#EcosystemsRecover: A Financial Model with a Human Approach
There are a lot of hard conversations and difficult decisions being had right now around staying afloat during this economic downturn. Businesses have spent days researching loans and filling out applications to get the funding needed to stay afloat.; employees have been furloughed or lost hours; and ecosystem builders have been having conversations around how to support their entrepreneurs and ecosystem. All of this is centered around lack of funding in a COVID world.
We know all too well the disparities that lie within our financial institutions. Access to much needed financial resources is inequitably distributed all under the guise of mitigating risk. That means that loans are granted to bigger, well established businesses who are majority white and male. Alternatives Federal Credit Union made the decision to change that. Recently, they announced the launch of their Alternatives Federal Credit Union Community Assistance Loan Fund, a historic $1.4 million, 0% interest rate, repayable, loan. The funds are being made available to individuals, businesses, organizations, and nonprofits who have suffered a loss of income due to the COVID-19 pandemic.
“The depth and breadth of the need in our community seemed very apparent to us. We started to see that beyond the businesses, there were people falling through the cracks. Essential workers who have to go to work, don’t qualify for unemployment, and have had their hours cut are struggling to pay their bills. We recognized that the stimulus packages and the help being given to individuals and businesses wasn’t enough. There were gaps - really big ones that needed to be filled pretty quickly. So we decided to meet that need to create our own fund for both small businesses and individuals,” says SCN member Chris Cain, Chief Experience Officer (CXO) at Alternatives Federal Credit Union.
Alternatives Federal Credit Union has a very different approach to lending. They know that money is one of the ways to empower people rather than disenfranchise them. Chris says, “We make people's lives better by money.” They have built a very robust small business development program and have deep relationships throughout the community. Because of these relationships, they became acutely aware of the impact COVID-19 had on the community as businesses started reaching out to them.
“We saw so many mistakes being made with the SBA Paycheck Protection Program (PPP). Despite all the initiatives happening even in the local community, it was still not enough money to get into the hands of these small businesses. We are facing an extinction level event with small businesses right now,” according to Chris.
Chris said her team had to closely examine the risk of offering a 0% loan to individuals who have no income. They started by determining how many of these loans they were going to expect to lose.
“The soul of this loan and how it was constructed is this: a trifecta of people coming together to make sure that the businesses and the people who get these loans have a team around them to help navigate when shit hits the fan. Because it will,” says Chris.
Working Across Departments Holistically
Giving out zero interest loans to high risk individuals and businesses may carry more risk,but it was something they needed to do to be on the right side of history and support their community. That doesn’t mean just giving out free money, though. As a financial institution, the team looked at how they could work collaboratively across departments to come up with a holistic approach to lending. Chris calls this the trifecta: having their small business or credit counselors, collections, and loan officers working together to assess the holistic financial situation of each borrower.
“Our team is working collaboratively across departments to help people navigate not only paying their own bills but getting their budget into a place where they can handle the debt. That means rather than just going online and filling out a loan, you’re actually going through a credit or business counselor to assess what your need is. If you have unemployment and stimulus money coming in, you don't need this loan. But if you are an essential employee and your hours have been cut, this loan was made for you,” Chris explains.
Having their credit counselors and loan officers work together allows loan officers to learn the nuances of how people live to help them be fiscally healthy. Whether that’s finding a way to consolidate debt, looking at their financials to discover where they are paying too much or whether they can get someone a better interest rate on another loan, this holistic approach puts borrowers in a better financial position.
“Our loan officers need to have much more than their loan officer hat on now. We need to take a look at people's lives as a whole - knowing that we don’t know what the future looks like so we have to mitigate risk in a way that is ok. So knowing that we are able to do everything within our power, building good relationships with our people, and having policies and procedures in place but also have support whenever everything goes to hell.”
The third piece in the trifecta is to put their “solutions department” (aka collections) front and center.
“Collections has a bad rap. Whenever people can’t pay their bills or ignore their bills, the collections officer is the one who calls them. I’ve learned from running the microloan fund in Staunton, Virginia is that it’s the relationships that matter. So if you help folks, if you say, alright, you have to make a choice between your grocery bill, your electric bill, and your loan payment. Let us help you figure out which ones to pay. And you know what, maybe this month it’s not your loan payment. So what are we going to do about that? It’s taking a look at where you are right now and giving you all the tools that you need to make you financially stable,” says Chris.
Alternatives also has great relationships throughout the community. They know the community resources out there and as part of their counseling they point people in the right direction to help them lower their financial burden. Whether it’s a daycare co-op, making sure they go to their food bank, or other non-monetary resources. Identifying those non monetary ways you can tap into our economy so it doesn’t hit your bottom line is key. Chris says their credit counselors are plugged into community resources in a way that other financial institutions are not, which helps them better serve their members.
“We’re putting our community relationships upfront. This trifecta of financial counseling, solutions, and lending working together as a team and learning from each other puts our borrowers in the best situation.”
Building Reserves
As a financial institution putting $1.4M on the line right now, Alternatives had to have a plan beyond building relationships for folks who may not be able to pay their loans back. They worked with local foundations and individual donors to set-up a 20% loan loss reserve. That means 1 in 5 of their loans could potentially not be paid back and they will still be fiscally solvent.
“We need to be making the right loans for the right people for the right reasons. Doing so puts us fiscally at risk. We either need to find a safety net, or we can’t do those kinds of loans. And right now, we can’t afford - as a society - to say, oh no we can’t do that because there’s too much risk involved. So we had to find a solution by establishing a safety net. Having a loan loss reserve gives us a way to mitigate that risk and make good decisions for the right reasons. Because we’re people, not just a financial institution,” says Chris. She adds, “It’s terrifying and exhilarating and game changing for us as an organization.”
How can ecosystem builders encourage this in their ecosystems?
Alternatives is one of many in a network of community development credit unions that exist across the country and are a great place to start. You can go to inclusiv.org to get a list in your area.
“There’s one thing I’d really love to see is more ecosystem builders engaging with community finance organizations like mine rather than big banks. Don’t get me wrong, big banks have their place, but if you’re talking about hyperlocal, it’s the credit unions who are going to understand your philosophy in a way a big bank isn’t going to. We’re basically banking with a civil rights agenda.”
Chris also advises talking to the small business lenders or even the SBDC in your area. Ultimately, as ecosystem builders, we need to really listen to the needs and pain points in the ecosystem and then look at who can help solve or minimize that pain in one way or another. A lot of times it’s a financial institution.
Advice to financial institutions
Chris urges other financial institutions to take risks and don't’ be afraid to help - especially right now.
“Find a way to mitigate risk and don’t be afraid. If it’s giving people the power of knowledge, great. If it's setting up a loan loss reserve, fine. If it’s tweaking how you’re doing your lending then do it. Taking that fear, looking it right in eyeballs and saying, alright, what is the reality here? What kind of solutions do I as a financial institution have or what other kinds of partners can help bridge the gaps in order to make those right decisions? Take a leap of faith, believe in people, and figure out how to get the yes to them,” encourages Chris.
She also urges financial institutions to start recognizing that they are ecosystem builders and go beyond traditional models. Dig deeper by looking at character based lending and nonmonetary types of capital so that you can do more ecosystem building work and ultimately help more entrepreneurs.