How a Digital Marketplace Is Disrupting Small Business Lending

Many small business owners do not have access to financing, leaving them vulnerable to predatory lenders. A digital platform powered by Mastercard is making it easier for them to secure CDFI funding.

When small business owners go shopping for a loan, they often find themselves walking through a Range of online borrowing options – cash advances, credit limits and different types of loans. While many promote their products as fast and convenient, they often come with high costs and confusing terms.

Non-bank online lenders are a growing source of financing for small businesses. Traditional banks are not always an option, especially for minority entrepreneurs who are Turned down for loans at twice the rate as white business owners. And the more mission-driven lenders that can help often fly under the radar, because their marketing budgets aren’t nearly as robust as some of the more predatory programs.

community reinvestment fund (CRF) is working to change the game of online lending. The Minneapolis CDFI launched Connect2Capital five years ago. In essence, the digital platform brings all the products offered by CRF and its peer organizations under one digital umbrella. Connect2Capital then uses a unique algorithm to match business owners with CDFIs and other mission-driven lenders. Once connected with a lender, small business owners continue to receive help from Connect2Capital as they prepare applications and go through the underwriting and closing processes.

In creating this marketplace, CRF didn’t reinvent the wheel. There are a number of existing platforms that match businesses with funding opportunities, but are not necessarily mission-driven lenders. The platform also solves a huge problem for CDFIs. Much of the success of CDFIs depends not only on their ability to raise money, but also on how effectively they can get money to the people who need it.

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“We realized that there really wasn’t a platform that was providing that kind of service for small businesses that was focused on non-profit community lenders that provide support and technical assistance to businesses, and that was comparable to fintech. offer better value and more flexible loan products in the U.S.,” says Patrick Davis, senior vice president of strategy at CRF. “Our whole idea was how do we get in front of predatory lenders. We want small businesses to be aware that there are other, more responsible products available to them.

In addition to connecting small business owners with lenders they might not otherwise find, the platform takes a lot of the legwork out of the process for CDFIs – ​​enabling them to process more loans and serve more entrepreneurs. Initially, CRF and its partners lent $7 million through Connect2Capital. Loan volume exceeds $300 million from more than 110 lenders across the country – serving mostly diverse small businesses. In 2021, nearly 70% of businesses served through Connect2Capital were owned by BIPOC, women, veteran or LGBTQIA.

The platform started with funding from several national banks and financial services companies. The Mastercard Center for Inclusive Growth, the company’s philanthropic hub, was an early supporter of Connect2Capital, providing a significant grant to improve and grow the platform during the pandemic.

“Platforms like Connect2Capital speak to the enormous opportunity to tap into some of the same technologies and innovation powering fintech that aims at least for small businesses,” says Sandy Fernandez, VP, North America, MasterCard Center for Inclusive Growth. To expand access to cheap capital. ,

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After securing the funding, CRF faced its biggest hurdle: getting buy-in from other CDFIs.

“We had a really hard time getting other CDFIs to see the vision and join the platform,” Davis says. “The first two to three years were really tough, and frankly we didn’t gain a lot of traction.”

Then COVID-19 hit.

The pandemic was devastating to many small businesses, especially those owned by entrepreneurs of color in low-income neighborhoods. In response, many government funds flowed into the CDFI sector. PPP loans and local and regional small business resilience programs. However, while CDFIs were relationally perfectly positioned to distribute funds, many were not technically well prepared to handle the volume. Many people turned to Connect2Capital for help.

“All that federal money needs to find a way into the hands of very small businesses that typically aren’t able to get financing from banks,” Davis says. “We were manufacturing this equipment for many years before COVID. It was perfectly fit to respond to the crisis.”

was one of those shows Southern Opportunities and Resilience (SOAR) Fund, which used the Connect2Capital platform to host its applications. SOAR directed $61 million in loans originated from 13 CDFIs to help small businesses in 11 southern states recover from the pandemic. About half the loans went to black-owned businesses.

Ascending SOAR was a beneficiary of the fund. The New York-based CDFI expects to make a total of $20 million in loans this year, according to the lender’s CEO, Paul Quintero. But as of mid-November, they had already serviced more than $35 million in loans, mostly to small business customers.

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Quintero attributes the volume to his presence on Connect2Capital. ascendant joined Connect2Capital around 2019, but in the wake of the COVID-19 pandemic the platform has seen a significant increase in activity.

“The platform and program helped us reach out to small businesses, and this is a big challenge for us,” Quintero says. “The pandemic unleashed the platform’s full potential.”

Connect2Capital will continue to expand in 2023 through its partnership with Mastercard. The platform’s growth was a catalyst for launching MasterCard. Strive USA, which will expand Connect2Capital and partner with other innovators to build on CDFI’s digital capability to deploy tens of billions of dollars in affordable capital to entrepreneurs across the country.

“CDFI has demonstrated how their combination of capital and technical support can meet the credit needs of small businesses, especially in challenging times,” says Fernandez. “As small businesses continue to face a wide range of challenges, Strive USA is bringing together resources and innovation across the philanthropic, public and private sectors to create a more robust small business support ecosystem.”

Christopher C. Williams is a freelance financial writer based in New Jersey. He worked for many years with Dow Jones Newswires and Barron’s Financial Weekly, and contributed to several publications, including The Wall Street Journal, The New York Times, and Essence magazine. He focuses on the intersection of business, economic equity, and racial justice.


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