By Danielle Douglas
Monday, August 2, 2010; 8
Bank of America announced last week that it will provide $10 million in grants to Community Development Financial Institutions and other nonprofit microlenders to spur some $100 million in small-business lending. The move marks the first time the financial behemoth will be giving, not loaning, these institutions money for small businesses.
The grants must be used to bolster loan loss reserves needed to access funds from the U.S. Small Business Administration and the U.S. Agriculture Department. Both agencies require CDFIs, organizations that are certified by the Treasury Department, to set aside around 10 percent of the capital they provide in reserves. So, for instance, for every $10 a microlender offers, it must stash away a dollar to cover potential losses.
"We started hearing that the availability of money was tied up because of the lack of reserves and thought this [initiative] was the best way to address it," said David Darnell, president of global commercial banking at Bank of America.
With large commercial banks having tightened the reins on small-business lending, community institutions have been filling the void, despite a decrease in funding. "For a lot of CDFIs, the ability to lend is dependent upon having that slice of grant support to fund the loan loss reserves," said Shari Berenbach, president and chief executive of Bethesda-based Calvert Foundation, a financial intermediary that funds such reserves. "This kind of a grant is incredibly catalytic."
More than 175 nonprofit lenders participate in the SBA's program, which provides small loans, averaging $13,000. Based on those figures, Bank of America anticipates the grants will help nearly 8,000 businesses secure new loans. The company is rolling out the first leg of the program in mid-August to assist organizations that can draw down reserves in the current fiscal year ending Sept. 30 -- the SBA's unused capital will be lost past that date. The remaining funds will target CDFIs that are eligible for the following fiscal year. Awards will be based on the microlender's track record and financial needs.
"We want the grants to be out in 12 months, so the [institutions] are able to draw down the funds from the SBA so that we are looking at $100 million in the hands of small businesses in 12 months, "said Dan Letendre, director of community lending and investing at Bank of America.
Microlenders often supply credit to borrowers that may not qualify for traditional loans because of poor credit. Such was the case for Barrett T. Johnson, an electrician from the District who needed money to service a few contracts. He turned to the Washington Area Community Investment Fund, which in conjunction with the D.C. Department of Small and Local Business Development floated him a $25,000 line of credit last September. "He was able to, over the course of this past year, rack up $280,000 worth of contracts based on that access to capital we extended him," said Timothy A. Flanagan, acting executive director of the Washington Area Community Investment Fund. "That means jobs for this community."
The Washington Area Community Investment Fund is one of 52 certified CDFIs in the District, Maryland and Virginia. Nationwide there are 800 of these institutions, which averaged $163 million in assets in 2009, according to the Treasury Department. A first-quarter survey by the Opportunity Finance Network, the trade association for CDFIs, found that half of the 120 respondents could not meet origination demand partly due to capital constraints.
Bank of America is one of the nation's largest CDFI investors, deploying more than $1 billion in loans and investments to 120 such lenders in 37 states. To date, the bank has invested $80 million in Washington area CDFIs.
A few other large financial institutions invest in CDFIs, including TD Bank and Wells Fargo. In May, Citigroup doled out $200 million to the Calvert Foundation for microloans. "The answer to the challenges and opportunities before us as a nation is an intelligent pairing of public and private resources to meet the needs of small businesses," said Berenbach. "If we want to create jobs, we have to be providing financing to small business. "