Senior Manager, Local Initiatives Support Corporation (LISC)
Leveraging Community Development Financing Tools
One of the best kept secrets in the impact investing industry are community development investment funds — public-private partnerships that can channel both debt and equity investments into your social enterprise. These funds include community development loan funds, microloan funds, credit unions, equity funds, and community development financial institutions (CDFIs).
CDFIs have become a common term for funds that aim to broaden economic opportunity for underserved and low-income communities by providing capital access. A majority are certified by the Treasury’s CDFI Fund, allowing them to gain access to key credit enhancement or other federal programs like the New Markets Tax Credit. The CDFI Coalition estimates that CDFIs invested in nearly 15,000 small businesses in 2018.
For companies looking at venture funding, there are currently 16 certified community development venture capital funds. One such fund called Launch NY identifies, supports, and invests in high-growth, high-impact companies to create jobs and wealth, and catalyze the entrepreneurial ecosystem in Upstate New York. At LISC, we have been able to channel $15 million toward impact investing funds like Launch NY and SustainVC Impact Fund II, a $25 million fund supporting early-stage companies focused on social and environmental impact. Within the LISC family of companies, we have also been directing additional resources to fund businesses that create quality jobs accessible to residents in distressed communities through our debt products. Examples include the following:
- The Good Jobs Fund is an impact investment initiative, born out of a partnership between New Markets Support Company, Morgan Stanley, and HCAP Partners. The Good Jobs Fund is a New Markets Tax Credit enhanced mezzanine loan fund to finance the growth of businesses creating quality jobs accessible to residents in distressed communities. The fund invests in businesses that are looking to accelerate their growth, have outstripped their senior debt capacity, and have challenges accessing adequate capital. Using a proven loan fund structure with low transaction costs, the fund finances smaller investments that cannot typically be supported with New Market Tax Credit financing. The first loan from the Good Jobs Fund was to Brooklyn based Ovenly, a bakery and social enterprise that creates jobs for New Yorkers who have faced high hurdles entering the workforce.
- immito is an SBA 7(a) non-bank Small Business Administration (SBA) lender. There are only 14 of these licenses available nationwide, and lenders must be approved by the SBA. The SBA 7(a) loan program provides small business loans of up to $5 million. The capital loaned through the program can be put to a wide range of business purposes like working capital or real estate. Key to the SBA program is government credit enhancement ranging between 75 and 85 percent of the loan amount, allowing SBA lenders to invest in businesses at lower interest rates and at more flexible terms. Fundera has put together a comprehensive overview of the 7(a) program, including loan types, requirements, terms and other lenders.
- In partnership with JP Morgan Chase and Acción Chicago, the $6.5 million Entrepreneurs of Color Fund provides financing to minority entrepreneurs in Chicago.
Another program that warrants mentioning is the Small Business Investment Company (SBIC) Program’s Impact Investment Fund. Launched in 2011, the fund supports small business investment strategies that maximize financial return while also yielding measurable social, environmental, or economic impact. As part of this program, the SBA committed to providing $200 million to Impact SBICs through the impact investment fund. Since 1958, SBICs have invested $87 billion in American small businesses, and many of our first VCs started as SBICs. SBICs are able to leverage capital raised from private investors with government guaranteed debt. Impact SBICs must deploy 50 percent of capital into investments in economically-distressed areas, low- to moderate-income areas, rural areas, or energy saving activities. Examples of impact SBICs include Bridges US Sustainable Growth Fund, SJF Ventures III, and Bluehenge Secured Debt SBIC.
This barely scratches the surface on potential funding opportunities leveraging community development tools. For more information on community development entities that provide business lending and investment, Community Action Partnership has put together a comprehensive guide.