Why Microloans?

CDFI-originated microloans help address the racial wealth gap by providing access to appropriately sized and affordable capital for small businesses owned by women and entrepreneurs of color.

While entrepreneurs of color and women entrepreneurs play a critical role in our nation’s overall economic health, racial economic inequality has reached staggering levels in the United States. It would take the average black family 228 years and the average Latinx family 84 years to achieve the level of wealth that white families have today. Though successful entrepreneurship can help close this gap. the success of Black, Indigenous, and People of Color (BIPOC) and women owned firms is often stymied by the many barriers they face in accessing capital.?

BIPOC firms, regardless of gender, show lower average revenues and lower profit margins. Lower levels of wealth, barriers in accessing external financing, and the legacy of occupational segregation have led to a much higher concentration of BIPOC and women-owned firms in industries with low barriers to entry, but also lower revenues and profit margins. Lower revenue and lower margins mean less ability to service debt – meaning that these firms typically need smaller loans.

These realities have led many BIPOC and women owned businesses to seek small loan sizes. Despite the economy growing more than 40% in the last decade, loans under $100,000 have fallen 38% at FDIC insured banks. CDFI microlenders help fill this void. Through trust, strong local relationships, and tailored underwriting and servicing strategies, lenders disburse prudent loans under $100,000, effectively reaching BIPOC entrepreneurs and women.

Unfortunately, CDFIs have also lacked access to capital and infrastructure. Small dollar loans at affordable interest rates do not generate enough income to cover lender expenses so the CDFI microlenders who serve entrepreneurs of color and women must rely on donations to subsidize operations. EBA Fund helps address the challenges of microlending by providing CDFIs a new capital tool and additional subsidy through the sale of their microloan portfolios. BIPOC and women owned firms can get more of the capital they need from CDFIs. The second result is that with capital tailored to what firms need, those firms can grow and be more successful, creating new sources of income and diversified assets capable of reducing the racial wealth gap.

If you're interested in partnering with EBA Fund to purchase loans and support CDFIs in your area, please reach out to Chelsea Probus. Learn more about EBA Fund here.