The Center for Rural Affairs has a long, proud history of providing financial assistance to rural Americans who would otherwise be unable to get traditional financing.
When most people think of lending, banks and debt come to mind. As a nonprofit organization, the Center does not follow the same rules and protocols as traditional lenders.
Small business lending history
Two main factors contribute to why the Center lends money to those to whom banks would generally not loan money.
About 40 years ago, the international microfinance movement occurred around the same time as Muhammad Yunus founded the Grameen Bank in Bangladesh. In his book, “Banker To The Poor: Micro-Lending and the Battle Against World Poverty,” he shares his experiences with the bank and in community development finance.
“What he showed is that you could lend responsibly to the poor, the unbanked, oftentimes, exclusively with no collateral, and they would pay the loans back,” said Brian Depew, executive director. “They started with very small loans that showed folks had the capacity and interest to pay the loans back and they recognized that the bank was acting in their interest and they wanted to be a part of that.”
The Grameen Bank inspired an international movement around microfinance, and the concept has been replicated in many countries, including the U.S.
“There was a similar trend here, which has become known as Community Development Financial Institutions, and the Center is one, a part of a network of nonprofit lenders all over the country,” Brian said.
A decade later, the Center became even more interested in lending after research on employment trends in the Great Plains showed a growing prevalence in employment in non-farm small businesses coming out of the farm crisis of the 1980s.
“We realized communities in this part of the country needed to diversify their economies because there were less employment opportunities in small-farm agriculture,” said Brian. “Entrepreneurship became one of those ways for folks to make a living and own a business in a small community in the Great Plains, and the Center started doing small business reports and lending as a strategy to support those folks, starting in the ‘90s.”
Access to finance as a human right, and lending repayment and risk management
Brian refers again to Muhammad’s book when discussing thoughts on access to capital being considered a human right.
“All of us use access to finance, whether it's to buy a house or a car or to start a business, or we rely on access to finance for things in our community like health care facilities and child care facilities,” he said. “Unfortunately, we’ve seen a retrenchment of traditional plans from communities we serve, whether from rural communities or from surveying low-income individuals or new immigrants. I’ve become absolutely convinced that if we want to control the destiny of our communities, we have to control at least some of the capital.”
He said the Community Development Financial Institution industry in the U.S. as a whole has a 97% to 98% repayment rate.
“The industry has shown that you can lend to people who banks won't traditionally lend to and be really successful with repayment and risk management,” he said. “It’s because nonprofit lenders tend to offer wrap-around services as well—small business technical assistance, homeownership classes, etc. We don’t just give people a loan; we’re providing training and coaching and stay hands on with them and are really invested in their success.”
The Center also maintains very strict standards in its underwriting efforts and is careful not to lend people more than they can afford to pay back.
“When you make the right sized loans and provide wrap-around services, people want to repay,” said Brian. “And, they do.”
Another way of looking at risk factors is to ask: What is the risk of not lending in these communities and to a broad swath of the population?
“That risk is disinvestment,” he said. “It’s disinvestment in our communities, it’s a decline in homeownership, it’s a decline in business starts, and if banks aren’t going to be doing that lending or aren’t lending deep enough in our communities that we care about, somebody has to do it or we risk a real disinvestment. We care holistically about these communities and we’re driven to try to fill those gaps that exist in the traditional finance world.”
Supporting the little guy
When people think about economic development, they often consider trying to attract big businesses or larger corporations like Microsoft or Google. As an economic development organization, the Center focuses its energy and commitment on smaller, local businesses.
“Big businesses have access to traditional finance; they don't need our help,” said Brian. “I’ll acknowledge that large businesses are an important part of the employment ecosystem even in a lot of mid-size communities, but especially small communities, like Lyons, Nebraska, with a population of around 850 people, where the Center’s home office is located, it’s just not a strategy that works for these communities.”
Small towns often don’t see employers with 1,000 or even 100 jobs move into the area. Instead, they see individuals who have started businesses and either are supporting themselves through self-employment or have a handful of employees, said Brian.
“We have a manufacturer in Lyons that has 50 or 60 employees,” he said. “That’s a major employer in a small, rural community, and that’s who we're focused on. Often, those are homegrown entrepreneurs, not somebody from outside the community who comes in and brings their business to the community.”
In small communities, microfinance and small business lending provide an opportunity for everyday, rural people to participate in the economy, to contribute to solving problems, or to fill needs and build assets through ownership.
“Large businesses are part of the ecosystem for employment, but by and large, if you work for a large business you don’t have the opportunity to build assets through ownership,” said Brian. “When you work, and are self-employed in a small business, you have that opportunity to build assets through ownership. Sometimes it’s as simple as owning the building that your business is located in. Just like being a homeowner helps you build assets, owning your business building is another asset you can build over time to increase wealth among everyday, working rural people.”
And, he said, with small business, more of the dollars spent stay local and are recycled in the local economy.
“Not only do you get the booster effect of the dollar staying locally, you're more in control of the destiny of your community rather than being at the mercy of some large employer,” Brian said. “We’ve seen this time and time again—if it’s in their interest, they’ll pull out of the community, they'll close the store, which results in a decrease in employment in the community, but it can also result in a decrease in access to services in the community.”
Expansion into housing lending
Many nonprofit lenders in the country are focused on areas outside of business lending, whether it be different forms of financing, community facilities, or other areas. The Center recently expanded its community finance work into housing lending.
“There are a lot of ways in which access to credit is important to living a good life in a good community,” Brian said. “We’ve really seen and diagnosed that a lot of small communities in our region have challenges in access to affordable housing. So, we’ve been trying to develop new lending products within the single-family mortgage space and explore multi-family housing and figure out how community-based financing can help be part of that solution.”
On top of supplying buyers with affordable housing in small communities, the Center is working toward filling the gap in traditional financing when it comes to buying and fixing up run-down or dilapidated older houses.
“One of our recently rolled-out loan products allows for rehab and repair loans, especially to both address that issue of dilapidated houses in communities, but also to try to leverage that to get those,” Brian said. “Oftentimes, fixing up dilapidated houses done right can actually produce affordable housing stock in a way that can be difficult with new construction.”
This blog is based on an episode of the Center’s weekly web series, Rural Rapport, featuring Brian and Nick Bergin, development director. To watch the video, visit our YouTube Channel. A new Rural Rapport on our work is broadcast each Tuesday at noon on Facebook, then posted to YouTube.
To learn more about the Center’s community development lending and homeownership loans or to apply for a loan, visit cfra.org/lending.