Community development investing is one way that faith-based investors can use their investments to make a real impact on the communities where they live and work. Investing in community development finance institutions provides aspiring entrepreneurs with the resources they need to launch businesses and services that many underserved, low-income and minority communities might be lacking. Since generally CDFIs and borrowers are members of the community, they have a better understanding of what would benefit the community than an outsider might. This makes it easier for the most critical needs to be met in the communities where they are based.
The COVID-19 pandemic exposed some of the unique challenges faced by Black, indigenous and entrepreneurs of color in underserved rural and urban areas when it comes to access to capital. This capital is the funding necessary to operate and grow these entrepreneurs’ small businesses. The uneven access to the federal government’s Paycheck Protection Program (PPP) loans and other emergency financial assistance highlighted a clear funding gap that traditional banks have not filled.
To meet these needs, some borrowers have turned to alternative sources of capital such CDFIs, Community Development Credit Unions, community loan funds and other non-predatory lenders who have proven that they can creatively and efficiently deploy capital, tailored technical assistance and other support systems to help them recover, thrive and grow.
Post-COVID pressures continue
As small businesses — particularly those in underserved, minority and low-income communities — have slowly emerged from the COVID-19 winter, the reality of rising inflation has brought new concerns, but these concerns come without the COVID relief valves available at the height of the crisis.
Many businesses that took big hits during that time now face three major concerns: First, they must grapple with increasing interest rates and the resulting higher costs of borrowing. Second, mounting fears of reduced consumer spending arise as customers adjust to lower disposable incomes due to increased costs of living. Finally, these small businesses face hiring challenges due to the continuing tight job market, when all businesses are fighting to retain employees.
Investors can be part of the solution
It is no surprise that impact investors are particularly interested in small businesses that are important drivers of the economy. These small businesses support neighborhoods and communities by creating meaningful jobs and driving innovation and competition.
Through investments in CDFIs, investors can support mission-driven alternative lenders that help maintain momentum in the recovery of diverse and low-income entrepreneurs. These institutions are nimble and innovative in reaching minority communities in a way traditional lenders are not. Located in the communities where their borrowers are, these lenders offer funding for businesses and services that are critical to the local community, such as loans to support new affordable housing initiatives, increased access to healthcare and access to clean water.
A simple way for individuals or institutions to support businesses in underserved and underrepresented communities is to identify investment products that channel a portion of assets to CDI. For example, at Praxis Mutual Funds®, a fund family of Everence®, we invest 1% of our managed assets to investments in Calvert Impact Capital, an impact-investing institution that helps people across the country and around the world.
CDFIs have what it takes to address financial inclusion at scale despite their challenges. They have processes in place to mitigate risk and can deliver capital in a more cost-efficient way, making it a win-win for the investors and the borrowers. Investing in CDFIs can help move us closer to a more equitable and inclusive economy.