Momentus Capital’s Senate Testimony Champions Community Advantage for Small Business Support

Momentus Capital’s Chief of External Affairs, Robert Villarreal, recently testified in front of the Senate Committee on Small Business and Entrepreneurship about improving access to capital in disinvested communities through the Small Business Administration (SBA) Community Advantage (CA) loan program. The Community Advantage pilot program was launched in 2011 to expand the points of access that small business owners had for getting loans from mission-driven financial institutions. These lenders intentionally support underestimated community members, businesses, and organizations – with an emphasis on assisting people of color, women-owned businesses, and startups.

From September 2021 to October 2022, CDC Small Business Finance (CDCSBF), a part of the Momentus Capital family of organizations, approved $37,561,700 in Community Advantage loans, far surpassing all other lenders nationwide. During this time, CDCSBF approved 253 Community Advantage loans, averaging more than $148,000 per loan. Last year, CDC Small Business Finance was also named the top Community Advantage lender in the country.

Following this success, Robert’s impetus for testifying before the Senate Committee is to make the Community Advantage Loan Program permanent. And doing so would secure ongoing federal funding to expand community entrepreneurship in the US, among many other positive implications.

Read Robert’s testimony below to learn the benefits of making the Community Advantage loan program permanent.

Watch the full hearing on at sbc.senate.gov

Dec. 14, 2022

“Chairman Cardin, Ranking Member Paul, and Members of the Committee, I am honored to testify before you today on behalf of Momentus Capital, CDC Small Business Finance (CDCSBF), and the Mission Lenders Working Group. First, I want to thank the committee for convening this hearing to discuss improving access to capital in underserved communities.

CDCSBF is part of the Momentus Capital family of organizations. Momentus Capital is a  mission-driven financial services firm that puts all of its resources into marshaling capital to support the vision communities have for themselves. CDCSBF is also the leading mission-based SBA lender in the nation. For the federal fiscal year ending on Sept. 30, 2022, CDCSBF was once again the number one SBA 504 lender (dollars) and the number one Community Advantage lender for both units and dollars.

Over its 44-year history, CDCSBF has provided over $22 billion in commercial real estate and small business loans, creating/retaining over 240,000 jobs.

I am also representing the Mission Lenders Working Group (MLWG), which I am a founding member of and which advocates and provides a voice for SBA Community Advantage Lenders. The Mission Lenders Working Group is a national network of SBA-certified  Community Advantage (CA) non-traditional small business lenders, including SBA Certified Development Companies (CDCs) and Treasury-certified Community Development Financial Institutions (CDFIs) located in urban and rural areas across the country. Members see their organizations as a coalition and stewards of the SBA Community Advantage Loan Guaranty Pilot program with a shared commitment to financing, supporting, and sustaining underserved and underbanked small businesses.

In these written comments, I will review the following:

● The origins and mission of the Community Advantage Pilot Program.

● The impacts and successes of the Community Advantage Program, as well as some of the challenges faced by participating Community Advantage lenders (industry-wide and from the perspective of  CDCSBF as a Community Advantage lender).

● How the Community Advantage Loan Program Permanency Act of 2022,  sponsored by Chairman Cardin, would strengthen the Community Advantage program.

Background on the Community Advantage (CA) Loan Guarantee Pilot: Its Origin and Mission 

The SBA Community Advantage Pilot Program was launched on Feb. 15, 2011. For the first time, the SBA’s flagship 7(a) program expanded the points of access that small business owners had for getting loans from mission-focused financial institutions with experience lending to minority, women-owned, and start-up companies in economically challenged markets along with their management and technical assistance expertise, to help make their borrowers successful.¹ This was an acknowledgment that the lending industry  needed to do a better job providing small-dollar loans to businesses in underserved communities or those classified as “emerging markets.”

The program’s goals, per the initial Community Advantage Participant Guide issued by the SBA, were:

● To increase access to credit for small businesses in underserved markets;

● To expand points of access to SBA 7(a) loans by engaging non-traditional mission lenders with experience working in underserved markets;

● To provide management and technical assistance to small businesses as needed; and

● To manage portfolio risk by utilizing the underwriting knowledge of mission lenders with successful track records lending in underserved markets.

As noted above, the critical component of the program was to expand the 7(a) program to mission lenders. The SBA defined mission lenders as falling into one of three groups: SBA-certified development companies (CDCs), SBA microlenders, and Community Development  Financial Institutions (CDFIs). The Administration understood that these lenders were best positioned to meet the capital needs of the underserved business populations not being met by traditional SBA lenders. Mission lenders have a deep knowledge of their communities,  are accountable to their communities via resident representation on their board of directors, and, as an explicit purpose and mission, assist small businesses that are located in underserved areas or are owned by women and minority entrepreneurs.

To ensure that the underserved markets were met, the SBA required that Community Advantage lenders make 60% of their loans to a designated Target Market. The Target Markets consist of the following:

● Businesses located in Low-to-Moderate Income (LMI) communities

● Businesses where more than 50% of the full-time workforce is low-income or reside in LMI census tracts

● Empowerment Zones and Enterprise Communities

● HUB Zones & Promise Zones

● New “start-up businesses” (Firms less than two years in business)

● Businesses eligible for SBA Veteran’s Advantage

● Business located in Opportunity Zones (added Oct. 1, 2018)

● Rural Areas (added Oct. 1, 2018)

Accordingly, the Community Advantage program offers access to 7(a) guaranteed lending to these institutions, which in turn increases access points to the 7(a) program for small firms who would struggle to access an SBA loan from a bank.

Since the program’s launch, there have been additional changes, which are highlighted in the attachment called “SBA Community Advantage Pilot Program Timeline” (please see attachment). Highlights include program extensions in November 2012, December 2015, and April 2022. Throughout the first several months of 2022, SBA worked with the industry in revising the Community Advantage Participant Guide, which included increasing the maximum loan amount from $250,000 to $350,000 and streamlining lending requirements. We thank and applaud the SBA for making these improvements to the program.

Impacts and Successes of the Community Advantage (CA) Program 

Since the Community Advantage pilot launched, the SBA has approved a total of $1,050,734,400 in Community Advantage loans to 7,673 businesses with an average of $139,000.

Both Community Advantage and conventional 7(a) lending fell during the pandemic as lenders shifted their focus to processing PPP loans. In FY 2020, SBA lending started to pick up, with Community Advantage lenders continuing to target a significant portion of their lending to underserved markets. In FY 2022, 717 Community Advantage loans were approved for an average loan size of $158,995, representing an increase in Community Advantage loan approval of 21%.

In FY 2022, 7(a) lenders made 47,678 loans through the program totaling over $25.6 billion for an average loan of $538,903. On April 27, 2022, Administrator Isabella Guzman’s testimony before the Committee mentioned the importance of small-dollar lending, and the 7(a) program data revealed a gap in the program’s coverage. For instance, the number of 7(a) loans of $150,000 or less declined by almost 52% since FY 2016,  and the number of 7(a) loans of $50,000 or less declined by nearly 58%. In turn, the average 7(a) loan size increased steadily since FY 2016, increasing by more than 87%.²

The Mission Lenders Working Group analyzed the SBA‘s FOIA data on the 7(a) Program and Community Advantage from FY2016-FY2022. The comparative data charts are below. While 7(a) lenders have steadily increased their lending to minority and women-owned businesses, Community Advantage lenders outpace lending to historically underserved communities. Community Advantage lenders particularly lend more to Black entrepreneurs, Hispanic entrepreneurs, and women-owned and start-up businesses based on the FOIA data for Fiscal Years 2012-2022. Of note, in the FY2020 Congressional  Budget Justification, SBA recognized that the Community Advantage program “reached significantly more women and minorities than the traditional 7(a) loan program.” ³ 

Over the last 10 years, experienced CDCs, CDFIs, and microlenders participating in the Community Advantage pilot have demonstrated their expertise, skill, and capacity as lenders and their ability to finance and support businesses that traditional lenders, including conventional 7(a) lenders,  are unable to serve. Compared to 7(a) financing, Community Advantage mission lenders have consistently and significantly outpaced lending to Black, Hispanic, and women-owned businesses as well as veteran-owned businesses and startups.

Additionally, analyzing the FOIA data from FY2016-FY2022 in a given year, most 7(a) lenders make just 20 7(a) loans or fewer.

FY 2018  

● 761 lenders (51%) made 5 7(a) loans or fewer.

● 972 lenders (65%) made 10 7(a) loans or fewer.

● 1164 lenders (78%) made 20 7(a) loans or fewer.

FY 2019 

● 766 lenders (53%) made 5 7(a) loans or fewer.

● 963 lenders (67%) made 10 7(a) loans or fewer.

● 1150 lenders (80%) made 20 7(a) loans or fewer.

We share the above information to illustrate that while some in the administration have been critical that Community Advantage lenders are doing too few loans, the data indicates that two-thirds of  7(a) lenders make less than ten loans per year. Finally, we want to remind congressional leaders and SBA that mission lenders were critical partners during the pandemic in deploying PPP loans and providing technical assistance to America’s small businesses.  CDCSBF funded nearly 6,000 PPP loans on its own for approximately $275 million. Our median loan was approximately $20,000, and we provided thousands of hours of free technical assistance. One small business client wrote to us:

‘This is the best I have been treated since I initially started this process with the banks when it all began. I am grateful for the chance to work with all of you. Even if there are no additional funds, at least I feel like I was seen.’

At the end of the day, that is what differentiates us as mission lenders; we SEE the clients that traditional lenders overlook and undervalue.

CDC Small Business Finance’s Impact as a Community Advantage (CA) Lender

CDC Small Business Finance was the second approved lender in the country, following Kentucky Highlands when the program was launched, and also had the first Community Advantage loan approved in the program.

Since the launch of the Community Advantage pilot in 2011, CDC Small Business has been “all in” as a Community Advantage lender and advocate for the program. Through the conclusion of the last fiscal year-end  (Sept. 30, 2022), CDCSBF had funded 1,277 Community Advantage loans for $178 million in loans to underserved businesses. These Community Advantage loans resulted in over 4,800 jobs being created and preserved.

CDCSBF is only one of two California lenders that has a national license, which has allowed us to provide loans at a wider scale. While the majority of our lending has been in the state of California, we have provided loans in 27 states and the District of Columbia. This also includes 12 loans in Maryland for just over $1 million, and 75% of these loans went to entrepreneurs of color.

Being a Community Advantage lender with a national license has allowed us to reach more underserved businesses and to collaborate with local partners, including other mission lenders, utilizing the SBA technology called Lender Match, which connects small businesses to lenders. This is one of the better SBA programs applying the use of technology to serve small businesses, and we applaud SBA for the program and its upgrades over the years.

I am also proud to report that over 38% of CDCSBF’s Community Advantage loans have been to entrepreneurs of color, even though SBA does not identify this as an Underserved Target Market per the pilot program. Overall, 65% of CDCSBF’s Community Advantage loans have gone to businesses in an SBA-designated Community Advantage Target Market (the minimum requirement is 60%), with the majority of our loans going to enterprises that have been in business for less than two years. In fact, nearly 40% of our Community Advantage loans are to pre-revenue businesses (pure start-ups), which is a category of businesses that traditional financial institutions, including conventional 7(a) lenders, are reluctant to lend and for which we have developed a deep understanding and an ability to underwrite.  I would also note that most non-traditional financial technology companies (fintech) do not lend to pre-revenue start-ups, as they rely on data-driven underwriting to evaluate borrowers, and start-up ventures, particularly underserved entrepreneurs, cannot provide that data.

The Challenge for Community Advantage (CA)

CDCSBF and MLWF supported the changes introduced earlier this year to the Community Advantage Program.  We worked with the SBA to implement changes that speed loan processing and the delivery of capital to underserved communities. Reforms included:

● Extending the pilot program for two years (to Sept. 30, 2024).

● Removing the temporary moratorium on new Community Advantage Lender Participation Applications.

● Granting delegated authority to all Community Advantage lenders.

● Modification to Lending Criteria to simplify and streamline underwriting and approval of Community Advantage applications, including authorizing the use of business credit scoring models.

● Modifying regulations to provide equitable access under SBA programs and economic opportunities to justice-involved individuals.

● Increasing the maximum Community Advantage loan size from $250,000 to $350,000.

● Revising fee methodology and maximum interim rate to encourage greater lender participation in the Community Advantage Loan Program.

● Revising collateral requirements to increase the speed capital being delivered to small businesses while decreasing overall costs to the Community Advantage lender and borrower.

● Allowing revolving lines of credit better to meet the evolving capital needs of small businesses.

● Revising the requirements for hazard insurance.

● Simplifying affiliation principles.

These reforms were important and appreciated by the industry. In fact, since the loan size was raised to $350,000, CDCSBF has Approved 20 loans over $250,000 for $6.4 million. These loans will create 93 jobs, and 16 of the loans were to businesses less than two years in business. In addition, seven have been to veterans, and nearly two-thirds to other underserved communities.

However, there is a need for continued reforms and changes to the program to increase lending by current Community Advantage lenders and encourage new lenders into the program. First and foremost is the program’s extension beyond the current two-year sunset of Sept. 30, 2024. The multiple extensions of the program, over different administrations, along with changing operating rules, have made it problematic for lenders to commit to the program.  No large for-profit financial institution would tolerate such programmatic changes. Yet, mission lenders are expected to continue to reach the hardest to serve and adapt to the changing rules, which are more restrictive than other 7(a) lenders.

Some additional reforms, improvements, suggestions, and clarifications include:

● We believe it imperative to have SBA’s full support for Congressional action to make the Community Advantage a permanent program.

● The Loan Processing Center still holds these small loans to the $350K+ standard underwriting SOP requirements – this is a burden and unnecessary for the small loan size, for example.

● Access to the Federal Reserve Discount Window: During PPP, SBA-approved lenders, including non-depository institution lenders, were eligible to participate in the PPPLF.  This included SBA-qualified PPP lenders, banks, credit unions, Community  Development Financial Institutions, members of the Farm Credit System, and small business lending companies licensed by the SBA. This would be an excellent option for so many lenders that need access to capital for the Community Advantage program.

● Loan Loss Reserve Requirements: Chairman Cardin’s legislation, the Community Advantage Loan Program Permanency Act of 2022, outlines significant improvements and clarity to the Community Advantage program. Many of the 110+ Community Advantage lenders have been active since June 2011 and have a proven track record of managing the  Loan Loss Reserve Requirements.

● Lender policy does not require Life Insurance for these small loans – but the Loan Processing Center won’t accept that explanation and requires underwriting to justify.

● Community Advantage lending is very story-based underwriting – explaining why the  poor credit history occurred, how it is improving, and why it makes sense to give  them a chance – But the Loan Processing Center seems to still focus on FICO score  and any event of collection account, delinquency and pushes back, regardless of  story explanation, and implies “lack of reasonable assurance of repayment.”

● Projections and Breakeven – Center still expects “historical” three years for existing businesses even though these are small loans.

● Business Personal Property (BPP) insurance – we justify not requiring BPP on some small loans when the use of proceeds is not for FF&E and/or Tenant improvements, and the balance sheet does not have significant assets to be replaced, and in each case, we get push back to add the BPP insurance – seems like it is just an  Authorization template mindset – not taking into consideration the information for each credit.

● A reduction in the minimum Community Advantage program SBSS Score – from 140 to 130.

● The ability for Community Advantage Lenders to provide 100% financing for all types of use of proceeds. Meaning that for start-ups, no 10% required equity injection, and for Change in Ownership, no required equity injection. The rationale behind this is not that the borrowers are unprepared to start or run a business, but rather that the monies they have saved be left in their hands/control as available liquidity for unforeseen events/bumps in the road.

● Community Advantage Program Credit Elsewhere – eliminate credit elsewhere test for Community Advantage lenders or, at a  minimum, clarify and ease the burden associated with satisfying the test. Community Advantage lenders are already required to target underserved markets and underserved businesses which do not have access to traditional financial resources.

As discussed above, the Community Advantage program fills a critical gap in access to financing of up to $350,000 for entrepreneurs in underserved communities. By allowing experienced,  mission-oriented lenders to utilize the 7(a) loan guarantee, the SBA is promoting access to the affordable capital and technical assistance that mission-based lenders like us need to launch and expand and uplift our nation’s economy.

The Community Advantage Loan Program Permanency Act of 2022

CDCSBF and the MLWG commend Senator Cardin (and Representative Chu’s bill in the  House) for exemplifying true leadership and commitment to small businesses with the introduction of ‘The Community Advantage Loan Program Permanency Act of 2022,’ which seeks to codify and strengthen the Community Advantage (CA) Loan Guarantee Program.  The bill recognizes the need to institutionalize mission lending as part of the SBA’s mission  to “aid, counsel, assist and protect, insofar as is possible, the interests of small business  concerns.”

This bill would create permanency for the Community Advantage program, which has operated as a pilot program since 2011, and expands the program to cover both economically and socially disadvantaged small businesses, including those owned by women and people of color, and requires a minimum threshold of 70% of loans made in these target markets by Community Advantage lenders. It would also require SBA to provide technical assistance and training to mission lenders by existing, seasoned non-profit mission lenders. We also know that data is critical to understanding the successes and areas for improvement. The bill’s requirement of weekly reporting as well as annually to Congress on the program’s performance, including demographic data disaggregated by racial subgroups, is an essential tool.

Furthermore, the legislation codifies the Network Partner model to expand the reach and benefits of Community Advantage lending into more underserved markets without necessarily increasing the number of Community Advantage lenders. CDCSBF has some modest experience working with the previous version of the partnership model (Community Advantage Associates), and the  Network Partner model, as presented in the bill, is an improvement on the previous model.

Additional features of the legislation include the ability to graduate a Community Advantage lender into a 7(a) loan with ease when the business borrower is ready – and this continues to build a pipeline of bankable businesses in underserved markets and, at the same time, frees up Community Advantage lenders capital to make new loans to unbanked businesses. The legislation further identifies that a  covered institution is not eligible to receive delegated authority from the Administration under the program until the covered institution has approved and fully disbursed not less than ten loans under the program and the Administration has evaluated the ability of the covered institution to fulfill program requirements.

We know that small businesses are the backbone of the U.S. economy, yet many entrepreneurs need access to safe, responsible capital. Unfortunately, research from the Federal Reserve Bank found that 62% of surveyed small firms were denied or discouraged from seeking the financing they needed to grow or maintain their business.⁵ These small firms reported low credit scores and insufficient credit history as the main barriers to credit access.⁶ The Small  Business Administration and its programs and partners help entrepreneurs overcome these barriers by providing business coaching, lender referrals, and guaranteed lending programs.

Mission Lenders understand that Community Advantage is the only SBA program enabling small-dollar lending intentionally targeted to small businesses in underserved communities, including low-to-moderate income (LMI) areas, rural areas, veteran-owned businesses, and start-ups. With the steady decline of community and small bank branches in recent years, CDFIs and other mission lenders play an important role in ensuring that small businesses are included. Without the Community Advantage program, many underserved entrepreneurs would be left unable to secure the financing they need to create and sustain jobs and contribute to a vibrant Main Street economy.

Granting this successful pilot program authorization under the Small Business Act will provide lenders with the assurance needed to invest in the necessary staffing and systems to maintain and grow their Community Advantage lending portfolios. This assurance will enable Community Advantage lenders to bolster their Community Advantage activity just as lending to small businesses overall, particularly to traditionally underserved businesses.”

Are you looking for a working capital small business loan? Visit the SBA Community Advantage loan page to apply.

Footnotes:

1. SBA, “Community Advantage Pilot Program,” 76 Federal Register 9627, Feb. 18, 2011; and SBA, “SBA Announces New Initiatives Aimed at  Increasing Lending in Underserved Communities,” Dec. 15, 2010.
2. Memo from U.S. House of Representatives Chairwoman Nydia Velazquez on the Full Committee Hybrid Hearing: “SBA  Management Review: Office of Capital Access.”
3. U.S. Small Bus. Admin., FY2020 Congressional Budget Justification and FY2018 Annual Performance Report (2019).
4. On Oct. 1, 2018, the SBA expanded the underserved market definition for Community Advantage to include rural areas.
5. https://www.fedsmallbusiness.org/medialibrary/fedsmallbusiness/files/2018/sbcs-nonemployer-firms-report.pdf
6. https://www.fedsmallbusiness.org/medialibrary/fedsmallbusiness/files/2018/sbcs-nonemployer-firms-report.pdf