Mission-driven, nonprofit lenders will use investment to support small business owners, entrepreneurs and community organizations
Kamau Murray always had the vision — an elite tennis academy that would provide opportunities and change trajectories for kids in struggling neighborhoods on the South Side of Chicago. It would be built on the site of the former Robert Taylor Homes, at one point the largest public housing project in America, also notorious for decades of violence and poverty.
But the more pressing question: where would he get the money?
Murray approached a relatively unknown and underutilized resource called the Chicago Community Loan Fund (CCLF), part of a nationwide network of mission-driven nonprofit lenders called CDFIs, or community development financial institutions. By federal law, CDFIs were established to financially help underserved communities.
In 2014, CCLF loaned Murray the first $1.3 million on the project, taught him about new market tax credits (a strategy he hadn’t known about before) and held his hand through the fundraising process.
What began more than 10 years ago as a scrappy start-up that he ran after work out of a local gym, Murray’s XS Tennis and Education Foundation last year opened a brand-new $16.9 million indoor multipurpose facility. XS Tennis serves about 3,000 students — subsidizing lessons for about 2,000 of them – and has sent 52 kids to college on scholarships since its inception, about half of them from low-income neighborhoods. Murray, 39, also coaches Sloane Stephens, who won the 2017 U.S. Open Women’s Championship and reached the No. 3 ranking in the world.
The idea for the tennis academy “was a deal that didn’t pencil out (financially), but they were able to see something,” Murray says of CCLF and several other original investors. “They believed in this project. This was not just an idea. This was not a South Side tennis program. This was going to be one of the best places to play tennis, anywhere.”
Hoping to build on success stories like XS Tennis, Starbucks announced today it will invest $10 million into four different CDFIs in Chicago: Accion Chicago, CCLF, IFF and Local Initiatives Support Corporation (LISC). In turn, these CDFIs will lend the money to small business owners, entrepreneurs and community-based organizations and projects to continue their work revitalizing struggling neighborhoods on the city’s South and West sides.
“We are excited about the impact that this investment will have in many communities in Chicago, but we are also really excited that we can highlight these organizations to potential borrowers,” said Peter Filipovic, Starbucks vice president and global treasurer.
John Kelly, Starbucks executive vice president for public affairs and social impact, believes this investment “is a perfect example of how we can use our scale for good, to use our resources and our financial success to help others as well. This is something that we believe is actually both going to have a positive social impact and be good for business.”
The $10 million loan will be distributed around January 2020.
It also aligns with work being done by Chicago Mayor Lori Lightfoot, who since her election earlier this year, has made fostering economic development in neighborhoods on the South and West sides a signature priority. She recently announced Invest South/West, an initiative aimed at helping the neighborhoods that are most critically served by local economic development organizations, including CDFIs.
So how exactly do CDFIs work? And why are they even necessary?
CDFIs emerged in the 1990s in part as a response to long-standing discriminatory practices such as redlining that made it difficult for people in certain zip codes to secure home loans and business capital.
In general, CDFIs work with projects or people that traditional lenders would consider too risky, or with dollar amounts that are considered too small. They offer coaching, connections, competitive rates, flexibility on loan repayments and a smoother underwriting process. Some CDFIs, for example, have no minimum credit score requirement. The CDFIs operate as part of a network; each has a different niche.
Accion Chicago, which focuses on neighborhood entrepreneurs and small business owners, funded 418 loans last year, with the average loan size around $9,000. Sometimes, business owners needed money to make payroll on Friday, or buy a piece of equipment like an oven, a truck or a lawnmower. Other times, Accion helped entrepreneurs hire more employees to meet increased demand for their product, or prove they had enough financing to enter into a bigger business relationship, with a downtown hotel developer looking for a subcontractor, for example.
“We provide capital that is targeted to what entrepreneurs need without overextending them,” says Brad McConnell, CEO of Accion Chicago. “Our belief is that the single most efficient way to create jobs and wealth in the communities that have long been starved of both is to invest in organizations like Accion, who in turn invest in the small business owners who are already there, who are creating that wealth in their community every single day and need assistance to do it more.”
The Starbucks investment is expected to fund about 500 Accion loans.
CCLF, on the other hand, funds projects around affordable housing, commercial real estate, community facilities (if a nonprofit group needs a roof repair, for example) or social enterprises for local initiatives like getting healthier food into a neighborhood. They give out loans in the $50,000 to $5 million range.
Several years ago, CCLF gave $500,000 to a developer, who used it to help jumpstart a 5-acre retail project called Englewood Square on a neighborhood lot that had sat vacant for 35 years. The development is anchored by Whole Foods, Chipotle and a Starbucks community store. The impact? The Starbucks Englewood Community Store has created local jobs, offers career skills and training programs for youth and supports diverse contractors. Whole Foods has engaged almost 40 different local small businesses within a 1.5-mile radius of the store. They help provide the store with products like fresh food, baked goods, herbs and cosmetics.
“CCLF’s predevelopment loan was instrumental in launching that project,” says Bob Tucker, CCLF’s chief operating officer. “We stepped up when others were skittish, filling a gap in the deal.”
The CDFI mission allows them to be more flexible in how they distribute and collect loans.
“Some people who come to us, their financial statements are on napkins in the glove compartment, so we’ll work with them over the course of years where they can get a loan and have financial statements and be able to tell their stories and get up and running,” Tucker says. “There’s no money to be made in that if you’re a bank, but that’s our mission. We’re willing to be patient and work with people like that.”
Juan Calixto, CCLF vice president of external relations, says that for those who get loans, if they need more time to pay it back, CDFIs can provide more flexibility.
“As long as the building goes up, and people are employed, we can wait. We’re not worried about securing our loans right away,” he says. “Our mission is to work with our customers to make sure their vision comes to fruition.”
Banks can’t do that because traditionally, they’re so heavily regulated. Still, Tucker says the default rate for CCLF loans is about 2 percent.
CDFIs also offer a responsible alternative to predatory lenders. Many borrowers who go to traditional lenders and get declined for a small business loan might turn to other sources of credit, typically from online lenders promising quick cash but with harsh penalties. Some of those lenders can charge up to 80 percent interest.
Starbucks has long had a partnership with the city of Chicago. It was home to the first U.S. store outside its home base in Seattle, and the company recently held its biggest-ever employee conference there in September, where 12,000 field managers came together for the Leadership Experience. In November, Starbucks will open its biggest-ever store, the 43,000-square foot Roastery on the Magnificent Mile.
“We only thrive if the community’s thriving,” says Kelly, of Starbucks. “CDFIs are a large part of the Starbucks way of adding to the community and benefiting it. We want to make sure that we are contributing to the community that we’re serving.”