How digital marketplaces are disrupting small business lending

Many small business owners lack access to financing and are vulnerable to predatory lenders. Digital platforms backed by Mastercard make it easier for them to access CDFI funding.

When small business owners go shopping for a loan, they often find themselves in a dizzying array of A range of online lending options – cash advances, lines of credit and various loan types. While many advertise their products as quick and convenient, they often come with high costs and confusing terms.

Non-bank online lenders are a growing source of financing for small businesses.Traditional banks aren’t always an option, especially for minority entrepreneurs The rate of loan rejections is twice that of white business owners. More mission-oriented lenders that can help tend to be lesser-known, in part because their marketing budgets aren’t as robust as some of the more predatory programs.

Community Reinvestment Fund (CRF) is working hard to change this online lending game. Five years ago, the Minneapolis CDFI launched Connect2Capital. Essentially, the digital platform brings together all the offerings offered by the CRF and its peer organizations under one digital umbrella. Connect2Capital then uses a unique algorithm to match business owners with CDFIs and other mission-driven lenders. Once connected with a lender, small business owners continue to receive help from Connect2Capital as they prepare their application and complete the underwriting and closing process.

In creating this marketplace, CRF did not reinvent the wheel. There are many existing platforms that match businesses with funding opportunities, but not necessarily mission-driven lenders. The platform also solves a big problem for CDFIs. The success of CDFIs depends largely not only on their ability to raise capital, but also on how effectively they get money to those who need it.

“We realized that there really wasn’t any platform that offered this kind of service to small businesses that were focused on non-profit community lenders that provided business support and technical assistance and offered better prices and more flexible loans than fintech companies product,” said Patrick Davis, senior vice president of strategy at CRF. “Our whole idea is how we confront predatory lenders. We want small businesses to realize that there are other, more responsible products that they can use.”

In addition to connecting small business owners with lenders they might not otherwise discover, the platform cuts a lot of legwork out of the process for CDFIs—enabling them to process more loans and serve more entrepreneurs with Serve. Early on, CRF and its partners provided a $7 million loan through Connect2Capital. Loan volume has grown to more than $300 million from more than 110 lenders across the country — primarily serving a variety of small businesses. In 2021, approximately 70% of businesses served through Connect2Capital will be owned by BIPOC, women, veterans or LGBTQIA.

The platform was initially funded by several national banks and financial services companies.this The company’s philanthropic hub, the Mastercard Center for Inclusive Growth, was an early backer of Connect2Capital, providing significant grant funding to improve and grow the platform during the pandemic.

Sandy Fernandez, North America Vice President, Center for Inclusive Growth, Mastercard, said: “Platforms like Connect2Capital present a huge opportunity to leverage some of the same technologies and innovations that power fintech to expand affordable access to underserved small businesses. capital opportunities.” .

After securing funding, the CRF faced its biggest hurdle: securing support from other CDFIs.

“We’ve had a really hard time getting other CDFIs to see the vision and join the platform,” Davis said. “The first two or three years were really difficult and frankly we didn’t generate much traction.”

Then COVID-19 hit.

The pandemic has devastated many small businesses, especially those owned by entrepreneurs of color in low-income communities.In response, much government funding has been channeled through PPP loans and local and regional small business resilience programs. However, while CDFIs are in the perfect relationship position when it comes to distributing funds, many are not technically prepared to handle the volume. Many people turn to Connect2Capital.

“All this federal money needs to find its way into the hands of very small businesses that typically don’t have access to financing from banks,” Davis said. “We’ve been building this tool for years before COVID. .”

One of the programs is Southern Opportunity and Resilience (SOAR) Fund, which uses the Connect2Capital platform to host its application. SOAR directs $61 million in loans from 13 CDFIs to help small businesses in 11 southern states recover from the pandemic. Nearly half of the loans went to Black-owned businesses.

climbing One of the beneficiaries of the SOAR Fund. New York-based CDFI expects to total about $20 million in loans this year, according to the lender’s chief executive, Paul Quintero. But by mid-November, they had loaned more than $35 million, mostly to small business clients.

Quintero attributed the trading volume to its presence on Connect2Capital.Shengteng joined Connect2Capital was circa 2019, but following the COVID-19 pandemic, activity on the platform has increased significantly.

“This platform and program helped us reach more small business owners, which was a huge challenge for us,” Quintero said. “The pandemic has unleashed the platform’s maximum potential.”

Connect2Capital will continue to expand in 2023, in part through a partnership with Mastercard.The development of the platform was one of the catalysts for the launch of Mastercard Strive USA, which will expand Connect2Capital and partner with other innovators to build CDFI’s digital capabilities and deploy tens of billions of dollars of affordable capital to entrepreneurs across the country.

“CDFIs have demonstrated how their combination of capital and technical assistance can meet the lending needs of underserved small businesses, especially during challenging times,” said Fernandez. “As small businesses continue to navigate a wide variety of challenges, Strive USA is bringing together philanthropic, public and private sector resources and innovations to build a stronger ecosystem of small business support.”

Christopher C. Williams is a freelance finance writer in New Jersey. He has worked for Dow Jones Newswires and Barron’s for several years, and has written for publications such as The Wall Street Journal, The New York Times, and Essence Magazine. He focuses on the intersection of business, economic equity, and racial justice.

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