Building a secondary market for CDFI loans

The problem

  • Despite the economy growing more than 40% in the last decade, loans under $100,000 have fallen 38% at FDIC insured banks. Small dollar loans that entrepreneurs can afford to repay rarely generate enough income to cover lender expenses. 

    The success of Black, Indigenous, and People of Color (BIPOC) and women owned firms is often stymied by the many barriers they face in accessing capital. CDFIs help fill this gap but must rely on philanthropy to subsidize operations and build their balance sheets. This reliance on limited sources of capital means fewer entrepreneurs are served.

  • A CDFI certification is a special certification given to organizations that provide financial services in low-income communities and to people who lack access to financing. These might be regulated institutions such as community development banks and credit unions, and non-regulated institutions like loan and venture capital funds.

  • Scale Link expertly sources and bundles CDFI loans so that large mainstream Banks have an easier time serving and empowering economically distressed communities. This translates into real change for the communities and people who need it most.

Our solution

Scale Link bundles microloans from different CDFIs and pools them together for banks to purchase. This translates into real change for the communities and people who need it most.

Helping communities

Our solution empowers CDFIs to grow their impact through reduced capital expense and unrestricted funding.

Supporting banks

Our solution centralizes expertise and volume so banks create impact they can count on.

How our solution works

Scale Link buys loans from CDFIs just above the net present value, ensuring the CDFI receives more income than if they had kept the loan.

Step one

Scale Link packages microloans in a streamlined process that help banks meet their lending test under the Community Reinvestment Act (CRA), including geographic and revenue diversification in key assessment areas.

Step two

Scale Link sells loans at a premium to banks in exchange for the benefits they receive under CRA. Banks are able to efficiently meet their Community Reinvestment Act requirements and help create a more equitable small business lending system.

Step three

Scale Link pays 75% of proceeds to CDFIs. Cdfis receive more income than if they had kept the loan.

Step four

CDFIs revolve capital faster allowing for more business loans in otherwise underserved communities.

Step five

The remaining 25% of proceeds is used to cover Scale Link’s operating costs, providing a pathway to long-term funding independent of the public and philanthropic sectors.

Step six

two women working together

Solutions for banks

We are seasoned experts building a secondary market for CDFI loans.

Creating a secondary market for CDFI loans requires centralized expertise. Scale Link was created with standardized processes for transactions, operational efficiency, and the ability to aggregate loans across markets.

When banks partner with Scale Link, they can count on CRA support that is:

By centralizing volume and expertise, Scale Link is an efficient, one-stop shop for CRA impact. Bringing deep expertise in CRA, Scale Link provides banks with CRA insights and tools to respond to fluctuating needs in their community and changes to CRA. 

Streamlined

For small, regional and mid-size banks, originating small-dollar business loans typically offers a thin to negative margin. A bank can save an estimated $2,000 or more per loan by purchasing a CRA-eligible loan compared attempting to originate and service loans in similar geographies and risk profiles.

Cost-Effective

Scale Link creates custom loan packages for banks, taking into account their CRA assessment areas, key geographies and desired credit box. Scale Link works with CDFIs in diverse geographies, which means it can quickly connect banks with loans across their footprint through one transaction. Scale Link structures transactions in a way that maximizes CRA benefit within a bank's assessment areas.

Customized

Partnering with Scale Link ensures bank capital flows to underbanked entrepreneurs. In addition to being a CDFI itself, the CDFIs Scale Link works with have a mission and mandate to deliver capital to entrepreneurs of color, women business owners, immigrants, and businesses in low-to-moderate income communities, both urban and rural. More than 75% of the loans Scale Link purchases are to entrepreneurs of color. 

Mission-Driven

Scale Link takes extensive steps to vet CDFI partners and reduce risks to banks. In vetting CDFI partners, Scale Link assures they are up to industry standards – carefully analyzing CDFI governance, risk management procedures, financial soundness, credit approval and credit policy, financial reporting, and more. For specific loan packages, Scale Link provides a loan tape of available loans with key risk variables and third-party risk ratings through PayNet’s AbsolutePD score, utilizing industry best practices to assess risk. 

Vetted

Scale Link’s loan packages are available whenever need arises for a bank. For consistent, reliable CRA credits, Scale Link offers custom recurring purchase packages, such as quarterly purchases meeting key requirements.

Consistent

Proven results for banks

Making Small Deals a Reality with Leaders Bank

Chicago area community bank searched for 5 microloans to help small businesses in the bank’s service area.

Testimonials

  • “We are proud to work with [Scale Link]. The contributions we make improve our CRA results and we know it will make an impact in our community.”

    Minnesota Bank & Trust

  • As we have stepped forward to support women, immigrants, low-income entrepreneurs and people of color running small businesses during extraordinarily challenging times, we need diverse and innovative funds like the [Scale Link] to support our liquidity in order to keep capital flowing to Main Street businesses.”

    Luz Urretia, CEO of Accion Opportunity Fund

  • “Our quarterly transactions with [Scale Link] help us to meet CRA goals while providing CDFI microlenders with much-needed capital.”

    Byline Bank

  • “Our mission to provide opportunity for minority and underserved business owners is more important than ever. We are proud to partner with [Scale Link] to strengthen our capacity and further our support for small businesses across our thirteen-state footprint.”

    Janie Barrera, President & CEO of Liftfund

  • “The team at [Scale Link] was incredibly responsive and helpful throughout the loan purchase process. We are pleased to have a new way to help more CDFIs and small businesses in our community.”

    First Eagle Bank

  • “The [Scale Link] is truly innovative and could be transformational for microlenders nationwide. It’s this very type of forward thinking and doing that will allow mission lenders to thrive.”

    Robert F. Boyle, Founder & CEO of Justine Peterson

  • “The [Scale Link] is an example of how we can collectively come together to re-imagine a new approach for our future and in so doing, address the triple challenges of liquidity, credit risk and sustainability during and after the pandemic.”

    Paul Quintero, CEO of Ascendus

  • “Allies for Community Business helps neighborhood entrepreneurs grow. Through creative partnerships like this, we can provide capital and coaching to even more underserved small business owners throughout the Chicagoland area.”

    Brad McConnell, Allies for Community Business

  • "Teaming up with [Scale Link] gave us (DreamSpring) the ability to leverage some of our existing portfolio and ultimately recirculate that capital to help more underserved borrowers realize their dreams.

    Anne Haines, President/CEO of DreamSpring

  • "This initial collaboration with Scale Link was the perfect opportunity to accelerate CRA impact in a new assessment area and get comfortable with the process. The Scale Link team was attentive and accommodating. We look forward to future transactions in other assessment areas to generate more community impact."

    First Bank

woman in a meeting room pointing at colored post-its on a whiteboard, while colleagues look on

Solutions for CDFIs

Scale Link’s primary goal is to support CDFIs and expand their impact.

Partnering with Scale Link can provide a sustainable solution to the small business financing gap and promote financial equity and inclusion for underrepresented populations.

When partnering with Scale Link, CDFIs can expect:

By purchasing CDFI loans, Scale Link helps CDFIs deleverage their balance sheets and free up capital that can be used to make additional loans and expand their impact.

Increased Liquidity

Scale Link pays CDFIs a price above the net present value of the loans, meaning CDFIs are always better off selling their loans.

Increased Spread

Scale Link offers technical assistance to CDFIs to help them grow and mature. As a “Growth” partner, Scale Link offers customized technical support and considers promotion to Preferred or Limited partner status after the lender achieves an annual loan production of at least 50 microloans per year. 

Hands-On Support

No matter what size or stage a CDFI is in, it can begin working with Scale Link. Whether a CDFI is new or established, Scale Link offers a pathway to become a “Preferred” partner, which can sell to Scale Link at any time for capital throughout the year.

Customized Options

Scale Link sells as many loans as possible at an even higher price to banks, further increasing the spread to CDFIs as 75% of that additional upside is donated back to the CDFI. To date, Scale Link has donated $3.5 million of new revenue back to CDFI partners.

New Sources of Funding

Increased liquidity and capital freed up from Scale Link purchases, as well as premiums donated back to CDFIs, are all unrestricted – which means CDFIs can use them for anything they need, from technology upgrades to staff salaries to more lending capital

Unrestricted Capital

Frequently asked questions

  • Scale Link has been designed to comply with official regulatory rules and guidance related to the Community Reinvestment Act (CRA). The primary purpose of the fund is to promote economic development through direct investments in CDFIs. Loan participations assigned from Scale Link count as retail small business loans. Donations made to Scale Link will count as qualified investments. Please email chelsea@scalelink.org for additional details and regulatory citations.

  • Banks can target CRA lending categories such as businesses in LMI census tracts or with $1M gross annual revenue or less. Banks may also target characteristics such as industry or loans in a specific credit box. CDFIs lend to entrepreneurs who typically do not qualify for bank financing. As a result, if a bank chooses an overly limited credit box, it may impact the number of loans available. Scale Link encourages banks to think of their credit box in relation to the total dollars at risk. While there may be many more units involved given the small loan sizes, the total liquidity commitment will typically be well below other loans the bank originates.

  • Yes. Scale Link has yet to find a bank with an assessment area where we have no loans. Please reach out to chelsea@scalelink.org.

  • Scale Link has a master participation agreement with each CDFI that governs the initial participation transaction. It is a non recourse agreement. CDFIs retain servicing and collections responsibility. Each time Scale Link does an additional purchase, a new participation certificate is created. Scale Link then transfers its interest to the bank through an assignment with Scale Link as the intermediary.

  • CDFI loan funds are nonprofits. The microloans they originate do not generate sufficient income to cover lending cost, client support, and their cost of capital. Yet we know these loans are essential to serving entrepreneurs of color, women business owners, and businesses in low-to-moderate income communities, who due to systemic bias often have smaller businesses currently unable to take on larger loans. Given the significant regulatory benefit banks receive through the purchase of small loan sizes through Scale Link, we ask the bank to support Scale Link and its partner CDFIs with a donation. Of that donation, a minimum of 75% is conveyed back to the originating CDFI.

  • Scale Link does comprehensive due diligence to ensure its CDFI partners are not only good lenders but are also plugged into the community. Once on board, Scale Link buys loans from CDFIs when they need to sell and holds those notes until a bank is interested to purchase. Purchasing loans through Scale Link allows us to provide CDFIs working in your assessment areas with liquidity when they need it, even before a bank is ready to buy, so they can more quickly and efficiently grow their total microloans disbursed.

  • Scale Link is looking for long-term partners and will do smaller transactions to kick start the relationship. Scale Link takes a “demo over memo” approach: we encourage banks who are new to loan purchases to do a small deal to learn how easy the process can be.

  • Scale Link’s mission is to buy and sell loans for the benefit of CDFIs and the communities they serve. We are experts at moving quickly and have done transactions in as little as 3 business days. Typical timeline ranges from 2 to 4 weeks.

  • Because both a grant and a purchase are completed, Scale Link typically gets a commitment from the CRA group for grant support and then completes a transaction for a loan purchase with the lending or treasury group of the bank, depending on the bank structure.

  • Traditional small business lending remains a thin to negative margin business for banks at smaller loan sizes. Scale Link compares buying a CDFI loan with a $10,000 balance and 36-month term to the average cost of a $50,000 loan over 60 months. The latter size is used because many businesses with under $1M GAR and in LMI census tracts seek, or can service, only smaller loan sizes. Client acquisition cost is set higher. Scale Link assumes if a bank needs a CRA eligible loan that it doesn’t have, it will require higher acquisition cost and likely be more time intensive to underwrite versus the bank’s standard loan product. Assuming these costs do not vary much as the loan size grows (other than ALLL), these same costs would result in marginally profitable loans above $100,000 in size.