cdc small business finance reviews

cdc small business finance reviews

Analyzing the Impact of CDC Small Business Finance on Small Businesses: A Comprehensive Review

1. Introduction to CDC Small Business Finance

While many have suggested that small businesses generate more than their share of net new jobs, the indirect effects of small businesses (how much larger businesses create compared to small business growth impacts) continue to be debated. What is not debated is that the spillover effects of small business growth are unequaled. While small business growth may not cause net job creation, instances of net job creation universally occur in the small business sector. There are no exceptions to this. The distribution of business forms found within the small business sector is diverse; the vast majority of firms are private for-profit enterprises. Public sector employment data show that small businesses represent up to 90% of employer entities, for a variety of classifications. The number of firms with fewer than 500 employees is much larger than the number of firms with 500 or more employees in urban and rural areas, employing more workers within the industry. Every state has a significant aggregate of jobs in the small business sector, with the number one hiring industry in every state being less than 100 formally classified employer entities.

CDC Small Business Finance provides loans to small businesses that engage in activities expected to produce positive social impacts. To understand whether CDC impacts small businesses as intended, a comprehensive review of CDC small business finance data was conducted. Non-parametric comprehensive tests of impact were used to understand the relationship between the credit provided to small businesses and census and community survey outcome data. The rates of small business survival and job creation are highly correlated with the credit supplied by CDC, and these two variables are the criteria that are most highly correlated with CDC credit.

2. Methodology for Reviewing CDC Small Business Finance

II. Evaluation Methodology The methodology for evaluating the performance of CDC’s own 504 loans was chosen in order to provide meaningful, substantive information. Our belief was that, while credit scoring analysis works with minimal cost and effort, the results would not be informative when the analysis covered a closed portfolio of loans that had all been deemed good credits. To generate meaningful evidence concerning program success, it was necessary to identify critical issues that could be studied, to provide objectives for comparison, and to analyze efficiency, effectiveness, and potential improvements. The findings may seem self-evident in that credit scoring is inappropriate. After explaining the chosen methodology, we provide a brief review of the credit scoring literature. Finally, we see if CDC loan performance is consistent with the literature, and we find that it is at most only marginally consistent with it. Since the stage of the loan cycle is more important, our results suggest that the current stage of the business cycle may have an important influence on the apparent lack of risk in CDC loans.

I. Introduction This review was the result of a comprehensive effort by Western Economic Services to interview virtually all small businesses that had received loans from CDC Small Business Finance during the time period 2000-2006, gathering a nearly perfect response rate. There were three main goals of the evaluation. The first was to survey these businesses and gather data on the overall performance of our borrowers and job growth. The second was to determine the impact of technical assistance programs offered by CDC on business success. And in recognition of the SBA’s recent emphasis on program outcomes, the third and most important goal was to gain an understanding of the direct effects that the SBA 504 loan program has on the performance and success of our borrowers. As the introduction to this report describes, CDC’s success is important and it must be demonstrated to secure support for the SBA 504 loan program. Our objectives were to offer recommendations to improve the performance of our loan program as well as to provide evidence for decision makers concerning the success of 504 lending, and issues that should be addressed if changes are to be made in the way the program is structured and administered.

3. Key Services and Programs Offered by CDC Small Business Finance

To be eligible for the services and financing provided by CDC Small Business Finance, a business must be for-profit and must have tangible net worth not exceeding $16.5 million and annual profit after tax not exceeding $5 million. Businesses must use the CDCNM Flexible Program for fixed assets and must have potential for job creation and/or preservation. Borrower’s owner/assets personal net worth limitation cannot exceed NA or $16.5 million. It should be noted that ineligible businesses include non-profit organizations, retailers (who primarily sell goods or provide services), passive investments or investment in real estate, businesses looking to purchase single-purpose structure or specialty facility space, gambling or speculative investments, and those who are excluded from SBA Programs as per federal laws and regulations.

At the core of CDC Small Business Finance’s business model is the CDC New Markets (CDCNM) program, which provides borrowers with below-market interest rates. The funds from the capital structure are lent to business enterprises to foster job creation and economic development, with the goal of revitalizing low-income communities throughout the organization’s California, Arizona, and Nevada markets. As a CDFI, CDC Small Business Finance is positioned not only to offer non-government financing but also to be an assistance provider, providing technical assistance in underwriting which the small businesses they serve might not have access to elsewhere. Aside from the financing products that have made them a financial leader in CDFI markets, CDC Small Business Finance has also been active in providing the SBA 504 loan program, as well as programs like the Access to Capital Lending (an SBA 7a microloan program) and the CDC Entrepreneur Loan (EDA RLF).

CDC Small Business Finance is a community development financial institution (CDFI) that provides a myriad of services and products to underserved markets in California, Arizona, and Nevada. The CDFI’s small business and sustainability financing products support urban and rural businesses in low-income communities within these three states. With loan products ranging from $10,000 to $15 million, CDC Small Business Finance addresses the needs of businesses in various stages. Operating within these states since 1978, the CDFI has been active in providing services to a broad range of industries. Key industries served by CDC Small Business Finance include child care, grocery stores, manufacturers, professional service providers including healthcare providers, entertainment, and retail businesses. Over the years, the CDFI noticed an increase in the number of services provided to healthcare providers, a finding that is aligned with national trends in terms of patient demand and anticipated growth in the number of healthcare providers needed to serve the U.S. healthcare system.

4. Case Studies and Success Stories of Small Businesses Supported by CDC Small Business Finance

In conclusion, the small business development efforts presented by this study reflect the dedication, motivation, and assets of the enterprises and the small business development organization, CDC Small Business Finance, in successfully supporting the assessed enterprises. Implications presented include the importance of motivation and being an opportunity seeker as the enterprise development engines. Information, capital, space, process support – whatever the enterprise needs, the small business development organization must have it available. Also, the literature reflects the entrepreneur’s need for opportunity and business development support. However, few in-depth case studies are available to present the small business development organizations’ capacity or support roles. The authors of this study believe that CDC Small Business Finance has the capability, as shown in the paper, to enhance the promotion of its small business development organization model. This is important to assist small business development organizations in providing an increased range of or enhanced level of support, understanding of enterprise capacity, and further expand their positive impacts on entrepreneurial asset ownership and economic development contributions.

Case Study 3: IFC Logistics – While docked in the Port of San Diego, a service company you owe one call to is IFC Logistics. The company primarily ships fish and tuna to the Far East. In receiving related international logistic support, IFC selected Canan College students to conduct a research project. Laina Walker, interning with the International Business Development Center, was assigned the project. She and her classmates did searches on about 25 countries the company could do business with. Her team ultimately narrowed it down to eight. The company representative is confident that they capitalized on all Walker’s findings.

Case Study 2: Battleship Adventure Park and Events Center – Lyndsay Blankenship started the mission to build Battleship Adventures Park and ever since she has worked her way up. In 1997, Lyndsay visited the Maritime Museum to support her mother’s obsession with the tall ship the Californian. And now, 19 years later, Lyndsay and Scott have purchased tickets for their entire staff to do the same. In between these trips, they were able to start and expand their successful business, currently located in a warehouse, thanks to the extensive assistance from the San Diego MBDA Export Center.

Case Study 1: Melodic Brewing – In 2012, Will came to Orange Incubator to refine his business plan but was still lacking a crucial piece to get his business off the ground. The brewing equipment he had refined was too large for his small plan; he needed a smaller 3 barrel brewhouse. In steps Orange Incubator Director Vincent Vasquez, working with Bradley’s lender Frank Altamirano, the deal was sealed with the Small Business Administration (SBA) 504 loan.

This section summarizes some case studies and success stories of small businesses supported by CDC Small Business Finance. The cases and stories reviewed in this section were taken from the reported successes section of CDC Small Business Finance and are meant to provide diverse examples of entrepreneurs that CDC Small Business Finance has supported. They are not meant to be generalizable or statistically representative of CDC Small Business Finance supported businesses. These are meant to portray businesses supported by CDC Small Business Finance that have succeeded against the odds and are now contributing to the economic base of their communities, creating jobs for people, and providing businesses with goods and services.

5. Challenges and Opportunities for Improvement in CDC Small Business Finance

The challenges we discuss could be addressed by interventions governing CDC Small Business Finance (SBF) and interventions flowing from the involvement of other capital market participants. In general, other sources of capital could be better targeted to meet the needs and potential of the types of business opportunities CDC SBF funds and technical assistance services serve. This issue of targeting, which has been perplexing for federal policy concerns, is of the essence. Can policy develop and implement targeting mechanisms for CDC SBF funds that are decentralized, reciprocal in related and regional entrepreneurs and boost the effectiveness of other sources of local business financing?

Policy interventions could address targeting by strengthening policy initiatives that align externalities or accommodate task complexity. In evaluating the effectiveness of SBIC regulations for one state, we encounter the recurrent problem of demonstrating the added value of one of many entities and what the policy story of the start-up, concept of product demonstration period implies for managers. Enterprises should be able to retain (or develop) unique management, technology demonstration, information screening, alliance transition management, and product positioning capabilities.

Furthermore, CDC SBF should complement other forms of minority, gender and age targeted capital obligations from pension funds and financial institutions; such obligations must have established the terms for prioritizing diverse entrepreneur networks as yield (rather than risk) loss or risk lends and balance pricing and underwriting criteria. Those efforts are ongoing and are likely to bear fruit in the fullness of time. The Community Reinvestment Act is a consistent enforcement vehicle. Such interests can best be met by redefining economic profitability, and by introducing this expanded definition into capital market criteria and evaluation standards. They will be responsible for performance measures that define effective, results-oriented public investment. They will also need to identify further measure refinements, building on the rating efforts that guided the original, pluri-dimensional risk instrument designs. Under the Public Investment Act, these rating systems can apply to all Certified Community Development Organizations and Accredited National, regional entities and other partners.