Small businesses play an important role in society by creating and sustaining jobs for local people and supporting local economic activity. This is especially true in left-behind communities, which have been the hardest hit by the COVID pandemic. Yet many sustainable small businesses in these communities cannot access mainstream finance and remain underserved. Community Development Finance Institutions (CDFIs) are one solution to this problem and have a social mission to serve these groups.
In 2018, Big Society Capital invested £30 million in the Community Investment Enterprise Facility (CIEF) to provide capital to four CDFIs. This investment and the government guarantee scheme have leveraged a further £30million loan from bank lenders into these CDFIs. During the COVID pandemic, these CDFIs have stepped up to deliver loans backed by the government guarantee scheme and support these small businesses.
Taking a look at progress
We are pleased to announce two recently published reports from Sheffield Hallam University that take a closer look at the recent progress made by the CDFIs supported by the CIEF. These are part of the longitudinal evaluation that we commissioned from Sheffield Hallam University’s Centre for Regional Economic and Social Research (CRESR) to explore the social and economic impact of CDFI lending through CIEF. The first report highlights the role these CDFIs played during the pandemic. The second report is the CIEF second-year evaluation report and its companion impact dashboard.
Supporting small businesses through the pandemic
During the pandemic, because of the lockdown and social distancing measures, the capital and liquidity needs of small businesses increased. CDFIs played an important role both by supporting existing CIEF borrowers through their client-centric approach and by delivering the Government’s Coronavirus Business Interruption Loan Scheme (CBILS), and later the Recovery Loan Scheme (RLS). The reports highlight a few achievements from the CDFIs in the CIEF portfolio during that period:
- Scaling up lending: In the second quarter of 2020, at the start of the pandemic, the CDFIs rapidly increased their lending capacity, deploying nearly three times more loans and four times more capital, compared to the first quarter of 2020, to respond to small business' lending needs
- Key enabling support from the government guarantee scheme: Over £29 million of CIEF loans made under the CBILS guarantee
- Close client support: Thanks to their relationship-based approach to lending, CDFIs offered repayment holidays or changes to their terms to 48 per cent of existing loans to help their borrowers survive. 77% of restructured loans returned to full repayments
CDFIs lending to deprived areas and underserved small businesses
The second-year evaluation report of CIEF highlights the key role CDFIs are playing in lending into deprived areas and to underserved small businesses
- Through CIEF and matched investment leveraged from Triodos and Unity Trust Bank, the four CDFIs made 524 loans to 481 small businesses, totalling £35.65 million from January 2019 until December 2020. This also attracted co-investment of £12.3 million from other investors. Overall, these small businesses in receipt of CIEF loans employed 4,070 people
- More than 50% of loans were made in the bottom 40% of most deprived areas in the UK and close to a third were made in the bottom 20%
- CDFIS are reaching underserved businesses that are not served by the mainstream banking system: close to 40% of the loans approved had been rejected from other sources of finance in the previous year. This is much higher than for small business loans generally, for which only 22% of loan applications are unsuccessful
- CDFIs are reaching a more diverse range of small business founders. For example, 18% of loans were made to female-lead applicants (compared to a UK average of 15%) and 12% to applicants from Black, Asian and ethnically diverse backgrounds (compared to a 5% average)
Subsequent reports will dive deeper into the financial performance of the CIEF loan book, the impact of CDFI lending on the growth and resilience of small businesses (supported by the CIEF) and seek to better understand the long-term impact of CDFIs on left-behind communities.
CDFIs’ potential for economic development
These findings demonstrate the potential of CDFIs in playing a key role in the development of economically deprived places, including in the ‘levelling up’ agenda. The scale of the investment needed to deliver on levelling up is overwhelming. But by working with the private sector, it is possible to considerably leverage the public money available to improve peoples’ lives in left-behind places. CFDIs are a proven mechanism that enable private investment to flow into deprived areas. A scale up of CIEF together with a long term, predictable guarantee scheme and direct government support to promote the growth and development of the whole CDFI sector would allow CDFIs to magnify their impact in left-behind places.