May 15, 2017

Federal Budget Might Axe Loans Designed to Boost Small Business

Reporting Texas

Kelly Jedele, owner and founder of Let Kelly, now runs her business from an office in South Austin, thanks to a loan from PeopleFund, a community development financial institution. Brianna Vargas/Reporting Texas

Kelly Jedele went to two banks in 2013 before she found one that approved her for the loan that helped her small business nearly double in size and revenue. She went from running Let Kelly, a home organization and personal assistant service, out of her home to an office in Southwest Austin. Her payroll expanded, and her four cleaning crews grew to seven. She hired a full-time personal assistant and is looking for a second.

Jedele’s first two loan applications were denied because she did not have enough credit history and Let Kelly was not generating enough money. The single mother started the company in 2009 after she was laid off from a home healthcare job.

“I figured now was as good a time as any to start,” she said.

PeopleFund, a nonprofit with operations in Austin and six other Texas cities, was willing to take a chance on her idea. She described the $30,000 loan  as “a milestone moment” for her company.

PeopleFund is one of more than 1,000 community development financial institutions (CDFIs) nationwide. They were thrust into the national spotlight when President Donald Trump released a 2018 budget blueprint on March 16 that called for the elimination of the U.S. Treasury’s CDFI Fund.

This program, which Congress established in 1994, addresses the nation’s growing wealth gap by giving low- and middle-income communities access to capital through not-for-profit community lenders. This capital helps clients build equity through small business creation and home ownership.

Some CDFIs provide loans and financial education to small business owners, while others offer mortgages or consumer loans. Others function as credit unions, providing checking and savings accounts to people with no previous bank account.

In their absence, there would be a larger wealth gap in Texas, said Raquel Vazquez, the chief operating officer for Business & Community Lenders (BCL) of Texas, which has offices in Austin and Dallas.

There are 29 community lenders in Texas, operating in 28 cities.

“It is troubling that President Trump’s proposed budget would cut this vital source of capital for small business growth,” U.S. Rep. Lloyd Doggett, D-Austin, said in an email. Doggett is a longtime proponent of the program and has pushed for Texas organizations to receive a greater share of the fund’s federal grant money given the size of the state.

“Unless we resist him, Trump cuts will result in a real human cost,” he said.

One cost is that people who are already struggling to access capital would have fewer lenders to turn to.

“I was like, ‘Wait a minute, how am I supposed to get to the next level [of my business] if I don’t have money, but I have to get to the next level to get money?’” Jedele said of her reaction when she was turned down for loans at commercial banks.

She was determined to make her business idea a success, capital or no capital, but she worried that without a loan, her daughter would have to endure a “bare minimum lifestyle” for an extended period. “At the time I was having trouble just paying the bills,” Jedele said. She once had to tell her daughter’s teacher that she simply couldn’t afford a $25 school fee.

Amber Cooney, PeopleFund’s director of advancement and education, said its clients, “for one reason or another, they can’t access capital from a traditional bank.”

Some clients are poor, while others struggle to acquire capital due to what Cooney called an “unexpected life event.”

“All it takes is one divorce or one medical emergency for someone’s credit or debt to be affected,” she said.

Veterans also face barriers to capital because extended overseas tours make it a challenge for them to build a credit history as someone in the civilian world might simply by using a credit card on a regular basis.

More than 90 percent of PeopleFund’s 143 loans in 2015 went to clients in its target market – women, veterans, minorities and low income.

Jedele learned about PeopleFund through a business coach she hired.

“I walked in as a worker bee, and I left feeling like the owner of my company,” she said.

Nearly a third of Texas businesses like Let Kelly employ fewer than 100 workers, according to 2013 data from the U.S. Small Business Administration. Eliminating the program would reduce small business growth and job creation.

Since receiving the loan, Jedele has hired 12 more employees. PeopleFund loans created about 3,300 jobs across Texas in 2015, according its most recent annual report.

In 2016, CDFI Fund grants financed more than 11,000 businesses nationwide, according to the CDFI Coalition, which represents the nation’s community lenders. These businesses help to create tens of thousands of jobs annually, coalition spokesman Bob Rapoza said.

Even though eliminating the program would save the federal government $210 million a year, he said, the long-term loss would be much greater because community lenders generate $12 in capital for every dollar in federal grants, or  more than $2.5 billion.

In addition to relying on federal funding, nonprofit lenders are supported by the commercial financial sector. Bank of America is one of the largest contributors to these organizations, investing more than $1 million in Austin organizations annually, according to its Austin Market President Nikki Graham.

“The benefits that we see from a banking point of view is that [CDFIs] really help people along the continuum of starting a business,” Graham said. “We have clients who come to the bank and due to our risk profile and their needs, sometimes there’s a mismatch.”

Graham views the CDFI Fund as an example of a successful private-public partnership that supports economic development.

“Much of the rhetoric during [Trump’s] campaign was around ‘Main Street’ and helping small business owners,” she said. “And I think [this program] is one way that the federal government does this. Although people don’t necessarily understand how it works, the business owners who have benefited and have started a business and been successful would say that [CDFIs] are definitely needed.”

The impact of community lending in Texas is not limited to the business sector.

BCL of Texas is about to launch a mortgage-lending program for residents without a social security number, which prevents them from applying for mortgages at commercial banks. Potential customers include undocumented immigrants as well as immigrants who are here on a long-term work visa or are seeking citizenship, Vazquez said.

In 2016, its existing mortgage lending program created 280 new Texas homeowners, nearly 80 percent of whom were minorities.

Texas already has one of the nation’s highest rates of unauthorized immigrants who are homeowners, at 41 percent, according to the Migration Policy Institute.

Vazquez and Cooney said private donations would keep BCL of Texas and PeopleFund afloat were Congress to eliminate or reduce the CDFI fund. But the number of clients served in the state would decrease, as would the amount given out in loans.

“We would continue to tell our story but the numbers of clients that we serve, the amount of money we’re able to give back into our communities, especially our low-income communities, would not be as significant and would not be as high as we’ve done in the past,” Vazquez said.