Arkansas CDFIs Poised to Scale Small-Business Lending

Small businesses in Arkansas that struggle to attract loans from traditional banks stand to benefit from the inclusion of community development financial institutions (CDFIs) in the latest iteration of the State Small Business Credit Initiative (SSBCI 2.0). A federal program reauthorized through the American Rescue Plan Act of 2021, SSBCI 2.0 will provide a combined $10 billion nationally to expand access to capital for small businesses emerging from the pandemic. In addition to providing credit and investment programs for small businesses, the legislation provided money for technical assistance to small businesses applying for SSBCI funding.

As mission-driven lenders, CDFIs are uniquely designed to meet the needs of borrowers who have been unable to obtain financing from mainstream lenders. The mission focus of CDFIs is critical to the successful implementation of SSBCI 2.0 because the reauthorized legislation (unlike that for SSBCI 1.0, which passed in 2010) allocates funding for under-resourced small businesses.

For example, SSBCI 2.0 allocates $1.5 billion for businesses owned and controlled by what the legislation terms “socially and economically disadvantaged individuals,” or SEDI-owned businesses. Furthermore, $1 billion in additional funding has been set aside for states and territories that effectively deliver support to SEDI-owned businesses. According to Arlo Washington, president of the Arkansas-based CDFI People Trust Community Loan Fund, SSBCI 2.0 is “a second chance at opportunity for economically disadvantaged small businesses in Arkansas.”

In Arkansas, CDFIs have been meeting regularly as they prepare to work with the state to implement SSBCI 2.0. The Arkansas Development Finance Authority (ADFA) is the state agency overseeing the program. Over the last several months, CDFIs have cultivated a relationship with ADFA, serving as a resource for the agency as it seeks to meet the program’s goals, particularly regarding financing for SEDI-owned businesses. According to Deborah Temple, a retired CDFI executive who is now consulting with CDFIs making small-business loans in Arkansas, ADFA was initially unsure about engaging with CDFIs. As Temple explains, “The numbers have made a difference in how ADFA views CDFIs as a valuable partner.”

What Are the Numbers, and Who Are the CDFIs?

CDFIs engaged in small-business lending in Arkansas said that they provided $440 million in financing to small businesses in the state in 2021. This financing led to the creation or retention of 16,739 jobs.

These CDFIs are a combination of banks, credit unions and nonprofit loan funds (see the list below). They are headquartered in Arkansas, except for Hope Credit Union and Local Initiatives Support Corp. (LISC), which have their headquarters in Jackson, Miss., and New York City, respectively.

• Alliance for Rural Impact
• Arkansas Capital Corp.
• Arkansas Small Business and Technology Development Center
• Communities Unlimited
• Diamond Lakes Federal Credit Union
• FNBC Bank
• FORGE Inc.
• Hope Credit Union
• LISC
• People Trust Community Loan Fund
• Southern Bancorp

CDFI collaboration in Arkansas is nothing new. For years, CDFIs have been referring clients to one another, working together to coordinate training and professional development, and coordinating efforts around public policy work. Nevertheless, SSBCI 2.0 has presented a concrete opportunity for them to take advantage of federal dollars flowing to Arkansas to support small businesses. According to Philip Adams, executive director of FORGE Inc., SSBCI 2.0 “has elevated the ways in which CDFIs across the state of Arkansas work together.”

CDFI Impact during SSBCI 1.0

Initially passed in response to the Great Recession, SSBCI 1.0 authorized $1.5 billion to support small businesses. In addition to authorizing a much smaller amount of funding compared to SSBCI 2.0, SSBCI 1.0 offered no incentives to lend to disadvantaged small businesses. Nevertheless, CDFIs across the country loaned and invested $630 million under SSBCI 1.0, though fund amounts varied across states. In Georgia, for example, CDFIs had a key role in financing small businesses, collectively lending more than $80 million. In Arkansas, however, CDFIs played a more limited role, lending less than $2 million to small businesses. FORGE Inc. and Communities Unlimited (then known as alt.Consulting) were the main Arkansas CDFI lenders during SSBCI 1.0.

ADFA Plans for SSBCI 2.0

Each state can choose to implement some or all of the following types of financing programs under SSBCI 2.0:

• Venture capital programs: Jurisdictions may set up public-private partnerships for equity investing or invest in venture capital funds. These investments focus on providing capital to underserved startups and democratizing venture capital across geography and to diverse founders.
• Loan participation programs: Under these programs, states, the District of Columbia, territories and tribal governments lend directly to small businesses alongside private lenders or buy an interest in loans made by private lenders.
• Loan guarantee programs: States, the District of Columbia, territories and tribal governments use SSBCI 2.0 funds to provide an assurance to lenders that they will be partially repaid in the event of default, after the lender makes every reasonable effort to collect, helping small businesses secure loans that may have otherwise been inaccessible or prohibitively expensive.
• Collateral support programs: These programs set aside funds as collateral for new loans, enabling startups to borrow with the assistance of SSBCI 2.0 capital to help their businesses grow.
• Capital access programs: These programs provide portfolio insurance in the form of a loan loss reserve fund. Lender and borrower contributions to it are supplemented with SSBCI 2.0 funds.

In Arkansas, ADFA has proposed implementing six programs as part of SSBCI 2.0: two venture capital programs, one loan participation program, two loan guarantee programs and one capital access program. The agency did not propose a collateral support program.

What’s Next?

The U.S. Treasury Department is still reviewing several states’ SSBCI 2.0 plans, including Arkansas’ plan. More details about which CDFIs will participate as lenders through the program will become available once these plans are approved.