A frequent question we get with Champion Community Investments is if CCI isn’t a bank, where does the lending money come from? Let’s take a look at that question because the answer has a very direct effect on how CCI lends to small businesses.
In the past 12 years, CCI has lent $8.1 million out of about $5 million in CCI investment capital. The recaptured principal is re-lent to new borrowers. Much of that original $5 million came from loans to CCI from the U.S. Department of Agriculture. CCI borrows from USDA. CCI deploys the money through loans to Southern Illinois small businesses. The borrowers repay the loans. Most of the repaid principal is relent to new borrowers. A percentage is repaid to USDA to service the CCI debt.
What does this mean for CCI and how the non-profit lends in the region? It means that in order for CCI to continue to borrow from USDA, it must exercise good judgment in lending to businesses. In order for CCI to be a good borrower, it must be a good lender.
First – and this question does come up on occasion – CCI doesn’t “grant” free money to small businesses. Much like a bank, CCI loans money with the expectation of repayment. Too many loans not repaid means CCI can’t repay USDA.
Another complicating factor is that CCI is a Community Development Financial Institution, a CDFI, as certified by the United States Department of the Treasury. CDFI’s commit to using their resources to create better, stronger, busier communities. CCI does that in part through its lending to business that might not be fully bankable. When a CCI borrower eventually succeeds securing commercial bank loans, that is considered a success for CCI as a CDFI.
For these reasons, CCI seeks borrowers who can demonstrate through their loan application submissions that they meet the “Five C’s of Credit” sniff test in the underwriting phase. The Five Cs of Credit has proven to be a powerful basis for loan underwriting decision-making. The Five Cs are as follows:
Character – Does the client’s credit history, as demonstrated by credit reports, indicate that the client has the ability and willingness to service debt responsibly?
Capacity – Does the client demonstrate an ability to repay by comparing existing debts to income?
Capital – Is the client investing personal assets into the project and how much is being invested in the project? To employ the colloquialism, is the client putting “skin in the game”?
Collateral – Is the client able and willing to collateralize a loan in such a way as to assure fair value in the event of default to CCI as a lender?
Conditions – Do the terms of the loan, e.g., interest rate, period, and uses of funds, meet the defined uses of and eligibility for loans, and do the terms of the loan provide a pathway to successful repayment? Are the external market and economic forces and trends favorable to the business project as proposed?
If an applying business is able to demonstrate through its application that the answer to the Five Cs is “YES”, there is a good chance that CCI can be of assistance. Borrowers who meet the Five C’s test help to ensure that CCI, in turn, will be a Five C-worthy borrower from USDA in the future.