Efforts are progressing in Kern to establish a local financial institution that would help an underserved part of the county’s economy by providing small loans to young and very small businesses that often struggle to get the financing they need.
At least three entities, including the Community Action Partnership of Kern, have expressed interest in starting what is called a Community Development Financial Institution, or CDFI. These entities are usually organized as a non-profit association with the mission of serving a specific segment of the population, such as minorities or the poor.
One question that has arisen is how many CDFIs the local market can support. Two CDFIs based outside the zone already operate in Kern, but the feeling among participants in the county’s B3K economic development initiative is that a locally based institution can offer unique advantages.
An additional consideration is what type of business advice any new CDFI should provide to unsophisticated borrowers, or whether this type of support is best handled by an outside organization specializing in such services.
While several options exist locally for businesses to apply for financing, there seems to be a consensus that more should be done to provide startups and very small businesses with loans of around $ 5,000 to $ 50,000. Traditionally, commercial banks and credit unions do not offer loans to such small businesses because they are labor intensive and not necessarily profitable.
B3K, a 14-month large-scale initiative for Better Bakersfield & Boundless Kern, prioritized the creation of a local CDFI after reviewing data showing that although Kern residents ranked first in the regions Comparable American companies for starting a business, the county placed last per share of startups that survived the past nine months.
The group concluded that one of the main contributing factors was that young entrepreneurs in the region often could not find the capital they needed to get started.
A leader of B3K’s entrepreneurship task force, local businessman and investor John-Paul “JP” Lake, said CDFIs may be the best way to fill this gap. They tend to focus on under-represented groups, he noted, and they are structured to work around borrower’s lack of collateral and sometimes low credit scores.
As the group explores avenues for forming a CDFI, they have identified alternatives that include setting up a pioneering organization that could be endowed with capital to establish a lending history. Lake said some of that money could come from one or more banks acting as sponsors.
Another strategy under consideration would generate revenue through the sale of special tax credits. Lake suggested that this type of income could be reinvested in a revolving loan fund dedicated to local small businesses.
Another member of B3K’s entrepreneurship task force, Nick Ambrosini, who is chairman and CEO of Bakersfield-based Valley Strong Credit Union, said more than one group is considering starting a local CDFI. But because the resources for such an endeavor are limited, he said, those involved are confident that only such an organization will ultimately come out of the effort.
The county’s small business community clearly needs it, he said in a statement.
“There is a general lack of access to capital for entrepreneurs and start-ups,” he said.
The director of the Bakersfield-based Valley Republic Bank agreed and took steps to remedy the situation by hiring someone to focus on using the institution’s new underwriting center to provide loans from $ 10,000 to $ 65,000, which he says remains below commercial banks’ traditional floor of $ 100,000 per loan.
President and CEO Geraud Smith said the bank has made microcredit a priority after examining data showing that 85% of Kern companies make less than $ 1 million per year. This, combined with the belief that local lenders can better meet the needs of the community, suggests to him that there is a need to be met.
“I think there is a pretty big need for a new entrant” in the local market, he said.
CAPK wonders if it should be this entrant – and is working with a Chicago-based consultant to find out.
Director of Administration Pritika Ram said an assessment due to be completed this fall will examine the need for a CDFI in Kern and, assuming sufficient demand exists, what kind of services it should provide.
In addition, the study will examine the organizational requirements demanded by CDFI and to what extent CAPK could meet them.
“Maybe they’re not micro-loans. Maybe they’re medium-sized loans,” between $ 50,000 and $ 250,000, she said.
Lake, of the B3K task force, said two other organizations were exploring what it would take to launch a CDFI, but declined to name them.
Fresno-based CDFI Access Plus Capital has been operating in Kern for three years and offers loans of up to $ 500,000. Founded in 2008 and now active in 14 counties across California, it has partnered with the city of Bakersfield to help provide grants and loans to small businesses affected by the pandemic.
Ana Medina, director of business development and services for the association, said local relationships are important, and she noted that two of CDFI’s employees live in Bakersfield. She said the organization is still working to meet the needs of Kern County.
Informed of B3K’s interest in promoting the creation of a local lender, Medina said it would be important to decide early on what type of CDFI the group is looking for. She noted some loans only to specific industries.
“What will this CDFI (locally based) focus on? she asked.
As B3K pursues its goals, she said, it can be helpful to reach out – even to her organization – as it explores what the new CDFI should specifically aim to accomplish.
“It would be important,” she said, “to talk to each other and say, ‘OK, where is the need? What need are you not currently meeting? “