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Theory to Practice:

Why donate to a CDFI? A look at how loan funds are supported by institutions and individuals –

Theory to Practice is an occasional blog series which explores the intersection of economic development research and current issues of debate within the practitioner community. In this post Emily Stallings (CSBDF’s Director of Development) discusses the data on how CDFIs fund their operations and explores the implications for both institutional and individual giving. For more information about CSBDF’s research and policy analysis program, click here. To learn more about how to support CSBDF through giving, click here.

The CDFI Loan Fund Model

As a fundraising professional who is passionate about the nonprofit industry in North Carolina, I was eager to learn more about the community finance industry when I started my role at Carolina Small Business Development Fund (CSBDF) in 2018. Bringing experience in higher education and nonprofit fundraising, I came into the position excited and curious as to how fundraising might be similar or different for community development financial institutions (CDFIs) compared to other types of 501(c) 3 organizations where I had worked or volunteered.

I was drawn to CSBDF and CDFIs because of their history in promoting economic growth and improving local quality of life. For those who are unfamiliar with what CDFI’s are – they are a specific type of social enterprise, defined by the Opportunity Finance Network as “private financial institutions that are 100% dedicated to delivering responsible, affordable lending to help low-income, low-wealth and other disadvantaged people and communities join the economic mainstream.” CDFIs can be structured in many different ways. Organizations apply for the CDFI designation through the CDFI Fund, a sub-agency of the Department of the Treasury. The Fund allows banks, bank holding companies, credit unions, loan funds, Native American Program institutions, and venture funds to receive the CDFI designation. In general, CDFIs must be profitable in order to be financially sustainable, but they are not profit-maximizing like traditional banks or financial corporations. Due to their mission and goal, many CDFIs – including CSBDF – are 501(c)3 charities.

Sources of Support for CDFIs

Like other nonprofits, 501(c)3 designated CDFIs depend on public and philanthropic support to sustain operations and programming. As soon as I joined the CSDBF family, I was swiftly immersed in the world of public sector grants and federal programs. Certain federal laws, mainly the Community Reinvestment Act, provide private financial institutions with regulatory incentives to support CDFIs. The generous and continued financial support of CDFIs by leading financial institutions, local community banks, federal agencies, state government, local municipalities, and community foundations was abundantly visible. Less clear to me were the common strategies and approaches used by CDFIs to target individual giving.

After speaking with other industry professionals and asking a lot of questions, it seemed to me that nonprofit CDFIs were relying much less on individual giving than other nonprofit organizations. To test this assumption and better understand the landscape of the CDFI world, I called on the data crunching, analytical prowess CSBDF’s research program. The result is an analysis of the CDFI Fund’s institution-level data set which explores CDFI contributing operating revenues over time and across different types of CDFIs. Importantly, the data are looking at sources of operating support that are not related to debt (contributing operating revenues only, not operating revenues in general). In the full report and brief, we also evaluate whether CDFIs are currently being efficient with existing funding streams.

What the Data Say

To give some context, it is important to consider how CDFI loan fund revenues from philanthropic sources compare to giving trends in the nonprofit industry as a whole. Industry reports show giving across the nonprofit spectra come primarily from individuals (70%), foundations (18%), and corporations (8%). Industry data do not include statistics on revenue from public sources, but there are obvious differences in how CDFI loan funds operate (note: percentages may not sum to 100% due to rounding).

Over the past decade, CDFI loan funds have been heavily reliant on public sector support and, to a lesser extent, private philanthropy. While the stream of public sector revenue appears to be fairly constant, the inherent uncertainty in public policy and future regulatory changes raises questions about the long-term stability of public funding for CDFIs. Even within the past few years, federal agencies have made proposals to change regulations that could directly impact CDFI revenue streams.

The bulk of private philanthropic giving to CDFI loan funds for operating expenses comes from foundations. However, there is a great deal of variability both in terms of mean philanthropic support and the amount of philanthropic funding as a proportion of total contributing operating support, suggesting that reliance on institutional philanthropy to fund operations could be insufficient for long-term sustainability. Compared against institutional giving, other sources of private philanthropy remain a small share of CDFI funding. Revenues from individual giving alone has ranged between 2% and 4% of total loan fund operating revenues each year since 2003.

Making sure CDFIs are supported from diverse sources is important, but its equally important that they be efficient with the support they already receive. Quantifying and operationalizing the efficiency of institutions is difficult in any context – but it is especially challenging with CDFIs due to limited data availability. But in general, our analysis suggests that CDFI loan funds operate at significantly less organizational capacity than other types of CDFIs, and average FTE staff changes have increased only slightly for loan funds over the past decade. Despite having less staffing than other types of CDFI institutions, loan funds are able to serve a large number of clients. It seems many loan funds operate with lean staffing, and that has not increased much over time (despite the increasing demand for services that nearly all nonprofits experience). We encourage you to read the full report for a deeper analysis of this data, or review the brief for a more high level overview.

Implications of Our Findings

The data suggest that CDFI loan funds are already being efficient with existing funds and are mostly maximizing available revenue sources. While this is a positive for loan funds, the data also indicate a need for innovation in fundraising. Overall, we believe the evidence suggests call for contributing revenue diversification and continued emphasis on programmatic efficiency. These strategies can promote the long-term viability both loan funds specifically and the CDFI model more broadly.

At an organizational level, CDFIs face ongoing capacity constraints that require new ways of thinking about sustainability. We think individual giving is an untapped source of operational support in the CDFI loan fund community. When structured appropriately, individual giving programs can create unrestricted revenue streams that could potentially be more reliable than large one-time or even multi-year support received from foundation grants.

CDFI loan funds that are 501(c)3 nonprofit organizations have earned that tax designation by benefiting a charitable class of individuals. Despite the challenges of appealing to individual donors, CDFIs can offer a compelling message around the efficiency and cost effectiveness of their work to improve local economic outcomes. Through concerted efforts to identify potential donors and strategically target messaging, individual donors could play a much larger role in the organizational sustainability of CDFI’s than they currently do.

What Comes Next

At CSBDF, our mission is to serve and support small businesses, driven by research that shows they are the engine of the region’s economy. Our passion to help existing and current small firm owners is based on a robust body of evidence that objectively shows their importance as a nexus of local economic growth. Through our research program, we hope to demonstrate to small business supporters that their giving has impacts that are wide-reaching in scale and impact. The capital access and technical assistance programs provided by CSBDF and other CDFIs are critical in ensuring all entrepreneurs have the opportunity to flourish, no matter their background or location. By supporting community-based lending, individuals and institutions are supporting small businesses that face endemic barriers to success. For example, CSBDF’s lending has a focus on helping rural firms (21% of loans), businesses owned by racial minorities (58% of loans), women entrepreneurs (39% of loans), veteran-owned businesses (18% of loans), and entities operated by lower income individuals (38% of loans).

While we think the research speaks for itself, the onus is on us as an organization to spread the word about what we do and why it matters. If you’ve read this far, there is no doubt that you care about small businesses too. As part of our increased effort to engage with our community, we were proud to announce the recent launch of CSBDF’s Small Business Champions, an recurring giving opportunity for those who support our mission and the communities we serve. We hope you will consider joining our family of Small Business Champions and engage with us at our events throughout the year. During this holiday season, we encourage individuals and institutions that share our vision for small business success to show their support through whatever organization is most meaningful to them. Of course we are thankful for those who choose to support CSBDF, but more importantly we want to see entrepreneurs thrive and succeed!

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