It’s often said that the best way to get a business loan is to prove you don’t really need the money. There’s a kernel of truth in that statement. Financial institutions are most amenable to lending when the potential borrower is likely to repay the loan quickly. But what happens when you’re based in a financially disadvantaged region, or are deemed a high-risk business? If you can get a loan at all, you’ll likely face higher rates and stiffer terms.
That is, unless you deal with a member of the Opportunity Finance Network (OFN), a nationwide alliance of over 200 community-development financial institutions (CDFIs), headquartered in Philadelphia.
Privately held CDFIs provide financing to businesses in hard-to-serve communities, in order to spark job creation and retention. They are profitable, but not profit-maximizing. OFN’s story begins in 1985. “Borrowing money from socially motivated investors was not a new idea, but those lenders were working independently,” says OFN president and CEO Mark Pinsky. “OFN helped bring many of them together, to share knowledge and experiences.”
Collectively, OFN members hold $10 billion-plus in assets, which are used to deliver responsible, affordable lending to low-income, low-wealth, and other disadvantaged people and communities. “Basically, we operate in places that conventional wisdom tells us to avoid,” Pinsky says. “By carefully managing risk, we can make money very affordable.”
In fact, the OFN network of CDFIs has originated more than $30 billion in financing since its founding, with a net charge-off rate below 1.7 percent—comparable to that of banks serving less risky markets. And, with its emphasis on local communities, it’s no surprise that OFN’s members run their own shows. “We cover urban, suburban, and rural markets in all 50 states, as well as many Native American reservations,” Pinsky says. “And all of them are served by separate, local institutions. We don’t sit in Philadelphia and decide about a loan for someone in South Dakota.”
For example, community banks are key players in the process, as their officers understand the particular opportunities and risks in their respective locales. At the same time, working with OFN enables those banks to serve a broader range of customers than they would otherwise.
In 2010, the Federal Reserve cited CDFIs as the biggest financial pipeline for small businesses. “Other lenders are reluctant in this distressed marketplace,” Pinsky says, “but we specialize in it. We’re lending at high volumes, and our investors are getting repaid.”
Those opportunities range from small retail shops to manufacturing facilities, nonprofits, and even homeowners. In one case, an OFN member institution in Massachusetts stepped in after a home had been foreclosed. It was able to have the home devalued and refinanced at a lower mortgage, one the owner could afford. “We’ve had good success in keeping people in their homes, while helping lenders avoid total losses,” Pinsky says.
OFN has also raised donations of more than $15 million from the Starbucks “Create Jobs USA” initiative. Supported by more than 800,000 personal donations and corporate support from Google Offers, Citi, MasterCard, and Banana Republic, the initiative has created or sustained 5,000 jobs nationwide. New opportunities, like a focus on health care, are also in the works—OFN is providing funds for primary-care clinics in low-income communities.
“We want our borrowers eventually to qualify for mainstream financing,” Pinsky stresses. “And when markets change, we have to be ready to step in—or step out—as needed. There’s no end to possible opportunities for our members to serve their communities.”