Small businesses account for almost 98% of Colorado’s businesses and employ almost half of the workers in the state, according to the U.S. Small Business Administration’s Office of Advocacy. In the construction industry, over 80% of Colorado workers are employed at small firms.
It can be challenging to connect those businesses with adequate capital. Community development financial institutions (CDFI) are a collaborative effort between public and private financing to promote economic development, especially in low-income communities. There are 15 such institutions in Colorado, many of them dedicated to creating affordable housing options.
For example, Funding Partners for Housing Solutions in Fort Collins provides financing assistance both for would-be homeowners, and for developers building affordable housing. The Mercy Loan Fund works in 39 states, including Colorado, to collaborate with socially responsible developers and finance single- and multifamily residences for low-income people. CDFIs work where traditional lenders can’t or won’t, extending credit, financial services and education to underserved populations.
“In a perfect economy, CDFIs don’t exist, really, because most folks can either fund [their business] themselves or they just go to a standard bank,” Alan Ramirez, director of lending at the Colorado Enterprise Fund, a CDFI based in Denver, told Colorado Builder. “Something is wrong with the deal that is causing them to come to a CDFI.”
It could just be that their business is too new to secure a traditional loan, or they don’t have the collateral to support a loan, he said. Things like divorce or a past bankruptcy can impact a small business owner’s credit score and make it hard to secure traditional funding.
“That’s where we step in to provide that loan. We take a little bit more risk to get that access to capital,” Ramirez acknowledged.
To mitigate that extra risk, CEF supports borrowers through technical assistance and business coaching, including finance, business operations, marketing and even legal assistance.
“Capital is one part of the solution, but operating efficiently is truly the silver bullet,” he said.
CEF’s business coaching is available throughout the life of the loan, and is available at no cost to the borrower. Funding comes from individual donors, financial institutions, government agencies, foundations and other nonprofits.
About 8% of the firms supported by CEF fall into the construction sector. The fund loaned about $810,000 to construction firms in 2017, with an average deal size of $54,000, Ramirez said. The fund has 34 active loans in its portfolio, totaling about $1.3 million.
Most of the loan requests the fund receives are for existing businesses rather than to start a new business. “The majority of the funds are being used as working capital” or for equipment, Ramirez said. Just 2% of all CEF’s borrowers default on their loans, Ramirez said. “Typically, when people are starting over, and we have a lot of that, they recognize when people are taking a chance on them.”