Community Developments Investments (April 2022)

Bank of America Partnerships Help Small Businesses Recover From Crises

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Dan Letendre, Managing Director, Community Development Financial Institution Lending and Investing Executive, Bank of America

Health crises and climate-related events often leave a devastating impact on our communities. As governments, businesses, nongovernmental organizations, and first responders continue to work together to combat the COVID-19 pandemic, organizations such as community development financial institutions (CDFI) are as important as ever, stepping forward to help some of the most economically disadvantaged and distressed communities get financial assistance to help stabilize and grow their local economies.

CDFI loan funds have played an important role in funding affordable housing, small businesses, and nonprofit organizations through the funds’ ability to blend philanthropic, public sector, and private sources of capital. These blended assets provide affordable loans and technical assistance to organizations that may lack access to traditional financing. Small businesses particularly may not have the financial reservoirs to bridge disruption during a crisis and are rarely a high priority for philanthropic relief in the early days of disaster recovery. Some small businesses may lack business continuity plans and insurance to cover disruptions. In such situations, access to capital with favorable terms is critical to a small business’s ability to recover and reopen.

In 2020 Bank of America originated more than $394 million in CDFI loans and investments and currently has a $2 billion portfolio in more than 250 CDFIs to finance affordable housing, economic development projects, small businesses, health care centers, charter schools, and other community facilities and services. This includes providing more than $250 million in capital to CDFIs in 2020 to help facilitate loans through the U.S. Small Business Administration’s (SBA) Paycheck Protection Program (PPP), an integral component of helping small businesses that were forced to close or reduce services because of the health crisis.

Also in 2020 we made a $1.25 billion, five-year commitment to advance racial equality and economic opportunity, of which $50 million is dedicated to support minority depository institutions (MDI) and CDFIs. This commitment includes direct actions, investments, and work to catalyze similar efforts across the private sector. The bank’s investments are designed to facilitate lending, housing, neighborhood revitalization, and other banking services. It is through these relationships that we share best practices in working with CDFIs to help transform and develop strong communities. One example is the Scottdale Earning Learning Center discussed later in this article.

Setting Up CDFIs Before Disasters Occur

To set up a CDFI in the wake of a disaster would be daunting, if not impossible. Organizations would experience challenges in sourcing and recruiting staff and leadership; designing the lending products, policies, procedures, and effective underwriting guidelines; raising funds for the substantial levels of grant capital that would serve as a first-loss cushion and to cover the operating budget; and building relationships with community leaders and social service organizations. CDFIs that are already up and running can mobilize to respond to a disaster.

In the early months of the health crisis in 2020, the SBA and U.S. Department of the Treasury included more than 80 CDFIs as approved providers of PPP loans to small businesses. These CDFIs provided hundreds of millions of dollars in forgivable PPP loans to help businesses recover, retain employees, and reopen. Bank of America provided $250 million in additional low-cost capital for the bank’s CDFI partners, which quickly deployed the capital to help small businesses.

Take for example, Scottdale Early Learning, which provides childcare and education services to families in DeKalb County, Georgia. As Georgians complied with shelter-at-home orders, Scottdale recognized that many families’ incomes and resources were affected and support and services were needed more than ever. Working with the Reinvestment Fund, which is a national CDFI, Scottdale was able to secure a PPP loan that allowed the learning center to continue to offer virtual learning programs for the families it serves, while covering its staff’s salaries.

This was not the first time Bank of America has seen an existing network of CDFIs quickly step in to provide disaster assistance. For example, in the weeks following Superstorm Sandy in 2012, communities in Connecticut, New Jersey, and New York were able to draw on the talents and resources of more than 30 CDFI loan funds operating in communities devastated by the superstorm.

One such microlender was Ascendus (formerly Accion East), one of 13 CDFIs we supported as part of a $20 million bank commitment of new funding for CDFIs to provide financing for small businesses and residents affected by the superstorm. To help small business owners who may not have qualified under traditional terms, Ascendus created the Sandy Recovery Business Loan Program, offering loans up to $25,000, with zero interest, no payments for the first three months, and a low fixed interest rate thereafter. In addition, small business owners received a grant to accelerate recovery efforts.

Because Ascendus was established and poised to stand up a program, local small businesses had timely access to capital on favorable terms in less than two weeks. The program helped 81 small businesses and saved 309 jobs through Bank of America’s $1 million in emergency response loan capital plus $100,000 in direct grants, all of which helped the local economic recovery.

Stabilizing CDFIs Immediately After a Disaster

CDFIs and their staffs are affected by the disasters that we expect them to help address. Their offices are subject to power outages, flooding, and other damage. Staff may lose their homes or face health and safety issues for themselves or their families. It is, therefore, important for funders and supporters of CDFIs to help them return quickly to fully operational status. In the aftermath of some past disasters, Bank of America and other institutions have offered CDFIs temporary office space and communication or information technology capabilities.

Unlike communities in northeastern states after Superstorm Sandy, small businesses in Puerto Rico had few CDFI resources to lean on. It was imperative that the few CDFIs operating on the island had the resources they needed to help residents and small businesses rebuild after Hurricane Maria caused an estimated $90 billion in damage in 2017.

PathStone Enterprise Center is one of the nonprofit CDFI loan funds that stepped in to help residents and small businesses of Puerto Rico after the hurricane. Damaged bridges and roads, destroyed cell towers, and an office without water and electricity were just a few of the challenges that PathStone staff had to work through. Yet they were able to develop a plan that helped more than 250 small business owners apply for relief and aid programs. The staff allocated more than $275,000 in grants and more than $1.2 million in loan capital to eligible small businesses to help with rebuilding and rehabilitation, equipment and inventory purchases, and much needed working capital, with an average loan size of $35,000.

Bank of America is a longtime partner of PathStone. To learn more about PathStone’s recovery efforts in Puerto Rico, read the article in this newsletter titled “PathStone CDFI Helps Puerto Rican Small Businesses Recover From Natural Disasters.”

Distinguishing Loans From Grants

The financial response to crisis and disaster situations is not a one-size-fits-all situation. Communities must prioritize the use of public, private, and philanthropic resources for the most urgent needs. That is when CDFIs can be effective stewards of resources and evaluate which situations can be addressed with loans and which can best be addressed with grants. For example, the capital needed by small businesses typically is used on activities that will earn income. Therefore, it is reasonable for a CDFI to structure some of the capital as a loan that can be repaid once the small business receives its insurance proceeds. A small business may, however, need to pay for uninsured damages or noninterest-earning properties, which are unlikely to be reimbursed. CDFI assistance for these circumstances is better structured as a grant to the small business.

In addition to our $250 million capital commitment in response to the COVID-19 pandemic, Bank of America provided $10 million in philanthropic grants to help fund CDFI operations respond to the pandemic. This grant funding was dedicated to CDFIs and is part of Bank of America’s $100 million philanthropic commitment to support communities affected by the health crisis.

Recognizing CDFIs’ Important Role in Disaster Recovery

CDFIs play an integral part in rebuilding our communities in the weeks, months, and years after health and climate crises. The events over the past 25 years, including the pandemic, have taught Bank of America that such crises are unpredictable but inevitable. It is imperative that we work together to create a national (or regional) pool of low-cost, flexible capital and philanthropic funding that can be mobilized quickly to fund CDFIs in post-disaster situations.

When staffed and supported appropriately, CDFIs can be the bridge of capital between the initial response and long-term recovery for the small businesses in our communities. CDFIs and their staff are tightly woven into the communities they serve and can provide flexibility and resources to small businesses that may think they have nowhere to turn. As a financial institution, Bank of America also plays a role to support a broad network of CDFIs and to ensure that all communities can be served during times of disaster and the long-term recovery and rebuilding that follows.

For further information, contact Dan Letendre at Dan.Letendre@bofa.com.

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