How to protect small businesses caught in the wake of the Silicon Valley Bank collapse  

When you hear “Silicon Valley,” you probably think of venture capitalists, tech startups, and wealthy figures like Bill Gates and Mark Zuckerberg. So you might be under the impression that the Silicon Valley Bank (SVB) collapse is a “Silicon Valley problem” – something only the most privileged have to worry about.

It is not. The impact of the SVB’s failure could impact the economic well-being of our most underserved communities. But there is a way to prevent this damage. Democrats and Republicans should join forces to create a national charter for Community Development Financial Institutions (CDFIs) to help them better support and protect entrepreneurs in historically underserved communities in both rural and urban areas.

Similar to but not identical to banks, CDFIs were designed to provide ease of use in underserved communities where people may not have as much experience with traditional banking. These financial institutions bridge this gap by offering competitive capital options, often coupled with technical business planning assistance and other advisory support programs.

A national CDFI charter simply means the establishment of a federal lending license for these institutions. It would achieve two main goals that would allow small businesses to grow and thrive in underserved areas.

First, it would allow chartered CDFIs to provide mentoring, liquidity, and the necessary operational and technical support to smaller CDFIs that provide such tremendous direct customer service to their local communities.

Second, it would allow chartered CDFIs to easily provide credit in areas of the country where CDFIs do not exist, without bureaucratic government licensing and exceeding compliance costs. The charter process would take into account compliance and risk capacity to ensure that only eligible CDFIs that meet the required thresholds receive such a charter. Thresholds may include, but are not limited to, minimum capital values; loan portfolio size; number of states in which ongoing lending takes place; multi-year credit plan volumes; and the referenced operational, technology and compliance standards.

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After the collapse of the SVB, policymakers are busy discussing ways to avoid similar situations in the future, considering tighter regulations and statutory regulations for regional and local banking systems. And given the existing collateral constraints and other underwriting challenges, small business owners in traditionally underserved communities (particularly minority communities and low-income areas) could be significantly hurt by these headwinds.

While most small business loans come from traditional financial institutions, CDFIs play a particularly important role in supporting entrepreneurs in underserved communities.

The Treasury first established a CDFI fund in the 1990s, but their performance during the pandemic has certainly highlighted the beneficial role such institutions can play.

CDFIs have secured their place as an integral part of an efficient financial system, delivering tens of billions of dollars to the underserved in urban and rural areas, providing more than $25 billion in financial assistance in 2020 alone.

The CDFI industry generates up to $12 in private capital for every $1 received from the CDFI fund and serves as an efficient force multiplier for economic development.

For example, through 2021, this fund funded nearly 700,000 small and micro businesses, created or sustained more than 2.5 million jobs, and supported the development of housing and community facility projects.

CDFIs have proven to be valuable tools for underserved entrepreneurs. It’s time they were given the tools they need to continue being force multipliers for underserved communities. A national charter (especially for non-depository CDFIs) could be very helpful here.

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There is an urgent need to secure and sustain active and efficient lending in underserved communities. As leaders of the bipartisan CDFI Caucus, Sens. Mike Crapo (R-Idaho) and Mark Warner (D-Va.) have made it very clear that they support CDFIs in their efforts to “scale their operations and encourage more lending in the low – and middle-income communities (LMI).

The SVB bankruptcy shows that there is no time to lose. If lawmakers want to enact reforms that reach beyond Silicon Valley, they need look no further than the CDFIs.

Ja’Ron Smith is the former White House director of city policy. Chris Pilkerton is the former Acting Administrator of the US Small Business Administration. They are the authors of the forthcoming book UNDERSERVED: Harnessing the Principles of Lincoln’s Vision for Reconstruction for Today’s Forgotten Communities.

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