There likely will be a new community development financial institution on the block.
Eric Foster, a Grand Rapids native, and Cuong “CQ” Huynh, a Vietnamese immigrant who lives in Alexandria, Virginia, met while they were W.K. Kellogg Foundation fellows from 2014-17. They quickly discovered they shared a passion for economic equity.
The pair partnered to conduct research, including a series of focus groups, surveys and listening sessions to understand the barriers and needs of minority entrepreneurs.
They found 58 percent of the black, Hispanic, Asian, Latino, Native American and immigrant populations surveyed feel they have been denied business loans due to their race, and about the same percentage feel they will in the future.
About 75 percent of respondents did not even apply for business loans because they believed racial bias from traditional lenders would leave them at a disadvantage.
Fifty-two percent of respondents used alternative financing, such as payday loans, to fund their business.
Foster and Huynh believe they can do better in their new firm, Rende Progress Capital (RPC), 818 Butterworth St. SW inside the Goei Center offices, by offering “excluded entrepreneurs” loans and other strategic and educational services.
“(We’re) not focusing on those groups of excluded entrepreneurs because of their race; it’s because they represent groups that face more lending and wealth disparities based on many statistical points of our research,” Foster said.
According to the U.S. Department of Treasury, CDFIs can be banks, credit unions, loan or microloan funds, or venture capital providers. CDFIs were established by the Riegle Community Development and Regulatory Improvement Act of 1994 “to promote economic revitalization and community development in low-income communities through investment in and assistance to CDFIs.”
CDFIs leverage federal dollars alongside private capital to inject funds into neighborhoods that lack access to capital, according to the Treasury Department.
Depository institutions, on the other hand, are “encouraged” by the Community Reinvestment Act of 1977 to “help meet the credit needs of the communities in which they operate, including low- and moderate-income neighborhoods.” Their CRA performance record is evaluated by the federal government “periodically” and is one factor used in consideration of the institution’s application for deposit facilities.
RPC still is awaiting certification to be a CDFI from the Department of Treasury.
Foster said there is a significant racial gap in the rate of loans issued by traditional lenders in Michigan.
“Forty-six percent of African-American business owners are turned down from loans by traditional lenders versus 12 percent of their white counterparts,” he said.
“Data nationally shows us that almost stays the same, even controlled for both sets of business owners being creditworthy.”
Huynh will leverage his experience as a graduate of the Venture Capital Institute, as well as his background on Wall Street, in his role as managing director for investments at RPC.
Foster — who is managing director and portfolio manager at RPC — also currently is principal of Progress Strategies+, a project management company for corporate and business clients that specializes in diversity and inclusion. He said he will wind down that firm as RPC gets off the ground.
RPC will issue loan amounts from $10,000 or less up to $500,000 to “promising startups” and existing businesses in Michigan, with a goal of eventually expanding to Maryland, Washington, D.C., and Virginia.
Foster and Huynh hope to begin offering loan services to the Grand Rapids area in the fourth quarter of 2018 as they raise capital primarily through equity lenders and program-related investment (PRI) loans.
RPC in April received a grant of $100,000 and a low-interest PRI loan for $200,000 from the Grand Rapids Community Foundation (GRCF).
Laurie Craft, vice president for community investment at GRCF, said the investment in RPC aligns with the foundation’s ongoing support for workforce development, entrepreneurship and social enterprise in West Michigan.
“We felt their commitment to focusing on excluded entrepreneurs and people of color was an important bit of work, and I think there’s a lot of support that goes with that so that they will be able to provide small businesses loans,” she said.
In the past, GRCF has provided loans to more established CDFIs, such as Northern Initiatives in Marquette.
“Eric did a fellowship with Northern Initiatives prior to starting Rende,” Craft said. “They served as a bit of inspiration for what he and his partner, Cuong Huynh, can do.
“Northern Initiatives was targeting 45 to 50 percent of their investments to minorities and lower-income communities. Rende is much more targeted than that.”
Foster said RPC will serve excluded entrepreneurs “across the board,” rather than shooting for a percentage.
“Our focus is throughout the state of Michigan, and the last count from the (U.S.) Census and Department of Commerce is there are 180,000 minority businesses throughout the state. We think that’s underreported because there are shadow businesses that are not legally formed,” he said.
To select its loan recipients, RPC will combine traditional loan approval criteria with a system its co-founders developed called Financing Approval through Racial Equity (FARE), which they say helps them look at a number of factors conventional lenders aren’t attuned to.
“We look at things holistically from a business standpoint, plus the aspects of equity and inequity, business impact on diverse communities and neighborhoods, and other social factors,” Foster said.
“In addition, (they must have) a sound business model; some foundation or at least a market for their product, good or service; some customer activity; and financial information.”
He said because RPC is a CDFI, it will have different requirements for collateral positions and credit history than a bank would.
“We look at things in totality and not focus on the prerequisites that a bank would,” he said.
Craft said GRCF is expecting a below-market rate of return on the $200,000 PRI loan to RCP. The foundation’s biggest priority will be assessing the social impact of the partnership with RCP.
GRCF will track 13 indicators from data RCP will record, including the number of businesses the firm lends to, the success of those businesses and their sustainability.
“Economic success across all sectors of our community raises all boats,” Craft said. “Having resources to spend contributes to the economy on many levels. Providing opportunities for disenfranchised populations to thrive and succeed requires great investment, and we need to be purposeful. This achieves that goal.”