Towards Equitable Underwriting: Innovative Approaches to Lending and Investing
This project produced a case study of three CDFIs who are successfully supporting equitable food oriented development in their communities. The resulting report presents an overview of systemic financial barriers that business owners and aspiring entrepreneurs face in marginalized communities. The EFOD framework illustrates the types of lending and investing needed to support such businesses. Some financial institutions are more effective than others at providing this support. This research seeks to understand the practices of CDFIs that are effective funders of EFOD in their communities. DOWNLOAD pdf report.
Equitable food-oriented development (EFOD) enterprises fit a unique business profile due to their assets and resource needs. Traditional lending approaches often fail to capture the potential of these enterprises and are therefore ill-equipped to support their development. EFOD businesses, however, offer great value to communities. If provided with the right financial support, they can succeed and thrive. This white paper will speak to the audience of financial institutions making investments in food systems entrepreneurs. It will respond to the questions: what are different underwriting and loan-making approaches that a financial institution can deploy to support EFOD-aligned enterprises? What institutional shifts are needed from financial institutions for more equitable lending practices and how are the innovators in this space spreading their impact to others in the field?
EFOD businesses have the potential to positively impact their communities in many ways. They can improve health, increase food access, stimulate economic growth, and share cultural heritage. Even though EFOD businesses are strategic investment opportunities, they often struggle in traditional lending environments to obtain the resources they need. As EFOD entrepreneurs launch and grow their businesses, they need different types of capital. The spectrum progresses along philanthropic or grant dollars, flexible capital, traditional debt, and institutional capital. Institutions that provide this funding include traditional banks, philanthropic organizations, federal programs, and Community Development Financial Institutions (CDFIs). Many traditional lenders fail to align the type of funding, timing, and useful support structures needed by the business.
Some innovators, however, are making advancements in this area. Inclusive Action for the City, a community development organization in Los Angeles, provides microloans, organizes purchasing power, and provides business coaching and real estate purchasing support. Rudy Espinoza is an EFOD steering committee member to interview about their work. The New Hampshire Community Loan Fund, a CDFI, targets local food and small business development. John Hamilton, VP of Economic Opportunity, oversees the Business Finance’s Farm and Food Initiative to support the growth of a healthy sustainable food system in New Hampshire. He has developed new approaches to actual versus perceived risk when considering lending to nonprofits and EFOD initiatives, and would be a good source for information. The Intertribal Agricultural Council, and in particular their American Indian Foods Program, leverages a federal partnership to promote EFOD businesses. They view themselves as business builders, not just lenders, for tribal businesses. Finally, Self-Help in Durham has just launched an initiative focused on food systems that would both contribute to this research and benefit from its findings.
This report explores how three Community Development Financial Institutions (CDFIs) drive economic growth in low-income and historically marginalized communities through Equitable Food Oriented Development (EFOD), a community development model that supports locally owned food-based economies (EFOD Collaborative, 2019). The report presents an overview of systemic financial barriers that business owners and aspiring entrepreneurs face in marginalized communities. The EFOD framework illustrates the types of lending and investing needed to support such businesses. Some financial institutions are more effective than others at providing this support. This research seeks to understand the practices of CDFIs that are effective funders of EFOD in their communities.
Six themes of practice emerged in the analysis:
- Cultivating trust to identify opportunity. Successful CDFIs rely upon networks to identify borrowers, funders, and technical assistance providers. They recognize the importance of building trust with the communities they serve and prioritize resources towards that end.
- Amassing and deploying flexible capital. Successful CDFIs focus on building a large fund with capital that can be customized into financial services that meet their borrowers’ needs.
- Underwriting with relationships. Effective CDFIs invest in their relationships with their borrowers to mitigate risk. By establishing coaching partnerships, these CDFIs support businesses to grow and to manage their repayment obligations.
- Designing products and services in a bottom-up fashion. Successful CDFIs assess businesses individually to identify the most impactful interventions for them rather than apply a one-size-fits-all approach.
- Developing localized expertise. Effective CDFIs develop extensive expertise in the communities they serve. Social, economic, and environmental knowledge along with robust partnership networks enable them to identify innovative opportunities.
- Responding to local systemic barriers. Successful CDFIs identify systemic barriers that burden their communities and take action to change them.
The themes of practice identified in this research can provide guidance for lenders seeking to restructure their practices to better support EFOD in their communities. Further research is needed into the relationship between CDFI funding sources and their ability to implement EFOD, as well as models for structuring successful partnerships between CDFIs and EFOD organizations. This research was funded by the World Food Policy Center at the Duke Sanford School of Public Policy and conducted in partnership with DAISA Enterprises.
- Lianna Gomori-Ruben, M.A.