A new system of bundling and reselling small-business loans is funneling millions to companies owned by women, people of color, immigrants and others who are often excluded from the financial system. Community development financial institutions – known as CDFIs – focus on small loans of $5 to $250,000 sometimes even if the business has not started turning a profit.
Brett Simmons, managing director at Scale Link, said the nonprofit buys loans from CDFIs and bundles them for larger banks looking to meet requirements under the Community Reinvestment Act.
“Any CDFI, after they originate a loan, they have to wait for repayment before they have new capital to lend. And we help them get that capital back faster by purchasing loans from them. So, that frees up new cash to lend. And then we also help them generate new revenue by packaging some of those loans together and selling them to banks.”
This secondary market is expanding. Since Scale Link launched in 2020, it has purchased 731 loans made by CDFIs to California small businesses, worth more than $14-million.
Sara Razavi, CEO of Working Solutions CDFI, said her group focuses on helping businesses that have a hard time getting financing from traditional banks that prefer to deal with larger, more established companies.
“They’re just low-income individuals who have limited credit profiles and have been designated by banks as being less likely to pay back, but we have an over 95% repayment rate,” she insisted. “So, the quality of our portfolio is extremely strong.”
Nationally, Scale Link has purchased more than 2,800 loans worth $43-million and has donated $4.4-million in profits back to the CDFIs.