In this post CSBDF’s Khaliid Scott (Research Fellow), Evelyn Chen (Research Fellow), and Urmi Bhatt (Business Systems Coordinator) join Vice President of Research Jamie McCall to review the results of CSBDF’s updated fiscal year 2020 lending impact evaluation. The analysis is available both as a report and short brief, each of which also contains a breakdown by region.
Why We Measure Impact
CSBDF is a community development financial institution (CDFI). Our core mission – and as a CDFI it’s also a regulatory requirement – is assisting underserved entrepreneurs. That includes small businesses owned by minorities, women, veterans, lower income individuals, and those in rural places. But why these groups? Because research shows assisting these populations results in sustainable community economic development.[i]
We are passionate about these communities because we know they face structural and systemic barriers to capital access. For that reason, we often utilize alternative underwriting criteria and character-based principles to issue loans.[ii]Through the use of social capital and a relationship-centred model, we aim to promote entrepreneurship-centered sustainable development in neighborhoods where it may not otherwise occur.[iii]
Given our theory of change, we know care must be taken to ensure loan beneficiaries are able to handle repayment obligations. The effectiveness of credit access as an economic development strategy relies on lending to those who can repay the debt.[iv] Like other CDFIs, CSBDF serves as a bulwark between small businesses and predatory lending practices.
For small businesses with very high credit scores, the terms of our financing will never be as favorable as what commercial banks can offer.[v] But we work in the gap between commercial banks and those who would lend to small business on very adverse terms[vi]. To evaluate CSBDF’s impact in filling this “gap,” it is important that we assess the economic growth promoted by our lending.
Some Caveats (More So Than Usual This Year)
Like other CDFIs,[vii] the impact of CSBDF’s lending activities is hard to measure for several reasons. Some of these are specific to 2020 (a global pandemic tends to throw a wrench into things), but others are a persistent challenge:[viii]
The effect size of any single CDFI transaction is relatively small and hard to isolate.[ix] This is partly because CDFIs issue loans for relatively low levels of capital compared to traditional banking organizations.
The loans we give interact with numerous endogenous variables that could be responsible for observed local economic improvements.[x] Trying to isolate outcomes caused by lending interventions and disentangling them from complex community systems introduces a notable margin of error into this process.[xi]
Our analysis only includes lending activity. As the pandemic unfolded last year, policy responses included the provision of emergency cash aid to small businesses. Through our partners, we issued hundreds of grants for millions of dollars. However, existing economic impact models are not amendable to measuring this type of intervention.
The economic upheaval caused by COVID-19 means there were, throughout 2020, many dramatic and sudden changes to North Carolina’s economy. The margin of error for input-output modeling expands when local economic conditions are unstable.[xii]
Economic Multipliers 101
Economic impact is usually measured through multipliers. A multiplier measures the relationship of a business’s activity to other business activities within a region. Multipliers can be added up to express how a lending intervention can have ripple effects throughout the economy.[xiii] We use Economic Modeling Specialist International’s (EMSI) input-output product, which includes 4 levels of effects: (1) initial, (2) direct, (3) indirect, and (4) induced.[xiv] Combined, these cumulative effects of CSBDF’s lending can be expressed in 3 ways:
Take the example of an entrepreneur who launches a new food truck business. Let us say the food truck will have 1 full-time employee and 2 part-time employees who work 20 hours per week. According to the input-output model, the net economic ipact of this activity across North Carolina would be:
Earnings: For every $1.00 the food truck pays its employees, $0.73 of additional earnings activity would be paid to the employees of other businesses (1.73x earnings multiplier).
Employment: The food truck’s 1 full-time and 2 part-time employees would result in 1 other job being created (1.34x jobs multiplier).
Tax Revenues: Finally, inventory purchases and sales made by the food truck would contribute $7,768 in new tax revenues each year.
Adding It All Up
During fiscal year 2020 CSBDF issued 226 loans for $9.2M. The businesses who received those loans generated economic activity that resulted in the below earnings, jobs, and tax revenue outcomes. On average each loan issued helped create $555,607 in earnings, 12.2 full-time jobs, and $61,098 in taxes. Over the course of the year this added up to:
The earnings multiplier for these small businesses is 1.81. For every $1.00 they pay their employees, $0.81 of new earnings is paid to employees of other businesses. Because CSBDF lends to main street firms, most of the earnings multiplier is from induced effects.
For the period assessed CSBDF’s lending clients reported creating or retaining 1,579 full-time equivalent jobs. These jobs helped support or save 1,184 new positions throughout North Carolina. These created and saved jobs are in a variety of industries – including some that you may not expect. For example, CSBDF’s lending clients helped support 395 jobs in healthcare and 112 jobs in manufacturing. A full breakdown of job creation by industry is available in the full report.
Small businesses help create tax revenues through their payroll, collecting sales tax, and by paying taxes on production and services. The IO model estimates that the tax contribution of CSBDF's new lending clients is about $13.8M each year. The vast bulk of this new tax revenue (83%) flows to localities and state government.
Economic Impact in the Western Region
Since 2014 CSBDF has been proud to serve as the host organization for the Western Women’s Business Center (WWBC). As an SBA Women’s Business Center, the WWBC serves the state’s western region by being a catalyst for entrepreneurship. In addition to a comprehensive technical assistance curriculum, the center also provides clients with access to capital.
There were 6 loans for $374,634 issued within the WWBC’s 25 county service area during the analysis period. Small businesses receiving those loans said it helped them create or save 13.2 full-time equivalent jobs. From July 1, 2019 to June 30, 2020, the entrepreneurs who received financing generated over $689k in revenues, created or saved 19 jobs, and contributed over $68k in tax revenues.
A Year Like No Other
The phrase “unprecedented” has often been used to describe 2020 – and indeed, for small businesses it was a year like no other. But our analysis shows that, even amidst the pandemic, small businesses were contributing to North Carolina’s economy. Admittedly the unstable economic means the margin of error is higher this year. Nevertheless, the data still show without a doubt that small businesses have big impacts [xv]. Across all metrics, per loan average economic impact increased markedly between FY2019 and FY2020.
DOWNLOAD THE BRIEF AND REPORT:
[i] Steven C. Deller and Tessa Conroy, “Business Survival Rates across the Urban–Rural Divide,” Community Development 48, no. 1 (January 1, 2017): 67–85, https://doi.org/10.1080/15575330.2016.1246459; Daniel Immergluck and Geoff Smith, “How Changes in Small Business Lending Affect Firms in Low- and Moderate-Income Neighborhoods,” Journal of Developmental Entrepreneurship 8, no. 2 (August 2003): 153–75; Jane Kolodinsky, Caryl Stewart, and Antonia Bullard, “Measuring Economic and Social Impacts of Membership in a Community Development Financial Institution,” Journal of Family and Economic Issues 27, no. 1 (April 1, 2006): 27–47, https://doi.org/10.1007/s10834-005-9002-7; Lisa J. Servon, Bootstrap Capital: Microenterprises and the American Poor(Washington, DC: Brookings Institution Press, 2011). [ii] Gregory B. Fairchild and Megan E. Juelfs, “Just How Risky? Comparative Institutional Risks of Mission-Based Depository Institutions,” Journal of Developmental Entrepreneurship 25, no. 04 (December 1, 2020), https://doi.org/10.1142/S1084946720500235. [iii] Clifford N. Rosenthal, Democratizing Finance: Origins of the Community Development Financial Institutions Movement (Victoria, Canada: FriesenPress, 2018). [iv] Thomas H. Stanton, “Help Borrowers, Don’t Hurt Them: Federal Credit Programs Need to Focus on Outcomes, Not Volume,” Public Administration Review 77, no. 6 (2017): 815–16, https://doi.org/10.1111/puar.12814. [v] Michael Swack, Eric Hangen, and Jack Northrup, “CDFIs Stepping into the Breach: An Impact Evaluation—Summary Report” (Carsey School of Public Policy, University of New Hampshire, August 2014), https://scholars.unh.edu/carsey/236. [vi] Susan Jones, “Predatory Loans, Community Development, and the TAMs,” Journal of Affordable Housing and Community Development Law 10 (2001): 90–100. [vii] Carlianne Patrick, Amanda Ross, and Heather Stephens, “Designing Policies to Spur Economic Growth: How Regional Scientists Can Contribute to Future Policy Development and Evaluation,” in Regional Research Frontiers: Innovations, Regional Growth and Migration, ed. Randall Jackson and Peter Schaeffer, vol. 1, Advances in Spatial Science (Cham: Springer International Publishing, 2017), 119–33, https://doi.org/10.1007/978-3-319-50547-3_7. [viii] Of course, these limitations also apply to many areas of community economic development policy. [ix] L. Owen Kirkpatrick, “The Two ‘Logics’ of Community Development: Neighborhoods, Markets, and Community Development Corporations,” Politics & Society 35, no. 2 (June 1, 2007): 329–59, https://doi.org/10.1177/0032329207300395. [x] Timothy Bartik and Richard Bingham, “Can Economic Development Programs Be Evaluated?,” in Dilemmas of Urban Economic Development: Issues in Theory and Practice, ed. Richard Bingham and Robert Mier, vol. 47, Urban Affairs Annual Reviews (Thousand Oaks, CA: Sage, 1997), 246–90; Roger R. Stough, “Endogenous Growth Theory and the Role of Institutions in Regional Economic Development,” in Theories of Endogenous Regional Growth: Lessons for Regional Policies, ed. Börje Johansson, Charlie Karlsson, and Roger R. Stough, Advances in Spatial Science (Berlin, Heidelberg: Springer, 2001), 17–48, https://doi.org/10.1007/978-3-642-59570-7_2; Michael Woolcock, “When Do Development Projects Enhance Community Well-Being?,” International Journal of Community Well-Being 2, no. 2 (July 1, 2019): 81–89, https://doi.org/10.1007/s42413-019-00031-z. [xi] Mary L. Ohmer, “Assessing and Developing the Evidence Base of Macro Practice Interventions with a Community and Neighborhood Focus,” Journal of Evidence-Based Social Work 5, no. 3–4 (September 5, 2008): 519–47, https://doi.org/10.1080/15433710802084284. [xii] Economic Modeling Specialists International, “The Economic Impact of COVID-19 on Your Community: How to Make a Proper Assessment,” EMSI KnowledgeBase (blog), April 9, 2020, https://www.economicmodeling.com/2020/04/09/economic-impact-of-covid-19/. [xiii] Ronald E. Miller and Peter D. Blair, Input-Output Analysis: Foundations and Extensions, 2nd ed. (New York City, NY: Cambridge University Press, 2009); M Henry Robison, Timothy Nadreau, and Jonathan Crapuchettes, “I-O Model Documentation: Establishing the NAICS 6-Digit US Base Model” (Moscow, ID: Economic Modeling Specialists International, December 1, 2015), https://www.economicmodeling.com/wp-content/uploads/EMSI_I-O_Documentation_Final_v3.pdf. [xiv] Geoffrey J. D. Hewings and Rodney C. Jensen, “Regional, Interregional and Multiregional Input-Output Analysis,” in Handbook of Regional and Urban Economics, Handbooks in Economics, Series 4 (New York City, NY: North Holland, 1987), 295–355, https://doi.org/10.1016/S1574-0080(00)80011-5; Scott Loveridge, “A Typology and Assessment of Multi-Sector Regional Economic Impact Models,” Regional Studies 38, no. 3 (May 1, 2004): 305–17, https://doi.org/10.1080/003434042000211051.
[xv] Zoltan J. Acs et al., “Entrepreneurship, Institutional Economics, and Economic Growth: An Ecosystem Perspective,” Small Business Economics 51, no. 2 (August 1, 2018): 501–14, https://doi.org/10.1007/s11187-018-0013-9; Matteo Aquilina, Rainer Klump, and Carlo Pietrobelli, “Factor Substitution, Average Firm Size and Economic Growth,” Small Business Economics 26, no. 3 (April 2006): 203–14, https://doi.org/10.1007/s11187-005-4715-4; David Birch, “Who Creates Jobs?,” The Public Interest 65, no. 3 (1981): 3–14; Gregg A. Lichtenstein and Thomas S. Lyons, “The Entrepreneurial Development System: Transforming Business Talent and Community Economies,” Economic Development Quarterly 15, no. 1 (February 1, 2001): 3–20, https://doi.org/10.1177/089124240101500101; David Neumark, Junfu Zhang, and Brandon Wall, “Where the Jobs Are: Business Dynamics and Employment Growth,” Academy of Management Perspectives 20, no. 4 (2006): 79–94.