How a Digital Marketplace Is Disrupting Small Business Lending

Many small business owners lack access to financing, leaving them vulnerable to predatory lenders. A digital platform supported by Mastercard is making it easier for them to secure CDFI funding instead.

When small business owners go shopping for a loan, they often find themselves wading through a dizzying array of online borrowing options — cash advances, lines of credit and a variety of loan types. 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 aren’t always an option, particularly for minority entrepreneurs who are turned down for loans at twice the rate as white business owners. And more mission-driven lenders who could help are often flying under the radar, in part because their marketing budgets aren’t nearly as robust as some more predatory programs.

Community Reinvestment Fund (CRF) is working to change this online lending game. The Minneapolis CDFI launched Connect2Capital five years ago. In essence, the digital platform aggregates all of the products CRF and its peer organizations offer 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 not necessarily mission-driven lenders. The platform solves a big problem for CDFIs, too. Much of CDFIs’ success relies not only on their ability to raise funds, but also on how effectively they can get money out the door to those who need it.

Patrick Davis (Photo courtesy of Patrick Davis)  

“We realized there really wasn’t any platform that was providing that kind of service for small businesses that focused on nonprofit community lenders that offer businesses support and technical assistance, and that offers a better price and more flexible loan products than the FinTechs do,” says Patrick Davis, the 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 there are other, more responsible products available to them.”

In addition to connecting small business owners with lenders they likely wouldn’t have discovered otherwise, the platform takes a lot of the legwork out of the process for CDFIs — enabling them to process more loans and serve more entrepreneurs. Early on, CRF and its partners lent $7 million through Connect2Capital. That loan volume has grown to more than $300 million from more than 110 lenders across the country — mostly serving diverse small businesses. In 2021, about 70% of businesses served through Connect2Capital were BIPOC, women, veteran or LGBTQIA-owned.

The platform got its start 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 critical grant funding 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 with the aim of expanding access to affordable capital for underserved small businesses,” says Sandy Fernandez, VP, North America, Mastercard Center for Inclusive Growth.

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

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

Then COVID-19 hit.

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

“All of that federal money that needed to find a way into the hands of very small businesses that aren’t typically able to secure financing from banks,” Davis says. “We had been building this tool for several years prior to COVID. It was perfectly fit for responding to the crisis.”

One of those programs was the Southern Opportunity 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 rebound from the pandemic. Nearly half of the loans went to Black-owned businesses.

Ascendus was one beneficiary of the SOAR fund. According to the lender’s CEO, Paul Quintero, the New York-based CDFI expected to loan about $20 million total this year. But by mid-November, they had already loaned more than $35 million, mostly to small business clients.

Quintero attributes the volume to its presence on Connect2Capital. Ascendus joined Connect2Capital around 2019, but has seen a significant uptick in activity from the platform in the wake of the COVID-19 pandemic.

“The platform and program helped us reach more small business owners, and that’s a big challenge for us,” Quintero says. “The pandemic unleashed the fullest potential of the platform.”

Connect2Capital will continue to expand in 2023, in part through its partnership with Mastercard. The growth of the platform was one catalyst for Mastercard to launch Strive USA, which will both expand Connect2Capital and partner with other innovators to build the digital capacity of CDFIs to deploy tens of billions of dollars in affordable capital to entrepreneurs across the country.

“CDFIs have demonstrated how their combination of capital and technical assistance can meet the lending needs of underserved small businesses, particularly in challenging times,” Fernandez says. “As small businesses continue to cope with a wide array of challenges, Strive USA is bringing together resources and innovation across philanthropic, public and private sectors to build a more robust small business support ecosystem.”

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Christopher C. Williams is a New Jersey-based freelance financial writer. He worked for many years with Dow Jones Newswires and Barron’s Financial Weekly and has contributed to 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.

Tags: small businesscdfistechloansmastercard

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