Giving Compass' Take:
- As we reflect of COVID-19 relief efforts, it's time to develop new frameworks for equitably distributing capital for small businesses.
- How does an equitable distribution of financial assistance for small businesses open up a more inclusive economy on a broader scale? What are you doing to reevaluate your support for small businesses as we navigate these crises together?
- Learn about how you can turn to CDFIs for a more equitable COVID-19 recovery.
What is Giving Compass?
We connect donors to learning resources and ways to support community-led solutions. Learn more about us.
When the COVID-19 pandemic hit, the US federal government assumed that banks were the best way to distribute billions of dollars of relief to small businesses. But this unplanned national experiment—the Paycheck Protection Program (PPP)—showed just how disconnected millions of people and small businesses are from the banking system.
We should have seen it coming. Banks have been moving away from local communities for a long time. In the years since the Great Recession, 389 banks have failed and more than 6,000 bank branches have closed. Small business lending in most US counties never rebounded; in 2017, it was roughly half the level of 2004. And since 1997, community banks’ share of loans under $100,000 has declined from 82 to 29 percent, leaving a gaping hole in the credit market for the smallest businesses. These gaps are even more acute in distressed communities.
But crisis reveals character, and over the last year, community development financial institutions (CDFIs) have been stepping up to meet the moment. CDFIs are community-based, mission-driven lenders. The Treasury Department mandates that they work in low- to moderate-income communities and/or communities with structural barriers to credit access (such as in native and rural communities, and communities of color). As such, they are uniquely positioned to drive financial inclusion and more equitable economic growth, and directly address systemic racial and gender wealth and income gaps by reaching diverse communities.
After witnessing the unequal distribution of PPP funds through banks, the government has increasingly turned to CDFIs to deliver relief loans to hard-to-reach small business owners. But while this has highlighted the potential of CDFIs to reach those most in need, it has also highlighted the challenges that keep them from effectively addressing financial inclusion at scale.
Read the full article about an equitable distribution of capital for small businesses by Beth Bafford and Patrick Davis at Stanford Social Innovation Review.