Bank financing for entrepreneurs is harder to get these days, thanks to rising interest rates and the collapse of Silicon Valley Bank. That’s especially problematic for entrepreneurs of color, who typically have a harder time getting financing than their white peers. One answer is to help Community Development Financial Institutions (CDFIs) increase their lending, especially to underbanked founders.
Paul Quintero
That’s where Entrepreneur-backed Asset (EBA) Fund comes in. With the aim of helping to boost lending by CDFIs, the nonprofit creates a new secondary market for CDFI loans. “The ultimate goal is to create an industry-wide change that makes pools of funding available to CDFIs, allowing them to better manage their balance sheets and growth and do it in a sustainable way over the long-term,” says co-founder Brett Simmons.
Pooling Microloans
Many CDFIs focus, at least in part, on businesses owned by women, people of color, immigrants and other groups that historically have had a tough time getting funding from the traditional financial system. But their resources typically are constrained by their own variable sources of funding—philanthropy and the public sector, as well as banks trying to meet their Community Reinvestment Act (CRA) obligations.
To address that problem, EBA Fund increases CDFIs’ liquidity through a new secondary market for their microloans. To that end, it pools loans in packages to sell to banks. That, in turn, accomplishes a few goals: Letting CDFIs free up assets to make more loans and helping banks meet their CRA lending tests. “We’re changing the incentives for lenders,” says Simmons. In addition, EBA Fund donates premiums on loan sales back to CDFIs, increasing capital flow.
Simmons estimates that EBA Fund has already freed up $41.5 million in potential loans to underbanked small businesses.
Moving Up the Launch
Simmons and co-founder Jonathan Brereton got the idea for EBA Fund a few years ago, after they formed Revolve Asset Management to facilitate transactions between CDFIs and banks. Their experience highlighted the value of creating a fund that could serve as a market-maker for these transactions, addressing mismatches in timing between when CDFIs want to sell and when banks want to purchase, and adding elements such as third-party risk rating and back-up servicing that reduce risk to bank purchasers. The fund would be managed By Revolve.
By early 2020, Simmons and Brereton, working with the Microfinance Impact Collaborative (MIC) and the Aspen Institute Business Ownership Initiative (BOI), developed their business plan, intending to launch later in the year. But, after the pandemic hit, they moved up their timeline to April and started rolling out the service that summer.
The real secret sauce, according to Simmons, comes from that combination of selling banks CDFI loan packages and charging a premium, 75% of which ERB gives back to the CDFIs. “As a result, we generate more revenue for our CDFI partners,” says Simmons—a total of $3.5 million over the last three years. “We really hit our stride in the last six months,” says Simmons.
To date, the ERB board has vetted and approved 20 CDFIs to be part of the ERB system and has bought loans from 13 of them. Seventy-percent of those loans have been to entrepreneurs of color.
Funding for ERB has come from a variety of sources, including Citi Foundation, the Bill and Melinda Gates Foundation and others.
New York City-based Accendus, which targets low-to-moderate-income small business owners, started working with EBA Fund about two years ago and has done around $1 million in loans through the program. “We see this as positive for the field,” says CEO Paul Quintero. “EBA just got started. They’re going to build an inventory of loans to attract a bigger marketplace.“
