Cascadia Revolving Fund
by Lynn Adler and Jim Mayer
Producers of Faith, Hope and Capital
don't we first talk about the causes of poverty in this region.
Pacific Northwest shares one characteristic with most areas of the country,
and that is that most counties have female head-of-household rates of
poverty that are shockingly high--30-50%. But there's also some sources
of poverty peculiar to the region. One peculiarity is that in the past,
the economy of the Pacific Northwest really consisted of timber and
the fishing industries. Today, those are beleaguered industries, becoming
much less part of the mainstay economy. It's happening in a relatively
short period of time, so the transition to a new economy is very difficult
for very large groups of people.
once said to us that the role of CDFIs was to reform the economy and
revolutionize the monetary system.
I think the goal is no less grand a conception than that. Now it seems
a little silly to talk in those terms when you're talking about a nascent
movement, which is struggling with very basic issues of how to do this
endeavor. But, I really think that CDFIs are the key to opening up tremendous
opportunity to a lot of people who are left out of the economic mainstream.
It's such a hackneyed phrase, but I really think that's exactly what
we're doing. I think the goal of CDFIs is to provide that initial foothold
that somebody can climb a mountain from--enough money to make your idea
fly. It just doesn't exist anywhere else and that's the whole idea of
CDFIs--to provide the nuts and bolts and the frameworks for support,
so people can make it over the long haul.
want to get to what the difference is between a CDFI and a bank. I mean,
how do they operate differently? What makes CDFIs sort of unique?
it's not necessary to be a bank-basher to draw the distinctions. I was
a commercial lender for four years. Some of the most important things
I know I learned from bankers who are really good at what they do. I
think bankers are underappreciated. But, they don't do what CDFIs do.
They are not in the business of trying to create entrepreneurs. The
difference is illuminated by what a CDFI looks at when they look at
a potential borrower and what a bank looks at. And primarily what a
bank looks at is historical performance. Well, CDFIs can't look at historical
performance, or if they do it's a little scary and they want to run
the other way. They have to look at future possibilities. So, we lend
on the future. Banks are, very reasonably, lending historically. Remember
they're taxpayer insured, and CDFIs are not. And we're funding raw
material. We're funding people who don't bring any assets to the operation.
Theres no wealth among their family and friends, so there aren't
a lot of comforting stashes of cash on which to fall back if there's
a cash flow bump, as there is often with our CDFI borrowers.
so given that reality, I'd think it would be impossible and you'd all
be going down the tubes.
I thought so in the very beginning, when I first started looking at
possible borrowers, business borrowers, as a lender. I was terrified
for about 18 months. And then I started working out the different characteristics
of potential successful CDFI borrowers. It's a totally different class
of characteristics, and you really learn how to recognize different
things. CDFI lenders begin to look at a company when banks are forced
to stop looking, for the most part.
you say that the mission, then, of an organization like Cascadia differs
from the classic mission of a bank?
absolutely. The conscious mission of a for-profit institution has to
be to maximize shareholder value. And in a bank there are classic borrowing
needs that every banker realizes. But, the repertoire of skills that
a loan officer in a CDFI needs is totally different from the repertoire
of skills that I needed as a commercial loan officer. We start looking
at financial statements when a banker in a regular commercial bank has
to stop. I remember when I first joined Cascadia, we had a loan officer
who brought the first four or five applications to me, and I thought
she was kidding. I absolutely thought she was kidding because I had
no grounds on which to judge whether this applicant would be successful
or not. All my moorings from my commercial banking training, said "Oh,
red flag red flag, red flag!" on every single factor. So, it's a totally
different technical enterprise, and its a completely different
repertoire of skills, completely different.
get back into this business of banks, how Cascadia for example, differs.
a classical economist can see that there's a reason why CDFIs choose
a nonprofit structure, and that's because the support that's usually
given to entrepreneurs is a very expensive effort. And you don't want
your CDFI institution to be trying to maximize profit... that would
mean withholding labor costs. And that's exactly what we shower upon
the entrepreneurs. That's really a critical component because, you know,
most entrepreneurs don't have the luxury of making too many mistakes,
and in the CDFI industry there's not a lot of capital to correct mistakes.
So, you want to have experienced people helping slightly inexperienced
entrepreneurs not make the classic mistakes that would cause them to
you would say that that's really a big reason for the success of CDFIs
is this relationship, what people call technical assistance?
it's not just the provision of technical assistance. It's creating a
relationship with a borrower so they're very comfortable picking up
the phone and saying, "I'm failing, I'm not going to be able to pay
you," and trying to convey the honest reasons why that's the case. I
mean, that's a very unusual relationship to have with your banker. A
banker is an official of a bank that needs to protect its shareholders.
So they're not often in a position to do what is in the best interest
of the borrower. Its not in the best interest of the bank when
those interests collide, as they often do with CDFI borrowers.
nonprofit entities. That's one of the things that make high risk, new
entrepreneurs more appropriate borrowers of CDFIs than banks. The major
goal of CDFIs is to keep those entrepreneurs in business. That's what
I consider the major goal--keep them in business. Even loss rates don't
describe what CDFI business lenders are really after. Because you can
lose not much money at all and still have a failure rate among your
businesses of 80%, and still, because of collateral and other reasons,
not lose any money. Well, that's not successful. You want to look at
loss-rates, of course, because you're financial institutions, but you
want to look at business continuation rates. And those have been strikingly
high too. We've achieved about a 90% rate over ten years. That's pretty
good when you look at most businesses in the country--maybe as high
as 80% fail in the first three to five years of operation. So, what's
the difference? The difference is, with a CDFI you've got somebody who's
partnering with you and trying to solve problems and look after your
business. The institutional needs of the CDFI are consonant with your
needs. They're the same; they're not different. You're not going to
have the clash of interests from business to organization.
sort of assuming that you take more risks, CDFIs take more risks. Is
think that's the duty of the CDFI industry to hone their skills so they
can recognize what exactly are the components of risk in a company that
doesn't qualify for traditional bank financing. Remember the banking
industry in the U.S. is supported by tax payer insurance, and the banking
industry can't finance the same group of companies that the CDFI industry
can finance. I think the whole notion that the CDFI industry is a social
service activity is a great disservice to the industry. We do character
lending, but we also have a very solid technical component to the lending
we do. There are lots and lots of people that I would have loved to
have helped, based on their character, but just knew, based on their
business ideas and their financial projections and the state of the
economy, they would fail. And it's not a favor to anybody to set someone
up to fail.
you think CDFIs take enough risk in their lending? I mean, it sounds
like they're very successful.
I don't think CDFIs take on enough risk at all. In fact, most of the
business lenders in the country have a social service perspective, and
they're afraid to lend large amounts of money. There's almost an ideological
component to their lending that they hide behind... thinking that you
can only lend $500 or $1500 to an entrepreneur to start a business.
And I just think it's ridiculous to think, in America, that you can
lend somebody $1500 and expect them to create a business that's going
to support a family. I mean, the average loan size of the business lending
at Cascadia has grown to $40,000. Well, plunking down $40,000 for someone
is a very different effort from lending them $500, which they could
repay from a second job. We're not about helping somebody with expanding
their hobby into more pin money. We're about helping poor families create
wealth. We want whole families and multiple groups of families to be
supported by these businesses that are started. And there just aren't
very many businesses in the American economy that can achieve that level
of scale on credit extensions of $1500. It's just not possible.
should maybe say a little word about the fact that despite this difference,
the loss rate among CDFIs is actually pretty low.
loss rate is surprisingly low, even among business lenders who don't
have large chunks of collateral, as housing lenders do. Loss rates still
approximate 1%, which is comparable to the best-run commercial banks.
Now, I think there's a whole set of reasons why that's the case. I know
in our case, one of the major reasons it was true for many years was
because, we could not afford to lose any money. We were a real grass
roots movement. We had no money to lose. We were in the same boat as
our borrowers. But, I think it's really the duty of CDFIs to get financially
stronger, and to put all that money at risk, at true risk in the hands
of their borrowers. A CDFI business lender lavishes attention on a borrower
compared to what's possible for a commercial lender, and it helps them
not make fatal mistakes. Lots of people make classic, classic mistakes
in their first two or three years of operation. There are ten or fifteen
classic mistakes that people tend to repeat, and can't anticipate. And
it's really the role of the CDFI lender to point it out before it becomes
a fatal mistake.
CDFIs taking enough risk?
I don't think they're quite financially strong enough in all cases.
But even given that, I think they're not taking the risk. I think it's
the very essence of CDFIs that they assume the risk that nobody's willing
to assume right now. The banks can't assume it; they're taxpayer insured.
The borrower isn't able to assume much risk because of lack of wealth.
So, who's going to assume the risk? It's just going to be a continuing
stone wall. It's going to be a continuing impediment to getting poor
people included in the economy, unless somebody steps forward and says,
"Okay, I'm willing to lose the money here." And, my goal was always
to raise enough funds so that we could lose a lot of money if we had
to lose a lot of money. I mean, I would've been delighted to have very
high loss rates. We didn't happen to have very high loss rates, but
then our ability to do unsecured loans was pretty restricted because
the number one priority was to get this grass roots movement sort of
whipped into shape as a sustainable institution. But, the constant acid
test is, you want to be a sustainable institution, but you want to be
an institution that takes a lot of risk.
seems to be a great interest among banks in doing community development
lending. I mean, almost every week in the paper there's some new huge
amount of money going somewhere. What do you think their motivation
is and how would you say that differs from what you guys are up to?
I think their motivation is the fact that the administration has begun,
over the past years, to put real teeth into the Community Reinvestment
Act. And the banks want to have a good CRA rating so they won't be forbidden
to open new branches or merge. I think that's the primary motivation.
And banks have a very important role to play in this industry.
seems that there are more and more partnerships now with CDFIs, and
I'm wondering how that will affect risk-taking.
think it should encourage the risk taking, because the risk-taking endeavor
is segregated from the bank. The CDFI provides the services to the bank--the
CDFI acts as an incubator for the bank. You know, when I was a commercial
lender there were lots of people I saw that I would have loved to lend
money to, but it was just an unreasonable thing to do in a banking environment,
where you have to get your money back, 99% of your money back. Now CDFIs
have achieved those kinds of loss rates recently, but I think it's due
to a combination of factors, including not assuming enough of the risk,
because they weren't financially able to assume enough of the risk.
are obviously people within the CDFI movement industry who don't subscribe
to this position.
yeah. You know, everybody wants to do well while doing good. And the
industry as a whole has posted really remarkable loss rates, about 1%.
But, then if you look at the business continuation rates, the borrower
continuation rates, they're lots less lustrous. People want the industry
to have no blemishes. They want you to be able to invest your money
and get it back with a return too, and nobody squanders it and nobody
loses it. And that's just unrealistic over the long haul. I think CDFI
movement has to be strong enough to withstand the losses that they must
take to get truly the poorest of the poor into the economic mainstream.
You have to look at housing different from business lending, too. It's
a good idea for a CDFI, if they can do it, to combine housing with business
lending because you can balance risks. Housing lending just isn't as
risky as business lending. You don't have everything on the line. You're
not lending directly to poor people; you're usually lending to intermediary
organizations. Boy, that's going to make me popular!
you think the overall goal of the CDFI movement should be poverty alleviation?
I think it's wealth creation. I think the goal of the CDFI movement
is wealth creation among people who don't have any wealth. And that
wealth can be increasing your net worth either through paying off a
mortgage or adding to the net worth of a business you start. You know,
there are so many collateral benefits to successfully paying off a mortgage
or having a stake in the community as a business owner. People tend
to pay more attention to their community, and they're able to give their
families more, and they don't use as many services. They become tax
yeah absolutely. Well, I think some of the mechanisms of the economic
system are brilliant and useful. There are a few impediments that have
kept poor people from using them very effectively. You know, I worked
for United Farm workers as a boycott organizer early on. I think that
was incredibly important to me because I don't have the attitude of
a social service worker come to minister to the poor. I mean, I really
think poor people have what it takes to do this incredibly difficult
thing of starting and sustaining a business. And that kind of trust
is necessary to being successful in this business. When we first started,
we were handing our organization's entire financial net worth to an
entrepreneur on an unsecured basis. Well, you don't do that if you think
they're going to not be capable of it.
you think CDFIs are big enough now to achieve their goals?
it's ridiculous to even think so. This is just the beginning of the
movement, and I think it's the duty of the CDFI industry or movement
to get big enough to make a difference. Were not anywhere near
that. I mean, we're not even close. But, that's okay, because the groundwork
that's being laid is very difficult groundwork. We have to figure out
how to do this in a lot of ways, especially in business lending. It's
really uncharted terrain. It's not easy stuff to do. There's a really
important technical component. First you have to learn what's classically
possible, and then you start learning what's CDFI possible. It takes
a long time; it takes a long time to teach other people how to do it,
and it takes a long time to accumulate the capital to be able to do
it. Its a very odd thing. We're not talking about feeding the
hungry, or clothing the naked, or housing the homeless. We're talking
about being an intermediary. We're talking about giving somebody the
tools so they can do that for themselves. You'd be surprised, but it's
a very difficult connection for people and the general populace to make.
how do you think it will make it easier for people and the general populace
to make this connection?
being successful, you know, telling stories. It's the fuel that keeps
us going in the CDFI industry. It's the little successes you have along
the way. Most of the 150 loans that Cascadia has made are really pretty
were talking about losing more money. Whose money should be lost?
I think that one of the most exciting structures that a CDFI can take
is a structure that combines two types of money--money from people like
you and me, or organizations that lend to the CDFI. This is money you
expect back. That's a very important chunk of money to have. But, also
the second type of money you need is money that belongs to you as the
CDFI. That's your equity money, and you don't spend it in operations.
You have a duty to reach break even. You can break even, I think, in
this industry, on operations. That leaves all the money that's your
net worth available to cover losses. So, the more net worth you have,
the greater risks you can take in your portfolio. That's an incredibly
important type of money to have. And of course, balancing how much of
that money you have with how much investor money you have is part of
the technical component of running these very different financial institutions.
where does all this equity money come from?
think one of the most powerful sources of donations can be individuals.
Lots of people are attracted to supporting CDFIs because they intelligently
put their money to work. The whole support system to help somebody succeed
at a very tricky endeavor is there. It's not just writing a check and
hoping they do fine. You write a check to a group that provides the
support services so it maximizes the chances of success for the entrepreneur
over the long haul. I think that's proven to be tremendously attractive
to people, as soon as they understand the mechanics of what's happening.
Of course, understanding the mechanics of what's happening is not often
because we're not feeding the hungry. We're doing something a little
more difficult to understand. And
the Federal CDFI Fund's chunk of money--a small amount to the government
but large to the CDFI industry--is just that type of equity money.
clear there have been groups that have delightfully taken big risks
in lending, but some people have lost a lot of money.
is definitely a tricky subject with at least two sides, which are polar
opposites. You want to take a lot of risk, but you don't want to take
stupid risks. Some CDFIs have not been well managed because they don't
understand the types of risks they are assuming. Actually, I get up
on my soap box and talk about how we need education about our specific
repertoire of skills so we can guard against this unwitting taking of
risk. Helping someone fail quickly just doesn't help anybody, any poor
person. I mean, an entrepreneur puts all their time and all their money
and all their energy and all their self-esteem into making this plan
work, and when it doesn't work it doesn't help anybody's self-esteem.
That gets back to a point I think is very important-- CDFIs need to
judge themselves very severely in terms of entrepreneurial success.
We cant throw up our hands and say, "Well if this business failed
that's okay because somehow self-esteem accrued to this entrepreneur
who failed." I just don't buy it. A lot of people buy it in the industry,
and I absolutely don't buy it. Nobodys self-esteem was ever helped
by failing in a project like that.
thing that has come to mind--when you read the paper you see that there
seems to be this incredible amount of wealth in the country. I mean,
every day there are people getting richer and richer. But, on the same
token there's also the flip side. Do you think that CDFIs can really
have an impact on this flip side?
I think CDFIs can be the bridge between the haves and the have-nots.
I think the opportunities for the poor are becoming more and more restricted.
Taking the long road of getting an education and having your children
become educated is very laudable and seems to work. But, there's a shorter
cut which is, to assume risk so people can get access to profits through
their own efforts right away. I think that's a very exciting and viable
the general populace is skeptical that there really is a large class
of people who can succeed when barriers are removed for them. I don't
think they believe that. And I think that's one of the things the CDFI
industry has proven, that yeah, we have lots of welfare moms who suddenly,
with $7,000 to $25,000 bucks are supporting themselves and going back
to school. That's a pretty exciting thing, and it's not a very expensive
thing. I mean, to us it's a very expensive thing because we're a grass
roots movement that's never had government support, never had healthy
foundation support. And 25,000 bucks strikes fear in our hearts to lose
it. But time and again the people we've chosen to back have proven that
they can do it. And, that's an exciting strategy for really doing what
this country says it stands for, which is creating opportunity. Well,
you can't create opportunity unless you plunk down money on the line
to give people a chance, money that you're willing to lose.
we have 150 examples just over the past few years ourselves, and our
biggest barrier is not finding those people--not at all. It's finding
the money to support the CDFI staff that can handle the relationships
with all those borrowers. There' are a tremendous number of borrowers
out there who are capable of that. I never worried about finding borrowers.
I just worried about paying the bills so we could keep the doors open.