Owning a small business offers creative freedom, flexibility and the personal satisfaction of following your dreams. And for many minority business owners, the prospect of giving back to, working with and investing in communities of color is worth the challenge entrepreneurship entails.
But there can be significant financial risk in launching a business, especially for minority business owners, as the pandemic has shown. Many small businesses, particularly those in communities of color, were already experiencing financial fragility prior to the COVID-19 crisis, making the prolonged economic effects of the pandemic even more challenging to operating a small business. It typically takes anywhere from three to five years before a business becomes profitable, meaning most entrepreneurs run on very thin margins for several years after starting an enterprise. Lower cash flow, along with the underlying systemic challenges faced by underrepresented groups, can make it difficult for minority business owners to access the credit needed to operate or scale their business long-term.
While there’s no quick fix, financial institutions must do their part to help make accessing business credit more equitable for diverse businesses. That’s why TD Bank has worked for many years with Community Development Financial Institutions (CDFIs) to provide access to capital when the bank could not directly underwrite a loan. TD also recently announced the establishment of a $100 million equity fund in support of minority-owned small businesses, demonstrating its continued commitment to combat racial inequities and provide opportunity in underserved communities.
The fund provides small business loans and technical assistance through work with CDFIs and Specialized Small Business Investment Companies (SSBICs). Pending Small Business Administration approval, $75 million of the capital will be funded through an SSBIC initiative. SSBICs provide financial assistance to disadvantaged businesses that are minority-owned, women-owned or are in areas of need. The remaining $25 million is earmarked for Black- and Latinx-owned small businesses to obtain funding through CDFIs.
“CDFIs have close ties with the communities they serve and are notably skilled in securing financing for minority-owned small businesses,” says Mike Carbone, Regional President for Metro PA/NJ at TD Bank. “Working with CDFIs will not only ensure the capital gets to the small business owners that need it most, but it will also contribute to job creation, stimulate economic development and revitalize these vibrant communities.”
The goal of CDFIs is to broaden economic opportunity among low- to moderate- income and/or minority communities by providing alternative options for capital and financial services. Among the ways they do that:
- Less rigorous requirements: CDFIs can approve loans and extend credit to borrowers when mainstream financial institutions can’t, due to underwriting requirements.
- Low-cost capital: Many CDFIs offer lower interest rates, allowing small business owners to owe less over time. And they often offer fixed rates, which allow for predictable payments, a true benefit during a pandemic when uncertainty continues to loom.
- Business Resources: CDFIs also offer technical assistance and other supports, like accounting, legal, human resources, general advice or even help writing a stronger business plan. The idea is to help small businesses sustain, adapt and grow long-term.
Each CDFI is different and may work with different groups (some are specifically women or minority focused, for example), so business owners should research the possibilities by visiting the Treasury Department’s CDFI Fund website or the Opportunity Finance Network page.
To learn more about TD Bank’s $100 million dollar equity fund, click here. And for insight on starting a new business or growing an existing one, visit TD’s Small Business Resource Center for tools and resources.