Community Chest for the Credit-Starved : Finance: A consortium of 52 banks will establish a $100-million development fund to make loans to small businesses.
In what is believed to be the largest effort of its kind, a consortium of 52 California banks has agreed to establish a $100-million community development fund to make loans to small businesses that have been unable to get credit elsewhere.
The Community Economic Development Lending Initiative, or CEDLI, is intended to address one of the nagging problems of small businesses statewide: the lack of readily available capital, particularly for companies with limited cash flow or equity.
The coalition’s member banks--including such giants as Bank of America, Wells Fargo and First Interstate--agreed Thursday to go forward with implementation of the project, which has been in the planning stages since September, the Federal Reserve Bank in San Francisco said.
“As the state slowly lifts itself from a long recession, this lending partnership will arrive at a crucial time by helping to expand small business and community economic development and create more jobs,” said Robert T. Parry, president of the San Francisco Fed.
Organizers of the project hope to begin accepting applications in early 1995. The goal for the first year is to make 175 loans, said Jerry Bowman, a Los Angeles-based Bank of America executive vice president and vice chairman of CEDLI.
CEDLI is modeled on a similar program that has been making loans to rehabilitate low-income housing. “It’s the largest program of this type ever created . . . “ said W. Gordon Smith, a vice president with the Fed in San Francisco. “And the complexity of this is also unprecedented.”
There have been other efforts to develop so-called multi-bank community development corporations, or CDCs, in the past, particularly in the wake of the Los Angeles riots. Most have been capitalized at between $1 million and $5 million, Smith said. In Los Angeles, banks funded a $10-million Southern California Business Development Corp. after the riots.
But while some of CEDLI’s programs will be targeted at minority businesses and inner-city or impoverished communities, its overall goal is broader: boosting the entire state’s lackluster economy, Bowman said.
Though the announcement of the program came on the eve of the second anniversary of the riots, that unrest had nothing to do with the project’s inception, Smith said.
Apart from its size, CEDLI will be distinctive in the types of programs it offers. “We hope to . . . take the $100-million loan pool and leverage it into $300 million to $400 million in credit availability,” Bowman said.
There will be four major initiatives:
* Co-lending. Participating banks will bring CEDLI their marginal loan applicants--those who don’t qualify under normal credit criteria. The bank will finance half the loan, and CEDLI will put up money for the other half under more favorable terms and with longer payout periods. The program reduces the risk to the bank and allows the applicant to get a larger loan than otherwise possible.
One thing the program will not do is lend money to would-be entrepreneurs for start-up companies. “That would be venture capital, and that’s something entirely different,” Bowman said.
* Loans to lenders. CEDLI will lend money to other community development corporations or nonprofit organizations, enabling them to make more loans themselves.
* Loan purchase program. CEDLI will buy loans held by such community groups, again freeing them to make further loans.
* Direct lending. CEDLI will lend to community organizations such as child-care centers, churches and food banks that don’t have access to traditional bank credit.
The project is the brainchild of Parry and John Trauth, executive director of the San Francisco-based Development Fund, a nonprofit group that has worked on affordable-housing issues. Richard Hartnack, vice chairman of San Francisco-based Union Bank, chairs the task force developing CEDLI.
The banks will kick in various amounts, depending mainly on their size. The largest chunk, $30 million, will come from Bank of America. In addition to the $100-million loan pool, CEDLI has been capitalized at $10 million in the form of foundation grants and other money.
The project is modeled in part on the California Community Reinvestment Corp., a $225-million loan pool to finance affordable housing.
James Johnson, outgoing director of the UCLA Center for the Study of Urban Poverty, viewed the announcement with skepticism, noting that other lending programs have yet to produce substantial economic development in impoverished communities such as the riot-affected parts of Los Angeles.
