Marketwise Community

Volume 5 Issue 2

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This issue of MarketWise Community provides a brief history of the formation of West Virginia Loan Fund Collaborative (WVLFC) as well as an analysis of how WVLFC members deploy capital to small businesses. The development of WVLFC and its ongoing work may serve as a model for other states to understand alternative lending activity within their borders.

The West Virginia Loan Fund Collaborative: Small Business Lending in Underserved Areas

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“I really find it rewarding to be able to assist a small business owner to get funding for their business and see the process from inception to operating a successful business — and once you are a part of that — you have a friend for life.”

Jim Gordon

Kanawha Institute for Social Action and Research 

 

Introduction

The Federal Reserve Bank of Richmond in partnership with the Claude Worthington Benedum Foundation and the West Virginia Community Hub (WV HUB) has developed a multiyear relationship with eight West Virginia loan funds to investigate credit access and deployment to rural-based small businesses. The loan funds are part of the landscape of so-called “alternative lenders,” which are nonbank lenders that extend credit or provide loans but do not hold depository accounts. Through a series of meetings that began in 2012, this voluntary group of community loan fund managers, community development financial institutions (CDFIs) and microlenders came together to form what is known today as West Virginia Loan Fund Collaborative (WVLFC).

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 (see Map 1). The eight organizations that compose WVLFC vary in organizational structure, capacity and lending focus. All of the loan funds participating in the collaborative have community-minded missions with small and microloan programs that direct their lending activities to businesses in distressed or underserved areas.


Map 1: Poverty Rate in West Virginia by County, 2012

Source: U.S. Census Bureau, Small Area Income and Poverty Estimates; FFIEC.

This issue of MarketWise Community provides a brief history of the formation of WVLFC as well as an analysis of how WVLFC members deploy capital to small businesses. The Richmond Fed’s analysis — based on an online lender survey, meeting discussions and loan fund data — found a general lack of existing industry group information about loan fund activities in West Virginia. 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.

Alternative Lending

Alternative lending is the industry term used to refer to nontraditional bank sources of credit. The players in this industry include small-dollar consumer lenders, for-profit commercial microlenders, peer-to-peer lenders, large retailers, and other alternative commercial lenders.1 These alternative lenders tend to specialize as sources of credit for microloans, which are relatively small dollar amount loans — for example, $50,000 or less — used to start or expand a small business. Alternative lenders distinguish themselves from traditional lenders in several ways, including the terms of their loans (length and interest rate), how they assess an applicant’s credit worthiness and their sources of capital to fund loans. For example, a traditional lender will look at an applicant’s credit score, financial statement, tax return and business plan before rendering a decision; in contrast, alternative lenders have been known to use less conventional measures such as real-time shipping schedules, social-media traffic and records in accounting software to qualify a loan.2

Other players in the alternative lending space are mission-driven nonprofit lenders that offer access to credit for the underserved. They typically offer other services to applicants, including business counseling and credit coaching.3 Further, unlike many of the alternative lenders who conduct business solely through an online platform, these nonprofit lenders develop long-term relationships with their clients.4 In the long run, the goal for nonprofit lenders is that their clients will be able to receive loans from traditional lenders.5

Importance of Small Businesses

Small businesses employ a large segment of the U.S. workforce, generating considerable interest in small businesses’ access to credit. The standard definition of a small business used by the U.S. Small Business Administration (SBA) is any business with 500 or fewer employees. According to the U.S. Census Bureau’s Statistics of U.S. Businesses, 48 percent of the U.S. private workforce in 2012 was employed by a small business. For West Virginia, the share is even larger at 51 percent.6  For both the United States and West Virginia, it is the businesses with fewer than 100 employees that employ the largest share of workers across all small businesses.7  Among that group, it is businesses with between one and 19 employees that make up the largest share.8

The economic success of small businesses has been touted as one strategy for ensuring the economic recovery out of the Great Recession is sustained. This success is measured by the development of new small businesses and the hiring of additional workers by existing small businesses. Based on data from the U.S. Census Bureau’s Business Dynamics Statistics, small businesses generated slightly over 2.4 million net new jobs nationally in 2012; West Virginia experienced a net gain of 9,637 new jobs.9  Despite its net jobs gain across the small business category, West Virginia had a net loss of 250 jobs for small businesses with 250–499 employees. This points to the fragility of this segment of small businesses in West Virginia given that the employee size category saw the net creation of 305,240 jobs nationally.10

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