Addressing the Capitalization and Financial Constraints of CDFI Microlenders

by Brett Simmons, Jonathan Brereton, & Joyce Klein

Community Development Financial Institution (CDFI) loan funds face a common capitalization challenge as they seek to grow—they must raise net assets to enable the additional debt financing needed to support an expanding portfolio. Among CDFIs that focus on microlending—making small dollar loans of up to $50,000 to small businesses—the financial challenges are even greater, as the revenue earned on these small-dollar, relatively short-term loans typically does not cover the cost to originate and service them (Klein & Okagaki, 2018, 12-14). Thus, CDFI microlenders must also raise grant (subsidy) dollars to support the increase in their lending costs as their portfolio grows.

In early 2018, the Aspen Institute’s Business Ownership Initiative (BOI) began working with the members of its Microfinance Impact Collaborative (MIC)1 to explore capitalization and liquidity strategies that could address the financial challenges associated with growth. BOI partnered with Revolve, a consulting firm with experience in the CDFI microlending sector, to support its efforts. This paper presents the results of that effort, discussing why microlending is important for mission outcomes but challenging to scale from a financial perspective, and identifying the set of capitalization strategies that the MIC members have used and explored. The paper focuses in particular on the most promising strategy identified—selling loans to banks that see value in purchasing the loans to support their Community Reinvestment Act (CRA) requirements, and identifies factors that CDFIs should consider in determining whether loan sales are a potential fit for their organization.

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