What are CDFIs and Why Should Small Business Owners Know About Them?—Business Fuel Podcast #76
Community Development Financial Institutions provide millions of dollars to small business every year
Listen to our interview with CEO of Opportunity Finance Network, Mark Pinsky
If you own a small business, you’ll want to meet Mark Pinsky and learn more about CDFIs. Check out today’s podcast and see what his company, Opportunity Finance Network, is doing to make sure small business has access to the funds they need. Particularly those who aren’t served by traditional financial institutions.
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Patrick Wiscombe: Serving over 386,000 people, this is The Business Fuel Podcast. Good morning, I’m Patrick Wiscombe. Thank you for tuning us in and taking us along wherever and however you’re accessing the podcast. Today we will be talking to Mark Pinsky, CEO of Opportunity Finance Network. His website is ofn.org. But first let’s bring in the producer and co-host of the podcast, Ty Kiisel. Good morning.
Ty Kiisel: Good morning. How are you?
Patrick Wiscombe: Doing alright. I was reading your article on Forbes about banking and innovation. Did you really just say banking and innovation in the same sentence?
Ty Kiisel: Bankers don’t like being told they’re not innovative, but most of the innovation in small business lending is not going on in the bank. However, this week I’ve had quite a few bankers call and say, “Wait a minute. We are innovative.” So we’re sharing exactly how they’re innovative in the post this week.
Patrick Wiscombe: Thanks Ty. Let’s bring in Mark now. What is Opportunity Finance Network?
Mark Pinsky: Opportunity Finance Network is a nationwide network of private sector financial institutions that focus their lending on markets that are otherwise not served by mainstream financial institutions. We make sure our lending reaches low income, low wealth, and other disadvantaged people. One of the things we’ve seen come through the recession is the more conventional businesses that have had a tougher and tougher time accessing credit. We work in all 50 states in rural, urban and native communities. We provide funding for small businesses, non-profit businesses, and affordable housing as well. Our institutions across the country manage tens of billions of dollars and are doing a steady flow of business.
Ty: Last fall, the Federal Reserve Bank of Cleveland said that more capital is coming available for every business in the country except for the smallest of small businesses. Ironically, those small businesses are the ones everybody identifies with. Let’s talk about what a CDFI (Community Development Financial Institution) is. What makes them different from a community bank?
Mark: There’s no doubt the smaller you get, the tougher it is to get capital. Deals under a million dollars are harder to come by than deals over 2 million. Businesses that need around $100,000 are struggling to find someone to lend to them in a responsible way. There are folks stepping into the market who are preying on the needs that these small businesses have. Most small business owners aren’t spending all their time becoming finance experts. They are sometimes vulnerable to predators and that’s a growing trend in the small business space. CDFI’s are the antithesis of these predators. We are trying to make capital fit to the needs of our borrowers. It may be a matter of having flexible payment structures. It may be a matter of pricing. Our small business loans are generally 8% or under. Some of the predators are 100% or over. We may be more willing to make loans with longer terms. We may be able to take unusual collateral. We try to be very flexible to meet the needs of the borrowers.
Patrick: You mentioned some lenders out there go 100% plus. Is that even legal?
Mark: Yes, in some states. Interest rates are regulated on a state by state basis, if they’re even regulated at all. So there are lots of places that you can charge whatever the market will bare. If you track down some of those companies that are predatory in the small business space, the folks that are running them are the ones that were running predatory companies in the mortgage space many years ago. They know how to do it. They know how the model works and they are taking advantage of folks who want to focus on running their business and making sure their employees are secure. They are coming in and getting owners to sign up for things that are not good for the business.
Ty: You’ve been around since 2002 right?
Mark: We’ve been around since 1985.
Ty: This isn’t your first rodeo in the marketplace. How are you able to take this underserved part of the population and give them flexible terms and low interest rates when everybody else is saying just the opposite? How do you profitably do this?
Mark: We are very good at understanding risk in these markets. We know from experience that the perception of risk is much greater than the actual risk. We we first started doing this, we were borrowing money from nuns, it was really their retirement money. When you borrow from nuns, you learn two things. #1 – You better reach someone that others aren’t going to reach. #2 – Under no circumstances do you lose the nuns retirement money. We had to find these folks who had good business ideas, good products, good customer base, good understanding of marketing, but for one reason or another, couldn’t get funding. Maybe it was an ethnic product that the bankers didn’t understand. Or they were serving a community the banks couldn’t connect with. One of the goals of CDFI’s is to be profitable, but not profit maximizing. Our goal is to give up a little bit in order to see the business succeed. When you do that, you see opportunities that banks simply don’t see.
Ty: I want to talk about profit, but not profit maximizing. That’s like a foreign language to most people, right? How do you convince that banks and investors you work with that you will be profitable but not maximizing it?
Mark: We want money that’s patient money because there are two ways to run a race. One’s called being a hare and the other is a tortoise. And by the way, who won the race? When you think about long term rather than short term, you win. There’s a need for others to go out and be profit maximizing in the short term every year. That’s fine. But there’s also a role for tortoises in this game. That’s what we do. We have investors who believe in that. They stay with us for the long haul. We’ve never lost money because our loans perform incredible well.
Ty: Your answer totally surprised me. I was expecting some kind of altruistic vision statement. This is just a different investor model. I totally relate to the tortoise and the hare analogy.
Mark: I don’t necessarily want to call it altruistic. We have a public purpose. We’re trying to change the way the marketplace works for small businesses. We believe the system can work better. We’re just an influence on the solution. There are communities, places, businesses, and people who are incredibly rich in potential, but poor in capital. We’re in the business of finding capital for all people. We like to demonstrate that things people think are impossible are actually possible. People who own and run small businesses are incredibly determined people. That’s who they are because you don’t start a business otherwise. We believe in them and are willing to find a way to lend to them.
Ty: I’m going to brag about you a little. Since 2002, more than 33 billion in financing and 600,000 new jobs. That’s why you are important and why we’re talking to you today. We need to get the word out that there is money available to people who don’t fit the traditional model. One of the reasons it works for you is what you call TA, Technical Assistance. Would you describe that?
Mark: I appreciate that. Those are kind words. The typical small business owner probably doesn’t have an MBA. When you walk into a bank, you have to walk in with a bunch of financial paperwork and most small businesses don’t know how to do that. When someone comes to us, we say that we will help you. Let’s learn how to manage cash flow, etc. We try to work with them to teach them the basics of financial management. Another form of TA we provide is thinking about marketing. Once we are able to make a loan, we stay with them. That’s one of the ways we manage risk. We want to make sure the loan is performing. We dont’ wait until someone is 30 days late. If they are two days late, we are on the phone to see if someone’s sick, late shipment, whatever. When we lend, it’s because we want them to succeed.
Ty: I love this model. We should try to make better borrowers out of small business owners so they can access the capital and grow the economy. Have you got a success story you can share with us?
Mark: We have no end of success stories. One that comes to mind is of a woman who grew up in El Paso, Texas. She was the sole caregiver for her mother who was disabled. She turned that experience into a career in healthcare. Eventually she wanted to start an in home health care program to care for other people. That’s not a big capital intensive business, but she eventually came to one of our members in Texas. It allowed her to get the capital she needed and get the marketing going. It’s now a steady, good business. She was able to turn something that was very hard as a teenager into something she can be proud of and something her community can be proud of.
Ty: You’re in all 50 states?
Mark: Yes. We work in urban markets, rural markets, and native markets.
Ty: How do I contact you if I’m a small business owner and want to plug into what you’re doing?
Ty: It’s been great talking to you. As we wrap up, what’s the one thing people need to remember?
Mark: Not all lenders are alike. Don’t take the first one that comes along. Make sure you know what you’re getting into before you borrow money from anybody. Right now especially, small businesses are vulnerable to some predatory people out there. I don’t want to see lending ever be the reason a company fails. That shouldn’t happen.
Patrick: Just to follow up on that, how do you know if you have a good loan?
Mark: It can be complicated. There’s no stamp of approval out there. One of the things you can do is check with the Small Business Administration, there’s one in every state. But there’s some flags you want to watch for on this. If the prevailing rate on the loan is more than 10%, you should at least think, “Can I do better?” If the cost of the loan is way more than that, you should run and find something better. Be wary of online lenders. If someone won’t tell you what the rate is, it’s not for you because they’re hiding something. If you get to closing and there’s a lot of fees, run away. Be sure to ask about fees upfront. Most important, if it doesn’t feel right, it’s not.
Patrick: We’ll go ahead and wrap up today’s edition of The Business Fuel Podcast. Remember you can pick up a fresh edition of the show each and every Tuesday morning, around 9:00, at Lendio.com/blog. Our thanks again to Mark Pinsky, CEO of Opportunity Finance Network. Check him out online at ofn.org. Thanks again Mark.
Mark: Thank you. It’s great talking to you.Patrick: So for Mark,Ty, I’m Patrick Wiscombe. Thank you for listening. We will talk to you next Tuesday.
Bringing you interviews with top business professionals and business financing tips to help fuel your American dream. This has been the Business Fuel podcast, with your hosts, Ty Kiisel and Patrick Wiscombe, heard exclusively on Lendio.com