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Cascade: No. 71, Spring/Summer 2009

CDFI Business Lending Grows During Recession

The current economic situation has changed financing prospects for small businesses around the country. To better understand how community development financial institutions (CDFIs) are responding to the need of small businesses for financing, we asked the executive directors of seven CDFI business lenders about their recent experience in loan demand, lending policies, and loan performance.*

To summarize, the CDFIs are receiving more inquiries and applications, including some from established businesses approaching CDFIs for the first time. The CDFIs are making more loans, and the average loan size increased from 2008 to 2009 at most of these institutions.

The CDFIs are experiencing a rise in delinquencies and are therefore increasing loan monitoring, working closely with existing borrowers and making loan modifications when necessary. They are also more carefully scrutinizing loan requests from start-ups. In addition, regarding their own funding, the CDFIs are concerned that past levels of bank support may not be maintained.

Swisco Inc., a window manufacturer in Camden, N.J., obtained a loan from the Cooperative Business Assistance Corporation. Shown are David Pallas, owner (left), and his brother Paul.Swisco Inc., a window manufacturer in Camden, N.J., obtained a loan from the Cooperative Business Assistance Corporation. Shown are David Pallas, owner (left), and his brother Paul.

Application Demand

The Cooperative Business Assistance Corporation (CBAC), based in Camden, N.J., reported that it received 102 completed applications in the eight-month period that ended February 27, 2009, nearly equal to the number it received in the full year that ended June 30, 2008. CBAC’s portfolio increased 7.5 percent during the eight months.

Michael Diemer, CBAC’s executive director, said: “Our financing has risen as conventional financing has fallen and owners are unable to fund their businesses through financing on their homes. Banks are referring customers to us because they need additional outside subordinate capital in the deal to get their loan committee’s approval. Otherwise they can’t make the loan because the business is a start-up or the loan is too small. Banks are also referring businesses as part of workout strategies.”

Community First Fund (CFF) reported that the number and dollar amount of its small business lending increased 20 percent and 30 percent, respectively, from July 1, 2008, to December 31, 2008. CFF’s marketing and business development contributed to an increase of loans in its pipeline, including many applications for working capital.

Dan Betancourt, CFF’s president and CEO, added: “CFF is seeing an increase in the number of referrals from banks. Some referrals are bank commitments that were not fulfilled. The difference is that banks would have financed many of these transactions in the past.”

Community First Fund made a working capital and equipment loan enabling Maria Martin to purchase a second truck for her catering business. Martin prepares breakfast and lunch meals that are delivered on weekdays by six employees to businesses in Dauphin County, PA.Community First Fund made a working capital and equipment loan enabling Maria Martin to purchase a second truck for her catering business. Martin prepares breakfast and lunch meals that are delivered on weekdays by six employees to businesses in Dauphin County, PA.

The Progress Fund (TPF) reported an increase in inquiries during the second half of 2008. David Kahley, TPF’s president and CEO, said, “It seemed that businesses were shopping around, while at the same time they seemed cautious about taking on more debt in the current economy.” TPF projected 20 percent less loan activity in calendar year 2009 due to economic conditions, and it was on track with that estimate as of the first quarter of the year.

Among microlenders, Community Capital Works (CCW) said its applications more than doubled, rising from five in July-September 2008 to 11 in January-March 2009. Leslie Benoliel, executive director of the Philadelphia Development Partnership, which established CCW, said: “More applicants are coming to us with better business savvy, more industry experience, and higher credit scores (for example, in the 600s and 700s).”

CDFI Loans Closed
Fiscal Yeara 2007
Fiscal Year 2008
Fiscal Year 2009
(Partial Year)
Delinquency Rateb
CDFI
Number
Dollar Amount
Number
Dollar Amount
Number
Dollar Amount
Percent
Cooperative Business Assistance Corp. (CBAC)
72
$2,284,500
62
$2,710,635
70
$3,290,535
3.12
Community First Fund (CFF)
79
$2,982,931
71
$2,971,514
57
$3,662,701
7.00
The Progress Fund (TPF)c
44
$4,576,609
33
$2,969,938
4
$623,750
2.53
Community Capital Works Inc. (CCW)
26
$103,600
26
$153,328
23
$88,500
3.07
Economic Opportunities Fund (EOF)
48
$172,900
39
$169,500
22
$102,500
10.85
First State Community Loan Fund (FSCLF)
8
$147,749
14
$1,226,467
2
$55,100
N/A
Rising Tide Community Loan Fund (RTCLF)
9
$170,700
12
$260,697
12
$293,300
4.30
    Notes: All data are as of March 31, 2009. N/A - Data not available.
  • a CBAC, CFF, CCW, and RTCLF use a fiscal year of July 1-June 30. TPF and FSCLF use a calendar year. EOF uses a fiscal year of October 1-September 30.
  • b Delinquency rate: Percentage of loan dollars delinquent by more than 90 days/gross dollar amount of loans outstanding.
  • c The number of loans and dollar amount include off-balance-sheet loans underwritten by The Progress Fund for the Commonwealth of Pennsylvania.

Also, the Economic Opportunities Fund (EOF), launched by the Women’s Opportunities Resource Center (WORC), has seen a substantial increase in the number of inquiries and loan applications, including some from businesses that didn’t seek its services in the past.

First State Community Loan Fund (FSCLF) had an increase in applications and inquiries in 2008, which it attributed to the tightening of the credit markets and its own increased marketing efforts. In 2008, it made 14 business loans totaling $1,226,467 — the largest annual volume of business loans since the fund’s inception.

At Rising Tide Community Loan Fund (RTCLF), launched by the Community Action Committee of the Lehigh Valley, inquiries rose 220 percent from October 2008 to March 2009 compared to the same period a year earlier. The amount of the average loan application rose from $14,272 in 2007 to $22,285 in 2008, and rose to $24,442 in 2009. Its approval rate rose 33 percent in 2008.

Christopher Hudock, RTCLF’s manager, said: “We are now seeing businesses that would have previously qualified for bank loans as well as a higher proportion of businesses with a longer business history. These new applicants generally have better credit quality and more collateral to offer than our traditional borrowers.” RTCLF has received many more referrals from banks with which it has established relationships.

Challenges

Diemer said that many business owners have been referred to CBAC by their bankers, but a substantial number of the referrals are in such poor financial condition and with a poor prognosis for recovery that it cannot help them. It is approaching the SBA, USDA Rural Development, and financial institutions for additional loan funds.

Diemer added: “Most of our small business customers have seen a downturn in demand for their products or services, but they’re small and flexible enough to have avoided overstaffing in the past and do not have to cut employees. Also, these companies do not have overcapacity in real estate and equipment. However, as demand continues to drop, some of our fabricating companies will be in trouble. Staffing companies are now seeing a big lack of interest in hiring.”

Betancourt said: “CFF’s biggest challenge is liquidity. Finding banking investors has become more difficult. We’ve started to look for investment capital from a wider range of investors, such as churches, social investors, and national banks. In addition, monitoring our delinquencies has become a major priority. We’re trying to make sure we prevent delinquencies from becoming defaults.”

Kahley said TPF has adequate capital sources and excellent long-term relationships with governmental agencies, institutional investors, and private foundations.

Benoliel said: “CCW’s main challenge is having sufficient capital available to meet the demand for new loans.” It has a loan fund of $300,000 and recently secured $250,000 in new capital commitments.

Barbara Anne Gardenhire-Mills, director of lending and training at WORC, said: “The primary challenge of the Economic Opportunities Fund is keeping up with the demand for new loans while also paying necessary attention to our existing loan customers. We don’t have adequate staffto do both.” She added that the CDFI is finding it more difficult to raise capital and operating dollars.

Vandell Hampton, executive director of FSCLF, said many businesses approaching FSCLF “already have bank financing in place and need additional money for growth and expansion, but their first lender is unwilling to provide more financing. It is very difficult for us to provide additional funding because the first lender typically has all the collateral tied up.” He noted that “many banks are moving away from the equity equivalent model and are looking for investments providing greater returns.”

Eric Keebler (right) makes electric violins and violas to the exacting standards of professional musicians. First State Community Loan Fund approved a $50,000 new equipment loan that enables Keebler and business partner Jason Lunn (left) to produce six instruments a month instead of six a year.Eric Keebler (right) makes electric violins and violas to the exacting standards of professional musicians. First State Community Loan Fund approved a $50,000 new equipment loan that enables Keebler and business partner Jason Lunn (left) to produce six instruments a month instead of six a year.

Hudock said: “The major challenge currently faced by the RTCLF is keeping up with increased demand — both in terms of stafftime and available loan funds. More loans are being approved and our available loan funds are dwindling. Currently, monthly payments don’t come close to meeting the funding demands for new loans. We may now need to borrow additional funds beyond the $1 million in our current loan pool.”

Changes in Lending Policies

Diemer said that CBAC is taking a harder look at businesses that depend on discretionary income such as concierge services, limousines, pet care, and restaurants.

Betancourt said: “CFF is now prioritizing its loans based not only on the strength of the application but also in terms of the impact that the small business has in the community. We are requiring a personal investment in the business by borrowers and are scrutinizing very carefully any application for a start-up business. For entrepreneurs looking to purchase the building in which their business is located, we are requiring an appraisal no older than five to six months.”

Benoliel said: “At both the staffand loan committee level, CCW is carefully scrutinizing loan applications over $5,000 because of the difficulty of starting or expanding a business in the current economic environment.”

In the past six months, the EOF implemented a minimum credit score requirement of 550, based on an analysis of loan performance in relation to credit score ranges, and started filing liens on collateral for loans of $1,000 or more.

FSCLF increased its maximum loan amount from $50,000 to $150,000 in 2008 but from time to time may lend above its maximum thresholds. In 2008, FSCLF provided $300,000 in an SBA 504 project for the purchase and retrofitting of a manufacturing facility in Seaford, Delaware, that created 20 jobs. Hampton added that FSCLF has tightened its credit requirements and noted: “It’s become increasingly more difficult to make loans to startup and early-stage businesses.”

Hudock said that RTCLF has increased its maximum loan amount from $25,000 to $35,000 in response to increased demand for higher levels of funding.

CDFI Descriptions
NAME HEADQUARTERS STARTED IN FOCUS SERVICE AREA CONTACT
Cooperative Business Assistance Corporation (CBAC) Camden, N.J. 1987 by city of Camden and six commercial banks Commercial loans, fixed asset loans, bank loan guarantees for manufacturing, industrial, and other businesses, SBA microloans up to $35,000, SBA 504 project financing. Camden, Atlantic, Cumberland, Salem, Gloucester, and Cape May counties, N.J. Began lending in Philadelphia in 2009. Michael Diemer
(856) 966-8181
mdiemer@cbaclenders.com E-Mail
www.cbaclenders.com External Link
Community First Fund (CFF)
Lancaster, Pa. 1992 Microloans up to $25,000; business and community development loans of $35,000 to $500,000; and affordable housing loans. 13-county south-central Pennsylvania region. Dan Betancourt
(717) 393-2351
betancourt@commfirstfund.org E-Mail
www.commfirstfund.org External Link
The Progress Fund (TPF) Greensburg, Pa. 1997 Loans to tourism-related businesses and farmers for the production of locally grown food products; area loan organization for Pennsylvania’s First Industries loans for tourism-related and agricultural projects; SBA 7(a) lender. Helps create tourism destinations. 39 counties in southwestern and northern Pennsylvania, West Virginia, and part of Ohio. David Kahley
(412) 216-9160
dkahley@progressfund.org E-Mail
www.progressfund.org External Link
Community Capital Works Inc. (CCW)
Philadelphia 1998 by Philadelphia Development Partnership
Two microloan programs: a peer step-lending program in which loans of $500 to $5,000 must be approved unanimously by peer group members; and a small business loan program providing individual loans of $500 to $25,000. Philadelphia, Bucks, Chester, Delaware, and Montgomery counties, Pa. Leslie Benoliel
(215) 545-3100, ext. 223
lbenoliel@pdp-inc.org E-Mail
www.pdp-inc.org External Link
Economic Opportunities Fund (EOF)
Philadelphia 1999 by Women’s Opportunities Resource Center
Credit builder loans of $500 to $1,000; direct loans of $500 to $2,500; credit lines of up to $2,500; small business loans of up to $10,000 (for existing businesses only); and a near equity loan product up to $35,000.
Philadelphia, Bucks, Chester, Delaware, and Montgomery counties, Pa. Barbara Anne Gardenhire-Mills
215-564-5500
bgardenhiremills@worc-pa.com E-Mail
www.worc-pa.com External Link
First State Community Loan Fund (FSCLF)
Wilmington, Del.
1993 Business growth loans from $15,000 to $150,000, typically to businesses operating for at least one year, and microloans of $300 to $15,000 to start-ups and early stage businesses. Community development and affordable housing loans up to $500,000.
Delaware Vandell Hampton Jr.
(302) 652-6774
vhampton@firststateloan.org E-Mail
www.firststateloan.org External Link
Rising Tide Community Loan Fund (RTCLF)
Bethlehem, Pa. 2001 by Community Action Committee of the Lehigh Valley
Microloans and classes in starting businesses for owners whose risk factors make it difficult to obtain funds from traditional lenders. Serves start-up and established businesses.
Lehigh and Northampton counties, Pa. Christopher Hudock
(484) 893-1039
chudock@caclv.org E-Mail
www.therisingtide.org External Link

Loan Performance

Diemer said: “CBAC loans booked for one year have no delinquency. Our problems in delinquency stem from older customers who, because of personal problems or in some cases a downturn in revenue, are unable to pay their bills. Our current delinquency has increased this fiscal year, and we have increased our provision for loan losses to up to 8 percent of the portfolio.”

Betancourt said that CFF’s defaults were 1.4 percent as of June 30, 2008, and estimated that they would be 2 percent to 3 percent for the July 1, 2008, to June 30, 2009 fiscal year. He added: “We are unfortunately seeing an increase in the number of clients applying for bankruptcy protection. While the number of bankruptcies is still only a small percentage of our total outstanding loan portfolio of small businesses, we saw nearly 10 last year.”

Kahley said that the overall portfolio of TPF is doing well and explained: “We’ve always avoided overleveraging ourselves. We’ve seen a small up-tick in the number of distressed borrowers. Nowadays, we have two or three problem loans out of 165, instead of one or two as in past years. We’ve made a handful of loan modifications that seem to be helping those owners.”

Kahley highlighted the resilience of the tourism-based sector that TPF focuses on. “When the economy slows,” Kahley said, “people still want a vacation, so they decide to stay closer to home and thereby spend less. Overall, the tourism businesses we see are generating roughly the same revenues as in past years.”

Benoliel said that CCW’s business loans have generally performed well but added: “We are seeing more of our loan payments drift into the up to 60-day range (from 5.6 percent as of December 31, 2008, to 18.8 percent as of February 28, 2009).” Gardenhire- Mills said that the quality of the EOF’s portfolio has deteriorated significantly over the past six months, Hampton said that FSCLF’s writeoffs increased in 2008, and Hudock reported that RTCLF’s delinquencies have risen in recent months.

Note: Opportunity Finance Network, the CDFI trade association, is publishing a quarterly CDFI market conditions report. Go to www.opportunityfinance.net External Link and select Knowledge Sharing.

  • * Comments are organized in order of the three CDFIs with a large business loan dollar volume in the past three years (Cooperative Business Assistance Corporation, Community First Fund, and The Progress Fund), followed by four microlenders (Community Capital Works Inc., Economic Opportunities Fund, First State Community Loan Fund, and Rising Tide Community Loan Fund).