Exploring Equity Considerations in Child Care Lending at CDFIs

As part of the Making Space series, Self-Help and the National Children’s Facilities Network engaged BennettWeston Consulting to better understand how Community Development Financial Institutions (CDFIs) consider racial equity in their efforts to support early care and education (ECE) providers. This report is the product of an intensive literature review, interview and survey protocol, and data analysis project with NCFN members. It explores the ways in which CDFIs currently approach ECE investing and technical support with racial equity in mind, and makes recommendations on how the field might continue to advance high-quality ECE opportunities for children and families who are often furthest from opportunity.

Practices to Continue:  

  • CDFIs explicitly and/or publicly state a commitment to racial equity. 

  • CDFIs review their internal organizational and program practices more closely as a step towards equity. 

  • CDFI staff recognize the importance of being more intentionally equitable in a sector that is dominated by women of color employees and employers. 

  • CDFIs continue to take a local and collaborative approach to partnering with the ECE sector, which allows for a deeper understanding of community need. 

  • CDFIs pivot to focus their attention on technical assistance and grantmaking to support capacity-building and improved child care quality. 

  • CDFIs offer creative and flexible underwriting that meets the immediate and critical needs of child care businesses. 

Areas for Growth: 

  • CDFIs can work to contextualize data on their lending and programmatic work by incorporating feedback from clients or borrowers. 

  • CDFIs can regularly evaluate the effectiveness of their programs and loan products, specifically assessing how well they meet current market needs. 

  • CDFIs can place a greater emphasis on rooting out potential bias, creating culturally responsive processes, or establishing processes to receive regular feedback directly from clients about their experiences seeking loans, grants, or technical assistance. 

Findings and Recommendations

Leading CDFIs and Best Practices

IFF 

IFF has long been an income-based lender as opposed to a collateral-based lender, meaning they do not require property appraisals to decide how much they are willing to lend, instead relying on a business’ cash flow. This practice is counter to traditional lending standards but has growing legitimacy as more people become aware of the legacy of redlining. In 2021, IFF added to its equitable lending considerations by updating target market criteria to make their loans and investments more accessible to BIPOC-owned nonprofits and others that often struggle to be approved for debt. 

LISC 

In 2020, the Local Initiatives Support Corporation (LISC) developed the 10X framework as an organization-wide framework to advance racial equity across all areas of their work, with a focus on Black communities and closing the racial wealth gap. While still early in development, the team has created a strategic plan and goals, and is working to develop metrics to track progress against these goals. 

Self-Help 

Self-Help's Small Business Guarantee Program provides an 80% guarantee up to $200,000 for Black-owned businesses, including ECE businesses. This product is used to fill collateral gaps caused by low property appraisals or low borrower equity contributions, which are a symptom of the racial wealth gap. 

LIIF and Reinvestment Fund 

While CDFIs intentionally serve low-income communities and sectors like child care that are not served by traditional banks, CDFI loan products also often tend to have higher interest rates and less flexible terms than traditional lenders. Both Reinvestment Fund and LIIF have pivoted their child care programs away from this lending structure and instead focus on grantmaking and technical assistance as a way to support the sector.