West Virginia Loan Fund Collaborative Case Study

Note: The quotes contained in this case study were originally published in the Richmond Fed’s Marketwise Community Volume 5, Issue 2, “The West Virginia Loan Fund Collaborative: Small Business Lending in Underserved Areas.”

I. CDFI Partnership Genesis and Structure

The West Virginia Loan Fund Collaborative (WVLFC) is a peer group of mission investors focused on small business lending that are headquartered in and serving the state of West Virginia. This collaborative started without any strict strategy or funding. It emerged from a November 2011 meeting on rural capital organized by Community Development staff from the Federal Reserve Bank of Richmond in collaboration with the West Virginia Community Development Hub (WV HUB) and the Claude Worthington Benedum Foundation, both of which had community development expertise in the state and an interest in alternative lending as a strategy for investing in rural West Virginia.

When the partnership of the Richmond Fed, WV HUB and Claude Worthington Benedum Foundation organized the first meeting on rural capital in November 2011, they did so to learn more about small business lending in West Virginia. They started with several assumptions in mind. The first assumption was that the loan managers of the various funds were familiar with each other and possibly already working together with certain clients. The second assumption was that the loan funds were funding constrained and needed additional capital to meet the needs of their current and future clients. The final assumption was that the organizations with loan funds were located primarily in high population areas of the state and that their lending was clustered within these same areas. Using a mix of survey responses, meeting discussions and loan fund data, this case study will discuss below how these assumptions were proven false.

At this first meeting, participants provided details about their loan fund, lending activity and funding sources. There was also a wider discussion about current opportunities and challenges and the future of rural lending. It was during this wider discussion that the participants saw an opportunity to become more organized as a group, including meeting regularly, expanding participation to additional funds as needed, prioritizing a statewide approach, developing a consistent message and recognizing the need to work collectively. Multiple meetings were convened in 2012; by 2013, the group began to formally call themselves the West Virginia Loan Fund Collaborative with two formal meetings per year that rotate in various locations across West Virginia.

WVLFC members vary by organizational structure, programs and lending focus, but all had specific lending activity in West Virginia. The oldest fund in the collaborative began originating loans in 1988, while the youngest began in 2011. Only three out of the eight organizations are certified CDFIs. One organization was a certified CDFI but found it unnecessary to renew its certification to support its lending activity. Another organization is exploring the idea of becoming a certified CDFI. In its early meetings, others also came, including interested representatives from the Small Business Administration (SBA), the  Small Business Development Center (SBDC) and a regional bank.

The Richmond Fed continues to convene the WVLFC at least twice a year, offering programming, facilitating shared learning and acting as a data partner for the collaborative. There is no formal legal structure for the WVLFC. It is considered a peer learning group and has no justification for dedicated staff or a legal structure.

II. Goals and Achievements

The goals of the WVLFC were to better understand the role and impact of mission-driven small business lenders. West Virginia provides an interesting study of rural capital deployment because the state is hard to serve on several fronts. It is a mountainous state with low population, high poverty and many distressed and underserved areas. When small business lending activity in West Virginia is examined at the county level and compared to other geographies across the United States, the National Community Reinvestment Coalition (NCRC) found that all counties in West Virginia could be considered small business lending “deserts.”¹

Understanding capital needs and default rates is also important. When the WVLFC was first analyzed, the members’ pools of funds for loans ranged from less than $1 million to close to $10 million. At the time of the data collection in July 2014, the majority of the organizations still had funds available to lend. In addition, those funds that reported an overall default rate for their loans have default rates that are well below the national average rate of 12 percent estimated by SBA for its microloan program in 2007.

Another goal was to create a strategy that addressed the difficult climate for small business credit access in West Virginia. Using a combination of private sector (Community Reinvestment Act (CRA)) and public sector (Small Business Administration and CDFI Fund) lending activity data, every county in West Virginia fell in the lowest quintile for access to loans. These results suggest a challenging environment for small business credit access in West Virginia. A potential strategy to overcome access issues is to seek credit from nontraditional sources. This was one of the driving forces that motivated the creation of a lending peer group in West Virginia.

To assess lending activity in the state, each fund participating in the WVLFC voluntarily submitted their active loan portfolio data to the Richmond Fed for mapping. Three rounds of mapping were conducted using data from 2012, 2014 and then 2017. Although it was “point in time” mapping, the goal was to see what trends or patterns were visible when the loan data from all of the funds was combined into one map. For 2012, which included loans active as of March and June of that year, the Richmond Fed received information on 293 loans totaling $20.1 million. For 2014, which included loans active as of March and July of that year, 372 loans were geocoded and mapped totaling $28 million. In the latest round of mapping in 2017, the collaborative was up to 647 loans and $45.1 million in active loans. The map on page 33 shows the zip code location of each active WVLFC loan as of 2017. This map conveys the presence of small business loans in all reaches of the state, which was a surprisingly expansive coverage of loans given the state’s challenging topography and very low population density in certain regions. Two strong areas for small business loans were visible, which were around the city of Beckley (Raleigh County) and the Mid-Ohio River Valley (Wood, Jackson, Wirt, Roane, Pleasants, Ritchie and Calhoun counties, generally).

The WVLFC has achieved much of what it set out to do. It has gained a better understanding of three primary items:

1. The lending impact of the core group of mission lenders in the WVLFC;
2. The geographic coverage of the overall lending (i.e., how well spread out and comprehensive their collective loans are in the state); and
3. The amount of credit and capital that the collaborative has put into the West Virginia market to support small business.

The WVLFC has also achieved the goal of building a strong peer network where the loan funds in the Collaborative refer business to each other, partner on loans and help each other with technical issues. The overall assets of the WVLFC are also growing due to their success over time.

III. Financing and Nonlending Activities

Each fund in the WVLFC is independent, there is   no shared professional staff and there is no shared financing resources like a loan loss reserve fund. Each organization has an individual business model, separate sources of capital and varying years in existence and professional staffing. When it makes sense to collaborate by partnering on a loan, the fund managers generally know which funds to call to make an inquiry. This is an offshoot of the peer learning that the WVLFC brings to the funds. However, these referrals are entirely done on a case-by-case basis. If a loan fund is working with a business client and cannot serve their needs but they think another fund might be able to, they will readily refer that client along to another member of the WVLFC if it makes sense to do so.

Building a stronger referral network for clients to be served by alternative lenders has always been essential to growing the pipeline of activity for loan funds. These nonlending activities come down to educating bankers, economic developers, small business development offices and others. In West Virginia, the WVLFC has made a conscious effort by way of its collaboration to build a stronger referral network in the group and engaging a broader audience of people and organizations who serve small businesses.

With the WVLFC members, nonlending activities are done on a case-by-case basis. For example, if a fund manager is working with another fund to serve a client, the two providers may overlap in the technical assistance support. In broader learning, the loan funds share information as needed on their business models; for example, fund managers may talk with each about whether or not it is worth the effort of getting certified by the U.S. Treasury as a CDFI, or if becoming a SBA preferred lender is worthwhile and in what ways.

IV. Impact and Assessment

Prior to the WVLFC, there was no organizing body tracking the funds’ type of lending or maintaining a directory of funds and where lending was targeted. Staff members from the different loan funds did not regularly engage with one another. Once loan fund lending activity was mapped by the Richmond Fed as part of the engagement with WVLFC, it became apparent that small business loans were being deployed in all reaches of the state, including several “hot spots” of loan activity. Finally, the analysis revealed a need for educating traditional financial institutions about the work of alternative lenders and the opportunities for collaboration. The development of WVLFC and its ongoing work may serve as a model for other states to understand alternative lending activity within their borders.

Since the inception in 2011, the WVLFC has mapped its loan activity in, roughly, two-year increments. The loans active in 2012, 2014 and 2017 were mapped. This gives the WVLFC some information on total loan activity, geography of the loans and from which funds the loans have originated. The data are submitted voluntarily by each fund, and while not scientific, help lay out some trends. Over this small window of time, there has been growth in loan activity and loan deployment, as well as an increase in overall lending capability. The Federal Reserve Bank of Richmond manages the collection of this loan information and mapping. The Richmond Fed’s Marketwise Community Volume 5, Issue 2, “The West Virginia Loan Fund Collaborative: Small Business Lending in Underserved Areas,” outlined the data and history of the WVLFC so that the funds had a way to share information about the Collaborative and communicate more consistently with internal and external stakeholders.²

V. Challenges, Opportunities and Leading Practices

The loan fund managers see multiple challenges to continued loan fund lending in West Virginia. One challenge is the clients of the loan funds — the entrepreneurs themselves. There is concern about the weak level of entrepreneurism around the state. Dave Clark of Woodlands Community Lenders states, “In general, I think W[est] V[irginians] continue to be pretty risk averse. Encouraging entrepreneurship continues to be [a] struggle.” Another challenge mentioned was the staff turnover both on the loan fund side as well as at traditional financial institutions. Carol Jackson of the Mid-Ohio Valley Regional Council said that it has been a challenge“[w]orking with local banks with a revolving door in commercial lenders. Just when I get a good relationship with one, they accept a promotion and move out of state to [a] bigger bank.” On the loan fund side, there will be the loss of experienced community development lenders as well as county Economic Development Authority (EDA) directors, which, according to Marten Jenkins of Natural Capital Investment Fund, will “require an infusion of funding for staff development and marketing and outreach at a time of diminishing resources to support efforts of this nature.”

The other challenge mentioned in a variety of forms in the loan fund managers’ survey responses deals with business development services and technical assistance. The importance of these services was mentioned earlier when discussing the keys to lending success in the hot spots of activity. Jenkins wrote, “Lack of funding for business development services such as the [WV SBDC] make putting together good loan packages a challenge, particularly in rural markets.” Another response mentioned the impact of technical assistance on start-up businesses. Dan Reitz of the First MicroLoan of West Virginia commented, “There is also a clear lack of SBDC resources in our particular service area. The State can’t seem to find qualified SBDC  agents and we see less and less help for the start-  up[s]. One of the three [tenets] of the SBDC program is assistance to start-ups, which seems to be of little or [no] importance to the SBDC [in] our service area.” The significance of this challenge may be best summed up by John Reger’s response that “[t]echnical assistance and business coaching are vital to the success of small business borrowers.”

Having a reliable, third-party convener and manager of the Collaborative is a practice that is necessary for these types of lenders. Bringing together a collaborative group such as the WVLFC is a challenge. CDFIs are usually understaffed and hard pressed to  find the time to act as a convener and data  aggregator. They are expert at compiling data on their own funds, but to take up the responsibility of doing that for a group of lenders would be taxing on any one organization, and it would present trust issues in other funds sharing this data. An organization like the Federal Reserve has the capacity and is viewed as an honest broker.

The WVLFC does not have a strategic plan at this point but could possibly embark on such a project in the future. The primary challenges of the WVLFC include deciding when and how to integrate new funds into the Collaborative in a way that maintains reliable loan assessment and mapping consistency. One of the ongoing challenges for mission-based lenders is nurturing a referral network on the ground and working with local bankers to understand how to partner with their funds and understand these funds are not in competition with traditional lenders; rather they want to fill the gaps where banks are unable to lend.

The longevity of the WVLFC will come down to maintaining value in the peer network. The WVLFC will never need to be disbanded since the members meet voluntarily and without any resources going to the collaborative. If a third-party convener like the Richmond Fed, the Benedum Foundation or the WV HUB can no longer manage the group, it may voluntarily stop meeting.