ERD: Did you consider structures for funding Excluded Entrepreneurs besides a CDFI? Why did you ultimately decide to form a CDFI instead of another option?
EKF: In forming RPC, we knew our structure needed to match the market we sought to serve. A CDFI loan fund made more sense for our target communities of “Excluded Entrepreneurs of Color” than, say, a venture capital approach, which would have taken ownership away from our entrepreneur customers. We could have pursued a fintech model, but the costs of the technology platform would have been prohibitive at the time. We also would not have had the same level of engagement or trust with the communities of color with which we wanted to work.
A bank would have been too expensive due to regulatory costs and would have been misaligned with our objectives. The CDFI structure allowed for more consideration of subjective criteria in the funding process. It also helps potential customers to understand barriers and access technical assistance better. That said, a CDFI may sound like a simple “capital in, capital out model,” but it is more challenging than it may initially appear. What makes it challenging is also what makes it rewarding, though.
ERD: How did you define the “Excluded Entrepreneur of Color” concept? Were any of the decisions impacted by using a CDFI structure?
EKF: From day one, everything about setting up our racial equity loan fund was focused on “disinvested communities”—particularly at the time of founding in West Michigan. The target market was never in question. The specific terminology developed alongside the structuring in our pre-launch phase.
In market research, the word “excluded” came up very frequently as a barrier to small business financing in our region. Many target customers expressed an experience of “exclusion” from their local economy, funding opportunities, and the marketplace in general. One person stated they felt “isolated from capitalism.” So, our community’s needs pointed us toward a CDFI, not the other way around.
ERD: Can you discuss your approach to partnering with various community organizations to launch and sustain RPC (e.g., funders, directors, advisors)?
EKF: Three philosophical principles drive our approach to partnerships.
First, a partner must demonstrate an understanding of and practiced ability to embrace racial equity (as opposed to “mere” diversity and inclusion). That means all partners (capital or non-capital) must demonstrate an embrace of racial equity. By “racial equity,” we mean “arriving at a condition where one’s racial identity—in a statistical sense—no longer determines how one fares in life.” We partner with those who practice or demonstrably take efforts to understand racial equity, as so defined. We have declined partnerships with organizations that reject this definition of racial equity or that have undertaken no efforts to better understand racial inequity in our communities.
Second, there must be a non-superficial reason for the partnership. We are not interested in working with people who only want to do so for marketing or goodwill reasons. There needs to be a motivating reason beyond public relations. Capital partners need to help grow and sustain returns for investors through operational support or otherwise. Non-capital partners need to be able to provide social capital or in-kind services that would otherwise be a large expense and/or inaccessible for the communities we serve.
Third, we use a partnership agreement to create alignment and understanding across specified key areas of partnership. The partnership agreement helps make sure everybody is aligned in RPC’s racial equity definition and ensures clarity and transparency in a number of critical areas, such as the diversity of our partner’s project/engagement team, racial equity training, nondiscriminatory practices, and related issues. The partnership agreement also helps RPC and its partner define mutual goals and periodically assess how well the arrangement is proceeding.
ERD: What types of attributes do you look for in partners, advisors, and board members?
EKF: First, it is important to reemphasize that racial equity and diversity, equity, and inclusion (DE&I) are distinct tactical goals. So, we may partner with those on the DE&I journey even if they have not yet achieved or fully embraced our definition of racial equity. At a minimum, though, our partners must understand the concept of racial equity, since this will allow them to begin to appreciate where our customers are situated in the broader economic and social environment. Second, they need to have a certain level of understanding and empathy as a basis for engagement with our customers. The ability to listen to clients without making assumptions is critical.
For advisors and board members, we seek out exemplars in the practice of racial equity and/or evidence of willingness to learn about and implement racial equity practices. Of course, we also require proficient knowledge and expertise, together with real world applications in the areas of business, finance, economics, and/or investments. There is absolutely no “tokenism.” There are plenty of extremely competent professionals who qualify as potential advisors and board members. For our loan committee, we require a majority of the members to be people who are representative of our target markets.
ERD: Relatedly, can you discuss your process for achieving alignment with partner organizations through written agreements? As a legal partner, we found the partnership agreement process very helpful in ensuring mission and values alignment.
EKF: Our partnership agreement helps ensure alignment between organizations based on the process of responding to the questions and prompts and, as importantly, discussing those responses. Unfortunately, we have declined to partner with some organizations that did not have any genuine reflective experience or understanding to achieve basic concepts of DE&I, let alone an understanding or embrace of racial equity ideas. Some responses demonstrated a lack of cultural competencies. We have even turned away potential capital partners, and some capital partners have decided against partnering, because of our unequivocal stance on Excluded Entrepreneurs of Color and definition of racial equity. Some were not ready to agree with the notion that certain communities had been denied capital based on racial criteria.
ERD: Do you expect or require your borrowers to clear certain legal hurdles before qualifying for a loan?
EKF: Yes, we require all borrowers to have properly formed their business entities with appropriate governing documents and federal tax ID numbers (EINs). Our Race for Progress loans are also flexible enough for us to consider other factors for those individuals with non-legal status, such as certain immigrants. We also require proof of appropriate and sufficient insurance. While insurance is not necessarily required at the early stage of a business, there needs to be a very good explanation or compelling reason why no insurance needs to be in place at that time. Much of the remaining information required is financial.
ERD: Did your borrowers ask RPC for advice on legal issues or referrals for legal counsel before RPC and Miller Johnson partnered on the pro bono legal service program? Do you know if they were receiving legal advice at all?
EKF: Prior to our partnership with Miller Johnson, RPC did not get many specific requests for referrals for the broader suite of services that a law firm is able to offer. Sometimes, there would be a reactive issue that a borrower brought up, such as contract or collections disputes with customers. For example, timeliness of payment on invoices may be different and also other lessons learned on contract terms. However, borrowers often expressed legal issues as “frustrations,” rather than legitimate grievances that somebody could help them respond to or for which they could obtain a remedy.
During the first two years of the pandemic, we also received a number of inquiries and questions about COVID-related issues, such as small business grants, loans (PPP and EIDL), and state/local regulations.
ERD: What factors were/are important to RPC in establishing and sustaining a legal services partner for your borrowers/customers?
EKF: A key benefit of partnership has been providing a constructive forum for our borrowers to discuss their businesses with professionals who maintain confidence, identify risks and opportunities, and take action zealously to advance their interests. Putting issues out on the table as legal issues—as opposed to simply frustrations—opened up conversations and opportunities for confidentiality, attorney-client privilege, and other topics. Most borrowers were expressing frustration, but not really accessing legal advice outside of the minimum hurdles we require to obtain a loan. It’s very likely that some borrowers would have just tried to persist through a legal issue rather than pursue a legal ally and advocate.
Also, working with pro bono clients in the same fashion as billable clients was a very important factor. For example, working with a borrower/client on cross-disciplinary issues and identifying, not just legal challenges, but opportunities proactively, has been a big benefit to our borrowers. Some “pre-packaged” or standardized legal services can be helpful very early on, but customizing the client relationship and thinking about the client as a longer-term relationship was an important distinction.
ERD: What issues did you observe in your borrowers accessing COVID-related loans, grants, and other financial assistance in the 2020–2022 timeframe?
EKF: Many borrowers (or potential borrowers) came to RPC for our COVID relief loan product, which we call the “Race for Progress COVID Relief Loan.” Our community partners encouraged us to provide this loan product, especially for those businesses that were unable to take full advantage of PPP loans and/or employee retention tax credits. RPC was also able to provide a longer-term financial foundation and partnership as opposed to a one-off grant or tax credit.
Tragically, we also saw authentic business harm and intimate stories of very difficult choices between personal and family health issues and supporting businesses financially. Specifically, we saw businesses having to choose between investing in their commercial survival versus providing financial support to family members (or survivors of those lost to COVID).
ERD: Has the COVID experience significantly impacted your approach to lending and/or technical support?
EKF: We provided some new loan products, as mentioned previously, but also now provide different technical support. To that end, during the COVID experience, we observed more tangibly the latent risks that businesses face. We are still seeing the impacts of COVID on general economic conditions, as our borrowers continue to dig out and recover. We try to be patient and creative in offering workout plans with those borrowers hit hardest.
ERD: You hold a stakeholder conference at least once a year. Can you describe the goals of the stakeholder summit?
EKF: The main goals are providing transparency in our progress toward stated goals and accountability toward mutually agreed upon desired outcomes. The summits are also opportunities to solicit dialogue among RPC and our stakeholders to explore new ideas and opportunities. We try to create a shared space for the community of partners to collaborate and share best practices.
ERD: Do you have any advice to share with other CDFIs or law firms thinking of forming partnerships to provide pro bono support to CDFI borrowers?
EKF: For CDFIs, I would say, “Do it!” Referring borrowers to law firm partners helps manage the latent risk factors I mentioned earlier. These partnerships also enhance borrowers’ social capital and open up opportunities for firms to provide technical assistance about legal service providers. Even though the pro bono relationship may not last indefinitely, participation can help our borrowers become savvier about using lawyers in the future.
At a recent CDFI conference, during a seminar on “best practices” for risk management, we shared our experience working with your pro bono program. Our peers’ eyes opened wide. We realized and shared with our colleagues that it is beneficial to both the borrower and to the CDFI itself to form these partnerships. It’s not just a “nice thing” for your borrowers to be able to access but can enhance the CDFI’s revenue and manage risk in the long term. It’s also a great way for law firms, such as Miller Johnson, to make sure they are consciously thinking about “blind spots” in their communities and working toward racial justice and racial equity.
