such banker will be familiar with the CDFIs' underwriting standards to facilitate quality referrals. These bankers will hold regularly scheduled meetings with key CDFI staff to set goals, monitor success rates, and make process adjustments to help achieve the lending volume goal under this Commitment.
SBA guarantees between 75% and 85% of each small business loan and the guaranteed portions can be sold on the secondary market. The capital provided by Bank of America to the CDFIs largely serves as financing bridge between the small business owners and secondary market investors. The bank's loans are typically structured as revolving lines of credit that, after a short warehousing period, afford CDFIs the opportunity to sell the SBA guaranteed portions and, thereby, gain access to liquidity for originating Community Advantage loans. Finally, SBA will not only continue to guaranty Community Advantage loans throughout the Commitment term but will also continue to support Community Advantage lenders with simplified guarantee application procedures and training opportunities.
Eight consortium members have been selected (from the pool of 40 active Community Advantage lenders) based on CDFIs' capacity to achieve the commitment. Since inception of the Community Advantage program, these leading small business finance CDFIs have originated two-thirds of the total Community Advantage loan volume by both number of loans and the dollar amount.
Announce the million target commitment, supported by the partnership with Bank of America and the SBA.
Bank of America will award Community Advantage Century Group members with philanthropic grants totaling million to cover operating expenses for the expansion of lending under the Community Advantage program.
Bank of America will underwrite and close lines of credit for each Group member in the amount necessary to meet the commitment. These lines of credit will be increased as the program scale grows.
Bank of America and SBA will initiate quarterly Group meetings for sharing best practices and performance tracking.
Bank of America will identify 'best match' bankers in every market served by the CDFIs, conduct the introductory meetings between the bankers and key CDFI staff, train the bankers to become familiar with the CDFI loan underwriting standards, facilitate referral goal setting, performance tracking, develop the follow up meeting schedule, and otherwise implement the loan referral process to each of the Group members.
Bank of America will invite other financial institutions to participate in the referral process.
Distribute updated Community Advantage program lending guidelines, prepared by the SBA, to the Group members. Discuss and clarify new guidelines during the quarterly Group meeting of all Commitment Makers.
Recruit two or more additional Group members based on their commitment and capacity to achieve the collective target of over million Community Advantage lending volume per year.
Achieve Year 1 lending benchmark of million (250 loans with an average loan size of ,000)
Achieve Year 2 lending benchmark of million (500 additional loans with an average loan size of ,000)
Achieve Year 3 lending benchmark of million (1,000 additional loans with an average loan size of ,000)
Small businesses find it increasingly difficult to borrow growth capital in the loan size between ,000 and ,000. Yet this capital is among the most valuable to small businesses, larger than the amounts supportable by the business owners' personal credit, but too small to be obtained as part of a real estate purchase transaction. Businesses need loans in this 'missing middle' range to expand operations, hire more workers and serve new markets.
There are several existing programs (including SBA Microloan Program) to provide microloans (less than ,000) to small businesses. Other programs exist (including SBA 504 Program) to help businesses borrow larger amounts (often over million) to finance real estate. Historically, there have not been many affordable options for small businesses searching for capital in between these two extremes, especially in the ,000 to ,000 segment.
Even Community Development Financial Institutions (CDFIs), innovative and creative alternatives to mainstream financial institutions, have difficulty serving this 'missing middle.' Fewer than 5% of loans (either by numbers or dollar amounts) provided by CDFIs fall in this loan size range.
Acknowledging this gap, in 2011 the Small Business Administration (SBA) created a pilot program, the Community Advantage Loan Program, to provide loan guarantees to CDFIs making loans in the 'missing middle'. Unfortunately, CDFIs have not taken full advantage of Community Advantage, having originated fewer than 10 loans per year per active CDFI (as a nationwide average) under this program. The lack of funding (for both operating expenses and loan capital) to CDFIs specializing in these loans, inadequate loan referrals, as well as guarantee compliance concerns have prevented CDFIs from fully utilizing the program. Failure to utilize the program invites the possibility of that the Community Advantage pilot may be ended in March 2017.
The Community Advantage Century Group welcomes additional CDFIs that will commit to provide growth capital (through the SBA Community Advantage Loan Program in annual amount of at least $10 million) to small businesses growing, hiring and serving new markets. The Group begins its increased lending, it also invites additional financial institutions to participate in the loan referral process.
Bank of America will provide support (philanthropic grants, loan capital, peer mentoring and loan referrals) to CDFIs joining this commitment. Additional members would enable the Community Advantage Century Group to expand beyond the $100 million commitment.