Roughly 30 percent of the nearly 1,000 community development financial institutions (CDFIs) in the U.S. serve primarily rural, or nonmetropolitan, counties.1/ Because they work in sparsely populated geographic areas that often lack the resources and infrastructure of urban areas, rural CDFIs face several unique challenges. For example, rural CDFIs tend to be smaller and do a lower total dollar volume of lending than their urban counterparts, which may create the perception that their outputs are not numerous or sizable enough to be attractive to investors. Declining populations, mostly due to outmigration, may hinder the work of rural CDFIs by shrinking the available workforce for new or existing businesses. Access to conventional business development capital may be limited in rural areas, leaving rural CDFIs as the only resource for aspiring entrepreneurs. And potential investors may simply be unfamiliar with the opportunities available in rural areas and thus be reluctant to engage in small communities.
To learn more about rural CDFIs and their challenges, Community Dividend spoke with Mary Mathews, who recently announced her retirement as the founding president and CEO of the Entrepreneur Fund, a certified CDFI headquartered in the city of Virginia in northeastern Minnesota.
Established in 1989 under the name Northeast Entrepreneur Fund, the organization initially focused on helping displaced workers from the area’s iron mining industry start businesses as a means of creating their own jobs. Today, the Entrepreneur Fund helps a broad range of entrepreneurs in the largely rural region of northeastern Minnesota and northwestern Wisconsin build strong, locally owned companies. In its 23-year history, the Entrepreneur Fund has helped start, stabilize, or expand more than 1,300 businesses; provided $14 million in loans to 451 businesses; and helped create or retain more than 3,500 jobs. Its initiatives include the CORE FOUR Business Planning Course®, a training program that has been used in 38 states and three foreign countries; and the Greenstone Group, an entrepreneurship development initiative launched in 2008 that uses coordinated support, including business coaching, to help growth-oriented entrepreneurs continuously improve their business skills.
Community Dividend: You’ll soon be stepping down after 23 years at the helm of the Entrepreneur Fund. How has the business development environment in your service area changed in that time?
Mary Mathews: The environment and support for entrepreneurs starting locally owned companies has improved, though there is certainly more to be done. When we started in 1989, many of the individuals we worked with had never personally known a business owner. Now there are stories in the media about people who have started and grown small businesses. The fact that entrepreneurship is more of a reality today presents exciting opportunities, particularly for residents of rural communities. To mention an example, a local serial entrepreneur with whom we’ve had a long-term relationship recently sold one of his companies for $10 million. And we’ll help him start the new company he’s planning.
One longstanding challenge is that it can be difficult for rural businesses to attract skilled employees because there often is no career track. If the job doesn’t work out, there’s rarely another job available. You have to pack up and disrupt your family. But things changed in the recent recession. For the first time, we observed architects, engineers, accountants, and other professionals sticking around after losing their jobs. They started coming to economic development organizations like ours to obtain assistance for opening new practices and building sustainable companies. Entrepreneurship or self-employment became a way for them to find more opportunities right in their backyards instead of having to move.
CD: The area you serve is sparsely populated in comparison to an urban community. Where does the demand come from to keep rural entrepreneurs’ businesses growing?
MM: It’s truly an evolutionary process. Often an individual starts a small business here to serve his neighbors or other members in the community. But of course, growth comes from expanding, serving a larger market, or creating a different distribution strategy for your products. The Entrepreneur Fund helps people figure out what products or services they offer that could go out to larger marketplaces. And today with the Internet, a lot of small service/retail or manufacturing companies can go global from here. Nevertheless, it’s still a challenge in small communities because of isolation and lack of access to good markets. But in most cases, it’s doable, if you think creatively about marketing your products and services.
CD: Is that one of the reasons why you started the Greenstone Group?
MM: Yes. Greenstone Group came about as a way for us to take our experience and staff capacity to a higher level and expand the support we could provide to the companies we were helping to grow. Today we have coaches and staff available who match the skill level of a wider spectrum of entrepreneurs. Early on, we primarily worked with dislocated workers and people who lost their jobs, to help them turn their skills and hobbies into something that could generate revenue and eventually sustain them over a long period of time. Then we started offering loans to entrepreneurs who needed start-up capital. In the mid-1990s, other organizations were choosing whether to emphasize training or lending. We recognized that our strength was in combining entrepreneur development and capital. Our experience in supporting entrepreneurs made us better lenders, and vice versa. And we also recognized that the lessons we’d learned about working with microbusinesses were applicable for larger companies as well. The difference lies in the skills level or the experience of the business owner.
CD: The Entrepreneur Fund received its CDFI certification during roughly the same time period you just mentioned—in 1997, to be precise. Back then, there were only a few other CDFIs in Minnesota. Now there are 38 other CDFIs serving communities in the state. Do you think there are still market gaps, despite that expansion?
MM: Yes, I do. Today, CDFIs provide financing in underserved areas for businesses, housing, consumers, nonprofits, and facilities, but in rural communities, it’s rare to see that full range of services available to the targeted populations of women, low-income people, and people of color.
The market gaps are even bigger now because of the recession. Many who qualified for bank loans in the past are no longer able to obtain the same deals. We serve a small niche of the overall market by providing business loans of up to $200,000, but with banks tightening their credit policies in recent years, we’re finding opportunities to serve clients who need larger loans. For instance, yesterday we approved a $250,000 loan to someone who had good credit but still couldn’t obtain a commercial bank loan.
CD: In your opinion, what should the nature of the relationship between CDFIs and traditional banks be?
MM: Our best bank relationships are where the bankers recognize that our role in entrepreneurial development and our participation in the financing package add value to the bank-business relationship and build them a better customer. We’re pretty intentional about not competing; our loan pricing doesn’t undercut conventional lenders.
CD: Some argue that CDFIs must conform to existing, conventional capital market systems to ensure an adequate supply of capital to the communities they serve, including rural communities. What are your thoughts on that? Do CDFIs have to be as sophisticated as banks, in terms of reporting and regulatory systems?
MM: As CDFIs become larger and more visible, the level of scrutiny will increase. The CDFI industry is talking about regulation, particularly in light of the potential of accessing funds through the conventional capital markets. We all report to our investors and funders now. Whether CDFIs should be regulated exactly like banks, I don’t know. I’ve listened to arguments from both sides. As part of our industry’s response to the question, the Opportunity Finance Network developed the CARS rating, which provides a level of third-party validation, transparency, and reassurance to investors.2/ The Entrepreneur Fund is CARS-rated. Also, since the early 1990s, we’ve been regulated by the Minnesota Department of Commerce under Chapter 56, which covers finance companies. We were the first nonprofit in Minnesota to be regulated under that chapter. It requires us to undergo an annual audit conducted by the state. Complying with that regulation helped us acquire an SBA 7(a) lender license.3/
CD: Partnerships among CDFIs and other economic development entities appear to be essential for success in rural areas. Would you agree that CDFIs can’t do this work alone?
MM: Yes. For example, Northland Foundation in Duluth is one of our partners. We have different niches; it primarily serves businesses that have markets outside of the region and tends to do bigger loans, whereas we primarily serve smaller businesses. We’re building a pipeline, a continuum of services and support in the region. We do front-end development work with some Northland clients and partner with them on some loans. A recent Northland Foundation loan report listed several businesses that received first-round financing from us. When they were ready for bigger loans, we provided technical assistance and Northland supplied the needed working capital.
Also, we often make loans with cities and counties in our region that have revolving loan funds, in much the same way that we partner with other CDFIs. Recently, we did a few deals with Carlton County in Minnesota and Douglas County in Wisconsin.
CD: How would you assess your progress, looking back on your years at the Entrepreneur Fund? And what do you think the future holds for the CDFI industry?
MM: Twenty-three years ago, I never dreamed that we would have the impact that we’ve had. The magnitude of it is even greater than I would have hoped. And the opportunities to grow, evolve, change, experiment, fail, and experiment again have been really exciting.
As long as market gaps remain, there will be opportunities for CDFIs. But there will be fewer funding sources for operations available and we’ll need to use them innovatively and creatively to accomplish more. One promising trend is that practitioners in the industry are starting to think about some creative “destruction and reconstruction” so that resources are used as effectively and efficiently as possible. Am I advocating for more vertical and horizontal integrations? Yes. We need to identify ways that organizations could do things collectively instead of individually and then figure out how to work better together. There are parts of the country that don’t have access to CDFIs. It’s incumbent on all of us, and especially next generation leaders, to figure out how to serve those places. And it is not necessarily by starting new organizations. Now is the time to look at doing some things differently.
What is a CDFI?
Community development financial institutions (CDFIs) are specialized entities that provide financial products and services such as small business loans and technical assistance in markets not fully served by traditional financial institutions. CDFIs can include banks, thrifts, bank holding companies, credit unions, loan funds, and venture capital funds. The CDFI Fund, a program of the U.S. Department of the Treasury, certifies and provides financial support for CDFIs. Other funding sources for CDFIs include investments and service fees. For more about the basics of CDFIs, visit the Minneapolis Fed’s CDFI Resources web page at www.minneapolisfed.org/community_education/cdfi.