How mission-driven financial institutions can improve credit access for underserved small businesses


Emily Ryder Perlmeter

Come In: Small Business sign

Small businesses matter. They’re major job creators, employing more than 46% of the private-sector labor force. They also happen to represent 99.9% of all firms in the country. Access to credit and other financial tools is critical to their creation and growth. Yet certain groups—such as women, people of color, veterans and lower-income individuals—struggle with equal access to business financing. This pattern held true even before the pandemic.

Now, for a moment, consider how important these job creators are to the economy. Pursuing initiatives that expand opportunities and promote affordable credit products for small businesses makes a lot of sense.

Late in 2022, the US Treasury Department approved a second round of funding for its historic Emergency Capital Infusion Program (ECIP). With up to $9 billion for Community Financial Institutions (CFIs), that’s an unprecedented amount allocated for mission-oriented financial institutions. The intent is to “augment their efforts to support small businesses and consumers.”

It is smaller than the first funding round. However, the additional capital suggests that Treasury has confidence that ECIP can make an impact for small firms across the US.

Connecting the dots between CFIs and small business

So, what is the connection between CFIs and small business growth? What kind of impact might the ECIP have in helping underserved small businesses stabilize and grow? I recently dug into some of the data for Texas to find out. (You can read the research at the Dallas Fed.) My aim was to help shed light on the connection between mission-oriented financial institutions and small businesses. Two key takeaways rose to the surface when I looked at the role CFIs played in deploying Paycheck Protection Program (PPP) loans across Texas.

  • CFIs got $3.2 billion in the hands of nearly 100,000 Texas small business owners between April 2020 and June 2021.
  • Small businesses that received PPP loans through CFIs were more likely to have their loans completely forgiven (i.e. converted to grants).
What are Community Financial Institutions?

The two important CFI types the Dallas Fed looked at are Minority Depository Institutions (MDIs) and Community Development Financial Institutions (CDFIs). Here’s how these mission-oriented financial institutions differ.

  • MDIs are federally insured banks or credit unions. People of color either own the majority of voting stock or primarily make up the board of directors. MDIs serve predominantly communities of color. Across the country, MDIs hold combined assets of $320 billion.
  • CDFIs are institutions that specialize in lending to low-to-moderate-income communities and other underserved consumers. This includes borrowers of color and women or those in rural or tribal communities. There are 1,300 CDFIs nationwide and 45 headquartered in Texas.
Community Financial Institutions and the PPP

PPP implementation provides a unique look into the difficulties that many small businesses face in working with large, mainstream banks. In the years leading up to the pandemic, small businesses with owners of color were less likely to have a relationship with a mainstream bank, according to data from the Federal Reserve Small Business Credit Survey.  What’s more, Black small-business owners were half as likely to have a lending relationship with a bank compared to white small-businesses owners. This lack of relationship presented a serious barrier to getting financial assistance in the early days of the PPP.

When the PPP opened in April of 2020, the demand for loans far outweighed supply.

Concerns soon surfaced that many small firms were unable to apply. Because of the program’s structure, banks prioritized lending to known customers. These customers were more likely to be white and well-established, and represent larger-sized firms. After criticisms about equal access, the PPP reopened a few weeks later. It had an additional $310 billion in funding and policy changes aimed at reducing barriers for underserved businesses. These policy changes hinged on creating greater opportunities for MDIs, CDFIs, and small community banks to extend PPP loans. The theory was that this would improve access for the most vulnerable firms, including firms of color, very small firms, and those in lower-income neighborhoods. But did that pan out?

Visualizing impact

Using loan-level data, we looked at the impact these policy adjustments seemed to have on expanded PPP access. We found evidence that emphasizing MDIs and CDFIs as lenders did lead to improvements for certain firms. This was particularly true for those located in zip codes where people of color make up more than half of the population. (Please note: Because of the way PPP data were collected, we cannot properly estimate the race or ethnicity of individual business owners. However, we can use firm location in a neighborhood where residents are primarily people of color as a proxy for firms of color.)

The maps below help show this correlation on a county level in Texas.

Map 1
Counties in Texas with the highest shares of residents of color
Map 2
Counties in Texas with highest share of PPP loans made by Community Financial Institutions

Counties with high shares of residents of color and those with higher reliance on CFIs for servicing PPP loans strongly overlap. Among the counties where more than 90% of the population is of color, the average share of loans from CFIs is 42%. In other words, CFIs did improve access for firms in areas with high shares of residents of color.

CFIs were also instrumental in providing access to loans for several additional vulnerable groups of small businesses in Texas.

  • Microfirms (five or fewer employees, including the business owner)
  • Firms in the leisure and hospitality sector (the hardest-hit sector in terms of lost jobs during the pandemic)
  • Firms in neighborhoods with ongoing high unemployment rates throughout 2020
CFI-serviced PPP loans in Texas were more likely to be fully forgiven

The PPP was intended to be more than a traditional lending program. It offered full loan forgiveness to recipients who stuck to specific rules, such as those who used large portions of their loan to retain their employees.

We used the same dataset to look at the success of PPP loan forgiveness and what role CFIs might have played in helping businesses convert loans into a grant. Across Texas, we found that holding other factors constant, loans serviced by MDIs or CDFIs had 1.7 times the odds of being fully forgiven than loans serviced by non-CFIs.

A new era for Community Financial Institutions?

With broader national understanding of the early failures of the PPP to reach historically underserved firms, several promising programs emerged to address gaps. These programs aim to lower barriers by providing capital to community institutions such as CDFIs and MDIs, as well as small business intermediaries that help firms receive technical assistance. The goal is to work toward closing disparities in lending and technical assistance for more vulnerable firms such as those that are very small, owned by women and/or people of color, and those operating in low-to-moderate-income areas.

These new initiatives include

  • ECIP
    As I mentioned, the ECIP offered an unprecedented amount of capital specifically for MDIs and CDFIs. In fact, it devoted almost $550 million to mission-oriented lenders headquartered in Texas. Several Texas-based recipients were among the top 25 lenders nationally with the highest share of lending to LMI borrowers or other vulnerable populations, including people in persistent-poverty areas. With the December 2022 announcement of a second funding round, support for mission-driven financial institutions has the potential to grow further.
  • CDFI Rapid Response
    In 2021, Treasury allocated $1.25 billion to CDFIs across the country to support lending to underserved small firms and help build CDFI capital reserves. This funding includes nearly $47 million distributed to 30 CDFIs headquartered in Texas.
  • State Small Business Credit Initiative (SSBCI)
    Reauthorized and funded in March 2021 as part of the American Rescue Plan Act, this program aims to improve small-business growth through state programs. The second iteration of SSBCI creates more incentives for states to prioritize programs that assist socially or economically disadvantaged firms.
  • Community Navigator Pilot Program
    In late 2021, the SBA announced monetary awards to regional small-business intermediaries across the country. The goal was to help build capacity for small-business hubs with reputations for connecting with underserved communities. The Community Navigator Hub awardees include two in Texas: the DEC Network in Dallas and the Abilene Chamber of Commerce.

We don’t know the impact of these initiatives yet. At the same time, driving capital to MDIs, CDFIs, and small business intermediaries shows promise to help reduce barriers in small business lending. Evidence from the PPP suggests that for many firms, MDIs and CDFIs can be critical partners in improving credit access for a small business that may not otherwise receive a loan.

Written by

  • Emily Ryder Perlmeter

    Emily Ryder Perlmeter is a senior community development advisor at the Dallas Fed. She conducts research that sheds light on challenges faced by low- and moderate-income communities, as well as promising practices to build a more inclusive economy.

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