Southwest Economy, Second Quarter 2020
LiftFund’s Microlending Helps Small Businesses Battle to Survive COVID-19
On the Record: A Conversation with Janie Barrera
Janie Barrera is the founding president and chief executive officer of San Antonio-based LiftFund. Created in 1994, LiftFund has one of the nation’s largest microlending portfolios. The nonprofit provides loans and management training to very small enterprises in Texas and seven other states. Barrera formerly served on the board of directors of the San Antonio Branch of the Federal Reserve Bank of Dallas.
Q. What kind of companies do you work with? Are small businesses in Texas different from those elsewhere?
At LiftFund, we work with small business owners who are unable to access capital from traditional financial institutions. We serve the moms and pops of our communities, like the neighborhood retail shops, restaurants, beauty salons, and cleaning and maintenance service businesses. Although the economic climate, top industries and regulations differ across states, small businesses share more similarities than differences.
A good example of a LiftFund customer is Kela Neighbors. Her daughter struggled with severe eczema. In an effort to help her, Kela researched the healing components of natural ingredients and learned how to mix them to make organic bath and beauty products. Once her daughter started using Kela’s homemade body mousse and soap, she noticed a significant improvement.
Inspired by this, Kela and her husband launched Organically Bath and Beauty in San Antonio. The Neighbors received a microloan from LiftFund to expand their business from a farmer’s market to their own storefront.
Q. What is your definition of a small business, and what is the environment for these businesses in Texas during the era of COVID-19?
LiftFund defines a small business as having 10 employees or fewer and annual revenues of less than $2 million. These businesses tend to have cash reserves of about eight weeks, so they have less of a cushion to weather a significant downturn than larger businesses.
Most small businesses are struggling. The good news is that besides the efforts of the federal and state governments, many municipalities have stepped up to provide grants and low-interest loans. Several large financial institutions have also partnered with LiftFund to provide grants and low-interest loans.
The majority of the funds issued by LiftFund have gone to low- to moderateincome individuals. We are reaching the least served.
In the long term, entrepreneurs are entrepreneurs, and they will continue to innovate and invest in new companies. They have a mindset that will keep them going.
Q. With so much economic weakness and uncertainty, what steps can a small business take to improve its chances of surviving?
Have patience and don’t give up. They [small businesses] may have to streamline what they do. I encourage them to take seminars that are online right now to learn how to navigate this crisis and to find out what resources are available.
Learn best practices from others who are going through the same things. For example, there are a lot of gyms that are shifting workout programs online and getting customers to pay for the online experience. Learning to use online technology is crucial.
Q. What has been the impact of the federal government’s Paycheck Protection Program (PPP) providing forgivable loans for small businesses to help them retain employees and fund operations?
In most cases, this program has had a very positive impact. In the first-round allocation of $454 billion, community development financial institutions were brought into the mix too late in the game. At first, only banks could issue the loans. After community development financial institutions complained, those that had already been participating in loan programs with the Small Business Administration were allowed to participate.
In the second round of the program, $30 billion of $310 billion [in federal PPP funding] was allocated to community development financial institutions, credit unions and community banks with assets less than $10 billion. While some have complained that the $10 billion threshold was too high in that it includes 97 percent of all banks, the allocation in the second round has allowed community development financial institutions to be much more active and to have greater success getting the money to small businesses.
The biggest issue with the PPP program has been that many small restaurants have been unable to qualify for the conditions of the loan forgiveness. Because of this, even some that received funds are holding on to the money because they are afraid that if they don’t qualify for the forgiveness, they might be unable to make future loan repayments.
Q. How has LiftFund been involved in the PPP and other recent programs for small businesses? Has LiftFund made PPP loans to noncustomers?
Due to the late ruling [allowing community development financial institutions to issue loans] and the rapid depletion of the funds, LiftFund was only able to make nine loans of about $800,000 in the first round of funding. With the $30 billion allocation to community development financial institutions in the second round, LiftFund has been able to issue 450 loans for a total of $16 million, with most under $40,000. This is a large increase in the amount of funds that we typically distribute. In a typical year, we make about 1,000 loans for a total of $29–$30 million. In the last eight weeks, we have disbursed over $33 million.
We offered PPP loans to all small businesses—regardless if we had done business with them before. One reason why banks had trouble disbursing to businesses that were not their customers is “know your customer” regulations that require paperwork on borrowers in an effort to reduce money laundering and other illegal activity.
Existing customers have already filled out this paperwork and, thus, can be processed for PPP loans more quickly. LiftFund has a process that we follow, which is similar to banks, so that existing customers can be processed more quickly. But even given that, more than half of the PPP loans that we distributed were to new customers.
One problem is that many small businesses don’t know about community development financial institutions, including LiftFund. But fortunately, Gov. [Greg] Abbott held a press conference that was aired all across Texas to announce a program that we partnered on with Goldman Sachs, and that publicity has helped us attract new customers.
Q. LiftFund has historically had a 96 percent repayment rate from small businesses. How is this pandemic going to affect your customers and potentially the LiftFund repayment rate and LiftFund’s ability to serve your constituents?
We are expecting a higher default rate, and we let all of our funders know this. Since we are not a bank, we rely on investments and grants. Due to our strong underwriting standards, we were able to get a very high repayment rate.
The COVID-19 loans have some of that rigid underwriting, but not all of it. The funders are telling us that we should be more flexible; they know people are hurting, and we need to get the money to them quickly, and they understand that this will increase the risk of loss.
Because most of the funding is coming with no recourse, LiftFund’s loan-loss reserve does not have to be as robust as in the past. After Hurricane Harvey, we projected losses of 15 to 20 percent, but they came in under 10 percent. But this will likely be worse—this is much deeper and longer. This is like eight weeks of a hurricane.
I don’t know when LiftFund will return to doing traditional LiftFund loans in terms of the strict underwriting and coaching of new businesses. It may be this year; it may be next year. Now we are focused on keeping businesses alive rather than helping them to start up.
Q. What else should be done to help small businesses?
There should be a third round of PPP funding from the federal government—this time for small businesses that have not been helped. We’ve done 454 loans to small businesses statewide, but this is just a drop in the bucket. There are many more out there that need help. In the third round, they should allocate a significant portion to women- and minority-owned businesses to ensure that the funding gets to them. We also need a grassroots campaign to reach out to these businesses to teach them how to qualify and apply for these loans.
Q. What type of long-term impacts will this pandemic have on small businesses and the economy in general?
In the long term, entrepreneurs are entrepreneurs, and they will continue to innovate and invest in new companies. They have a mindset that will keep them going. They will find a way to rebuild and to raise wealth within their families. Being in this field for 26 years, I can tell you people are so resilient and creative. I wish I had a crystal ball and could tell you what they will come up with, but I can’t. All I can say is that they will come up with a plan that I never thought imaginable.
Southwest Economy is published quarterly by the Federal Reserve Bank of Dallas. The views expressed are those of the authors and should not be attributed to the Federal Reserve Bank of Dallas or the Federal Reserve System.
Articles may be reprinted on the condition that the source is credited to the Federal Reserve Bank of Dallas.
Full publication is available online: www.dallasfed.org/research/swe/2020/swe2002.
Photo Credit: Carlos Javier Sanchez
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