Federal Reserve Bank of San Francisco and Rocio Sanchez-Moyano, Lessons Learned from Small Business Lending During COVID-19: A Case Study of the California Rebuilding Fund (2022)

Summary

Federal Reserve Bank of San Francisco Community Development Research Brief 2022-3, dated May 2022, by senior researcher Rocio Sanchez-Moyano, a case study of the California Rebuilding Fund. Drawing on interviews with lenders, state officials and members of the CA Small Enterprise Task Force, it describes how state funds and a loan guarantee were combined with private and philanthropic money, more than $100 million in all, to make small business loans through CDFIs. The brief notes that federal aid such as the Paycheck Protection Program confirmed advocates' fears that owners in the most vulnerable communities were underserved. Loans were capped at the lesser of $100,000 or up to 100% of three months of pre-pandemic revenue, and participants said momentum for funding small businesses faded as the pandemic went on.

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Lessons Learned From Small Business
Lending during COVID-19: A Case Study of
the California Rebuilding Fund

Rocio Sanchez-Moyano
Federal Reserve Bank of San Francisco
May 2022
About the Author
Rocio Sanchez-Moyano is a senior researcher in Community Development at the Federal Reserve Bank
of San Francisco. Her areas of expertise include housing and asset building, with a special interest in
racial equity and the experiences of Hispanic and immigrant households. At the SF Fed, her focus is on
emerging trends in community development finance and financial inclusion, including the role of fintech
in low-income communities. She holds a PhD in City and Regional Planning from UC Berkeley.



Acknowledgments
I would like to thank the individuals who agreed to be interviewed (named on the next page) for their
contributions to this research. I also thank Bina Shrimali, Sarah Simms, and Lina Stepick at the SF Fed,
and Beth Bafford, David Beier, Bulbul Gupta, Carolina Martinez, Dan Moret, Scott Wu, and Randi Zeller
for their reviews and comments on this brief. Thanks to Jay Banfield, Carolina Reid, and Adair Morse for
early introductions to the California Rebuilding Fund and CA Small Enterprise Task Force and to Duncan
German for support in coordinating interviews. A final thanks to Carolina Reid for early support in
research design.



Disclaimer
The views expressed in this report are those of the author and do not necessarily reflect the views of
the Federal Reserve Bank of San Francisco or the Federal Reserve System.



Suggested Citation
Sanchez-Moyano, Rocio. 2022. “Lessons Learned From Small Business Lending During COVID-19: A
Case Study of the California Rebuilding Fund.” Federal Reserve Bank of San Francisco Community
Development Research Brief 2022-3. doi: 10.24148/cdrb2022-3.




Lessons Learned from Small Business Lending During COVID-19: A Case Study of the California Rebuilding Fund   1
Interview Participants

Beth Bafford, Calvert Impact Capital                                     Gayle Miller, California Department of
                                                                         Finance
Katherine Baird
                                                                         Dan Moret, Community Reinvestment Fund,
Jay Banfield
                                                                         USA
David Beier
                                                                         Bob Porter, Pacific Community Ventures
Gwendy Brown, Accion Opportunity Fund
                                                                         Michael Rapaport, Accion Opportunity
Julian Canete, California Hispanic Chambers of                           Fund
Commerce
                                                                         Sara Razavi, Working Solutions CDFI
Austin Choi
                                                                         Alfredo Silva
Kaela Colwell, Morrison & Foerster LLP
                                                                         John Tawadrous
Patrick Davis, Community Reinvestment Fund,
                                                                         Nicole Taylor, Silicon Valley Community
USA
                                                                         Foundation
Elliot Donnelley
                                                                         Alex Tenorio
Jesse Finfrock
                                                                         Olga Terets
Joe Gabai, Morrison & Foerster LLP
                                                                         Luz Urrutia, Accion Opportunity Fund
Bulbul Gupta, Pacific Community Ventures
                                                                         Robert Villarreal, CDC Small Business
Mark Herbert, Small Business Majority                                    Finance & Capital Impact Partners

Renee Kaplan                                                             Adam Werbach

Susan Lamping, CDC Small Business Finance                                Scott Wu, California Infrastructure and
                                                                         Economic Development Bank
Jenny Lee, Working Solutions CDFI
                                                                         Randi Zeller, Partner Emeritus, Kearney
Susan Mac Cormac, Morrison & Foerster LLP

Carolina Martinez, California Association for
Micro Enterprise Opportunity

All interviewees without institutional affiliations were interviewed due to their participation with
the CASE Task Force or related volunteer efforts; many interviewees with affiliations were also
Task Force members. One interview participant requested to remain anonymous.

Lessons Learned from Small Business Lending During COVID-19: A Case Study of the California Rebuilding Fund        2
Executive Summary
As the COVID-19 pandemic forced California businesses to shut down in March 2020, the fate of small
businesses, which often had fewer reserves to draw upon when trying to survive the shutdowns,
became particularly concerning. Federal aid measures, including the Paycheck Protection Program
(PPP), brought relief to many business owners, but their deployment also confirmed what many small
business advocates feared: business owners in the most vulnerable communities and underrepresented
business owners often struggled to obtain assistance. At the same time, small business lending capital
dried up. Many banks and fintechs slowed their lending. Mission-driven lenders with experience serving
underrepresented communities—like community development financial institutions (CDFIs)—received
more applications than they could possibly fund and had limited established channels to attract new
funding quickly. A coalition that spanned government, universities, small business advocates, lenders,
and concerned private citizens came together to design a solution that would leverage public funds
with private dollars to provide low-cost capital to small businesses that were rebuilding after COVID-19
via loans from CDFIs. The result was the California Rebuilding Fund (CARF). This report provides a brief
history of the creation of the CARF; details its structure, loan terms, and application process; highlights
lessons learned from its creation and implementation; and looks forward as this fund continues to
operate in California and as other states or localities consider establishing similar funds.

Why was the CARF needed?

At the time the CARF was designed and launched, those interested in assisting small businesses in
weathering the economic crisis prompted by the pandemic faced a particular set of problems and
constraints: how could they assist the smallest and most vulnerable small business owners as
affordably as possible with limited state funding? The CARF designers proposed an innovative solution:
combine existing small business loan guarantees and a new infusion of state dollars with private
capital to create liquidity for CDFIs to make small business loans. By coupling public and private
funding, the CARF was able to leverage a more limited state investment with private funding. At the
same time, the state’s involvement decreased the risk to private investors, which would increase the
willingness of private actors to invest and allow small business owners to access the capital at a lower
cost. CDFIs in California were well positioned to serve small business customers, particularly those that
were most likely to be struggling to access federal relief efforts. But these institutions faced their own
capital constraints that limited the amount of loans they could provide. By providing CDFIs with liquidity,
the CARF facilitated increased lending to at-risk small businesses.




Lessons Learned from Small Business Lending During COVID-19: A Case Study of the California Rebuilding Fund   3
How does the CARF structure provide affordable capital to small business owners?

The CARF's goal is to provide credit that is as affordable as possible to a broad array of small business
owners. The CARF achieves this through a public-private partnership between the state’s Infrastructure
and Economic Development Bank (IBank) and private investors, philanthropic organizations, and local
governments. The CARF is designed to leverage two different forms of state subsidy: a COVID-19
Disaster Risk Loan Guarantee and a separate infusion of state funding into the CARF. This state funding
is then supplemented by loans from private investors and philanthropic capital; in all, more than $100
million in government, private, and philanthropic capital has been raised to fund small business loans. In
both cases, the public funds are the most at risk if small business borrowers default on their loans. This
decreases the interest rate required to secure private capital in the fund, which then translates to lower
interest rates for small business borrowers. Each infusion of public funds is held in its own structure,
allowing for the parameters to change based on the source of capital (currently the guarantee
program or the state’s investment of first-loss capital) and as lending needs evolve.

CDFIs were chosen as the small business lenders for the program due to their familiarity with serving
small business borrowers, especially those that had been left behind in earlier pandemic-relief efforts.
Participating CDFIs come from all parts of the state, ensuring that all communities are served by a
participating lender. CDFIs have deep experience serving small business borrowers—especially women,
minorities, immigrants, and low-income individuals, who were some of the most at risk of not obtaining
other types of support during the economic crisis. The CARF also partnered with small business
technical assistance (TA) providers to help spread the word about the program and aid small business
owners in applying. Applications were routed through a centralized platform built for the CARF that
matched small businesses with a participating lender.

What are lessons learned from the CARF?

The CARF (and other funds like it that launched during the pandemic) demonstrates a way to leverage
larger amounts of capital through CDFIs to serve vulnerable small business borrowers. Even outside of
economic crises, the smallest small businesses—along with those owned by people of color, women,
veterans, immigrants, and low-income individuals—often struggle to obtain credit and capital. These
businesses are an important part of the economy, and programs like the CARF may be able to continue
to provide them with access to credit after the pandemic recovery. As governments and small business
advocates across the country consider how to support small businesses and whether programs like the
CARF are a match for their goals and needs, several lessons may be learned from the California
experience.



Lessons Learned from Small Business Lending During COVID-19: A Case Study of the California Rebuilding Fund   4
The CARF provides a pilot case for leveraging public and private capital to increase the credit
available to small businesses and to lower its costs.

By using public funds to lower the risk exposure of private investors, the CARF was able to lower the
borrowing costs for small businesses relative to what is typically available on the private market.
Although borrowing costs are expected to rise as the economy emerges from the most acute strain of
the pandemic, the use of public capital can keep costs in line with lending typical of CDFIs while
increasing the availability of capital for small business loans. The CARF also provides an example of a
centralized platform that offers both investors and small business owners a single touchpoint while
enabling a range of CDFIs to participate in the program.

Despite decreased risk, raising capital can be challenging.

The CARF was able to raise more than $100 million in private and philanthropic capital to provide small
business loans. Nevertheless, participants noted that momentum for funding small businesses faded as
the pandemic progressed, and the amount of time and effort needed to raise these funds surprised
some participants. It is possible, however, that once these types of programs become more established
(and less unknown to potential investors) and are able to approach capital-raising at scale, some of
these challenges may be reduced.

Standardized loan products are possible for CDFIs, but determining appropriate fees may need further
refinement.

The bespoke lending of the CDFI industry has often been cited as a barrier to reaching larger capital
markets. Though CDFI participants in the CARF admitted that the loan parameters within the CARF
could differ from their typical products and were, at times, more conservative, the CARF provides a test
case that enabling CDFI liquidity through a standardized loan product is possible. However, one
remaining potential barrier is ensuring that CDFIs earn sufficient income through origination and
servicing fees to make up for the loss of interest income.

The structure of the CARF itself is flexible and allows for different funding sources and lending terms.

As a result, it can be adapted to new sources of capital or different economic needs. For example,
additional 0 percent interest loans for San Francisco small businesses were made available through an
investment of the City and County of San Francisco into the CARF. This structure will also enable the
CARF to continue to add new lenders and update lending terms as the economic situation surrounding
the pandemic evolves.



Lessons Learned from Small Business Lending During COVID-19: A Case Study of the California Rebuilding Fund   5
These structures are complex, will vary significantly based on state lending laws, and require
partnership of a diverse group of actors; aligning terms can be challenging.

Though the CARF can serve as a model for similar efforts in other contexts, designing these programs
for other geographies will still require considerable effort to align actors and comply with local lending
laws. Additionally, as with many multiparty efforts, aligning terms to meet conflicting perspectives can
be challenging. Operating from a common set of goals will mitigate these challenges.

It can be useful and important to coordinate and leverage with other existing government programs to
provide a continuum of capital and complementary services without generating confusion for small
business owners.

The CARF was designed and launched at a time when the state of California expected to have limited
capital available to serve small business owners and the federal PPP funds had been exhausted. When
the state found itself with a budget surplus, it allocated $4 billion in small business grant relief across
several rounds of funding. The type and amount of aid offered varied from the CARF, and the CARF
designers viewed these efforts as complementary, allowing small businesses to access grant capital
earlier in the pandemic and then pivot to debt capital as they rebuilt for the post-pandemic economy.
However, they acknowledged that the existence of the grant program, along with renewed 2021
funding of the PPP, complicated communication efforts surrounding the CARF and required small
business owners to evaluate which program would best suit their needs.

Technical assistance (TA) is an important component of enabling small business participation in these
types of programs.

The CARF partnered with a variety of technical assistance and small business advocacy organizations
to educate small businesses about the program and assist them in applying. Several TA providers
stressed that early coordination on assistance was important, rather than treating it as an afterthought.
Many small business owners experienced challenges in applying, even though the program was
targeted to them, and the work of these organizations was important to the program’s success.




Lessons Learned from Small Business Lending During COVID-19: A Case Study of the California Rebuilding Fund   6
Contents


          Introduction ................................................................................................................................................................................. 8
          Methodology .............................................................................................................................................................................. 8
          Identifying the Problem ........................................................................................................................................................ 8
          Creators of the CARF ............................................................................................................................................................. 11
              The State of California ..................................................................................................................................................... 11
              CASE Task Force ................................................................................................................................................................. 12
              CDFIs ..........................................................................................................................................................................................14
          The California Rebuilding Fund ......................................................................................................................................15
              Structure of the CARF ......................................................................................................................................................15
              Fund administration and governance ..................................................................................................................19
              Application process, loan terms, and eligibility ............................................................................................ 20
          Reflections on the CARF ...................................................................................................................................................... 21
              Design constraints and structural advantages .............................................................................................. 21
              Fundraising experience.................................................................................................................................................23
              How the CASE Task Force operated.....................................................................................................................24
              CDFI motivations and challenges ...........................................................................................................................26
              Technical assistance.......................................................................................................................................................29
              Challenges due to timing and uncertainty ........................................................................................................ 31
          Looking Forward ....................................................................................................................................................................32
          Conclusion ..................................................................................................................................................................................36
          Appendix 1 – Loan Terms; Blended Facility ............................................................................................................ 37




Lessons Learned from Small Business Lending During COVID-19: A Case Study of the California Rebuilding Fund                                                                                                    7
Introduction
As the COVID-19 pandemic forced California businesses to shut down in March 2020, the fate of small
businesses, which often had fewer reserves to draw upon when trying to survive the shutdowns,
became particularly concerning. Federal aid measures, including the Paycheck Protection Program
(PPP), brought relief to many business owners, but their deployment also confirmed what many small
business advocates feared: business owners in the most vulnerable communities and underrepresented
business owners often struggled to obtain assistance. At the same time, small business lending capital
dried up. Many banks and fintechs slowed their lending. Mission-driven lenders with experience serving
underrepresented communities—like community development financial institutions (CDFIs)—received
more applications than they could possibly fund and had limited established channels to attract new
funding quickly. A coalition that spanned government, universities, small business advocates, lenders,
and concerned private citizens came together to design a solution that would leverage public funds
with private dollars to provide low-cost capital to small businesses that were rebuilding after COVID-19
via loans from CDFIs. The result was the California Rebuilding Fund (CARF). This report provides a brief
history of the creation of the CARF; details its structure, loan terms, and application process; highlights
lessons learned from its creation and implementation; and looks forward as this fund continues to
operate in California and as other states or localities consider establishing similar funds.


Methodology
Data for this case study were primarily gathered from interviews and occasional email exchanges with
interview subjects. This data collection was supplemented with content from IBank public meetings and
through review of materials submitted to the record in IBank meetings, as well as publicly available
materials, such as websites and news reporting. Thirty-five individuals were interviewed during 27
interviews (30‒60 minutes) conducted by videoconference from December 2020 to June 2021. Follow-
up interviews were conducted with four participants because clarification was needed. Elements of
the CARF evolved over time, and this report reflects details represented during the time of the data
collection.


Identifying the Problem
The nine-county Bay Area issued California’s first shelter-in-place order on March 16, 2020; Governor
Gavin Newsom’s statewide stay-at-home order soon followed, on March 19. According to estimates
provided by Professor Robert Fairlie to the California Assembly, the number of active businesses in
California dropped by 26 percent between February and April 2020. This number rose back to February

Lessons Learned from Small Business Lending During COVID-19: A Case Study of the California Rebuilding Fund   8
levels by October but fell again during the final months of 2020. Declines between February and April
were particularly sharp among Hispanic business owners. 1 Closures were even more severe among
small business owners, with one estimate from Opportunity Insights suggesting that the number of small
businesses in California declined 45 percent from January to April 2020. 2

The federal government rolled out the PPP in April 2020, but the first rounds of funding were quickly
exhausted. Research indicates that many in minority communities faced unequal access to loans.
Research documented that minority business owners received loans later in the summer than White
business owners 3 and that majority-minority communities often received fewer loans per capita than
mixed or majority-White areas. 4 Matched-pair audit studies indicated that minority business owners
both were discouraged from applying to PPP and given incomplete information by bank employees.5
According to the 2020 Federal Reserve Small Business Credit Survey, Hispanic- and Black-owned firms
were less likely to apply for PPP; among those who did, smaller shares received all of the funding they
sought, relative to White applicants. 6 In California, businesses in higher-income zip codes were more
likely to receive PPP than those in lower-income areas. 7

Given uncertainty about the course of the pandemic, the economy, and the ability of small business
owners to repay loans, many traditional lenders were hesitant to make small business loans, and




1
  Robert Fairlie, “The Impacts of COVID-19 on Small Business Owners.” Testimony before the California State
Assembly Committee on Jobs, Economic Development, and the Economy, February 23, 2021.
2
  Little Hoover Commission, “First Steps Toward Recovery: Saving Small Businesses” (Sacramento, CA: Little Hoover
Commission, December 2020).
3
  Sifan Liu and Joseph Parilla, “New Data Shows Small Businesses in Communities of Color Had Unequal Access to
Federal COVID-19 Relief” (Washington, DC: Brookings Institution, September 17, 2020).
4
  Mark E. Schweitzer and Garrett Borawski, “How Well Did PPP Loans Reach Low- and Moderate-Income
Communities?,” Economic Commentary (Cleveland, OH: Federal Reserve Bank of Cleveland, May 27, 2021).
5
  Anneliese Lederer et al., “Lending Discrimination Within the Paycheck Protection Program” (Washington, DC:
National Community Reinvestment Coalition, July 15, 2020); Anneliese Lederer et al., “Lending Discrimination During
Covid-19: Black and Hispanic Women-Owned Businesses” (Washington, DC: National Community Reinvestment
Coalition, November 10, 2020).
6
  “Small Business Credit Survey 2021 Report on Firms Owned by People of Color.”
7
  Rocio Sanchez-Moyano, “Paycheck Protection Program Lending in the Twelfth Federal Reserve District,” Federal
Reserve Bank of San Francisco, Community Development Research Brief Series, March 3, 2021, doi:
10.24148/cdrb2021-01.
Lessons Learned from Small Business Lending During COVID-19: A Case Study of the California Rebuilding Fund   9
lending activity by fintechs unrelated to PPP evaporated early in the pandemic. 8 CDFIs have historically
served harder-to-reach small business owners, and interviews with CDFIs in California indicated that
they were experiencing hundreds of phone calls a day from small business owners looking for support.
However, a lack of liquidity and available capital was constraining the lending that many CDFIs could
do. CDFIs were constrained in more than one way. They were working with existing customers who
may have needed assistance (such as loan modifications or forbearance), as well as fielding a surge in
requests for new loans. Many CDFIs were also participating in PPP, leaving limited financial resources
and staff capacity to meet the increasing demand.

As this was unfolding, individuals across the state were working on solutions at the same time Congress
and the federal government were designing and implementing the PPP and other small business relief
programs. Several parallel tracks eventually merged to form a coalition called the California Small
Enterprise (CASE) Task Force, which developed the CARF with the support of California’s IBank. The
primary goal of the groups involved in the CARF was to find a way to facilitate loans for small business
borrowers. They were concerned that small businesses had fewer resources to begin with and less time
to avail themselves of those resources. They were also concerned with evidence that small businesses
were being left behind in PPP, with larger firms taking much of the resources available. Many
interviewees stressed reaching underserved small businesses that often have difficulty obtaining
capital—those owned by low-income individuals, people of color, immigrants, and women. Once the
group settled on CDFIs as the originating lenders of the small business loans, a secondary goal became
generating liquidity such that these CDFIs could originate more loans. Though CDFIs were fundraising
on their own to raise additional capital to make new loans, being able to fundraise as a group had the
potential for much larger-scale lending and would place the burden of fundraising on the lending
program rather than on individual, overstretched CDFIs.

On August 26, 2020, the CASE Task Force and its allies presented a proposal to the IBank Board of
Directors, with support from the IBank, and received approval and funding for the program. The
proposed structure was a small business loan program funded through a public-private partnership.
The IBank would provide funding and sit in the riskiest position, enabling more risk-averse investors to




8
 AnnaMaria Andriotis and Peter Rudegeair, “WSJ News Exclusive: People Need Loans as Coronavirus Spreads.
Lenders Are Making Them Tougher to Get.,” Wall Street Journal, March 28, 2020, Markets section; Peter Rudegeair,
“Small Businesses, Hit Hard by Pandemic, Are Being Starved of Credit,” Wall Street Journal, December 20, 2020,
Markets section; Itzhak Ben-David, Mark J. Johnson, and René M. Stulz, “Why Did Small Business Fintech Lending
Dry Up During March 2020?,” Working Paper, Working Paper Series (Cambridge, MA: National Bureau of Economic
Research, September 2021), doi: 10.3386/w29205.
Lessons Learned from Small Business Lending During COVID-19: A Case Study of the California Rebuilding Fund   10
lend money to the fund. CDFIs would make the loans to the small business borrowers but would be able
to transfer the bulk of the loan to the fund, generating liquidity to make more loans (for more details, see
the Structure section). Governor Newsom officially launched the program on November 20, 2020.


Creators of the CARF
The CARF was designed by members of the CASE Task Force. Its ultimate structure, however, was the
result of conversations with its key partners in the state of California and among CDFIs, the lenders
originating the small business loans. Design elements were also affected by lenders to the fund. Though
the CASE team was the primary designer of the CARF, this section starts with the state of California, as
the CARF eventually leveraged a program created by the state in early 2020.

The State of California

Various actors across California’s state government had been considering how to support small
businesses as the pandemic began to unfold. The California IBank launched a COVID-19 Disaster Relief
Loan Guarantee program in April 2020. It was adapted from an existing IBank guarantee program but
was targeted, through a network of CDFI partners, at smaller businesses than those traditionally served
through the IBank’s non-pandemic guarantee program. This program launched at the same time as the
federal PPP but originally had limited take-up. Though the IBank guaranteed the loans, CDFIs still
needed to have sufficient liquidity to make and hold the loans, and in the late spring/early summer of
2020, CDFIs were also actively engaged in PPP lending and had limited additional capital available to
issue loans aimed at the guarantee. One CDFI that was making loans under the Disaster Relief program
insisted that the CARF was needed because liquidity constraints limited the number of Disaster Relief
guaranteed loans it could originate. An interview with another CDFI suggested that it was hesitant to
lend without certainty around having the loan guaranteed, as well as when the guarantee program
might run out of funds.

Individuals at the IBank turned to thinking about how to help CDFIs access the capital they needed to
make the loans that the IBank could guarantee. The state of California was projecting large budget
deficits at the time, so state actors knew there would be limited funds to provide direct capital to CDFIs
(the guarantees themselves are funded through the IBank, which is self-sustaining and does not receive
state appropriations to fund its traditional programs). Around this time, policymakers at the IBank and
others involved with the Governor’s Task Force on Business and Jobs Recovery had conversations with
various individuals who ultimately became involved in the CASE Task Force (and also played a role in
connecting these various actors) and settled on the possibility of a public-private partnership to
leverage the limited state dollars that were available at the time. As described in detail in the Structure

Lessons Learned from Small Business Lending During COVID-19: A Case Study of the California Rebuilding Fund   11
section, the CARF was able to essentially utilize the guarantee structure already in use by the IBank but
in a way that streamlined the process and provided liquidity to the CDFIs. The IBank additionally
provided first-loss capital to support a fund without guarantees, which could be used once the
guaranteed fund was depleted. These commitments from the IBank were then leveraged with private
and philanthropic capital.

Taking a loss position was a departure from the IBank’s general strategy. The decision to put funds at
risk was made with the goal of maximizing the total amount of funding available to small businesses by
using this loss position as a way to incentivize private capital participation at low interest rates for small
business owners, particularly in the uncertain economic environment surrounding the pandemic. During
interviews, government individuals referred to these positions not as charity but as investments in the
state’s small business infrastructure. One interviewee from the state suggested that the program was a
proof of concept as to whether by decreasing the risk, private investment would flow into the program,
but they also suggested that these loans were not as risky as generally perceived by traditional
lenders. This interviewee’s hope was that the program could help push conversations around the
metrics used to assess small business risk and ultimately demonstrate that these businesses were not as
risky as often perceived. Additionally, the intention was to build capacity among the state’s small
businesses and to help establish banking relationships. State interviewees hoped these businesses
could grow and eventually access more traditional lending products or other programs offered by the
state that are targeted at larger small businesses.

In addition to supporting the CARF, the state also created a small business grant program after budget
revisions no longer projected deep deficits. This program initially allocated $500 million in grants. The
legislature allocated an additional $2 billion to the program in March 2021 and an additional $1.5 billion in
July 2021. This grant program was capitalized at much higher levels than the CARF and can reach a
larger number of small businesses, but the funds available to any individual business are smaller than
those in the CARF. 9 One interviewee suggested that the funds were deployed through grants (rather
than further capitalizing the CARF), due partly to speed of distribution.

CASE Task Force

State officials at the IBank and on Governor Newsom’s Task Force on Business and Jobs Recovery had
heard of promising programs in Chicago and New York State that were developed and deployed




9
 CARF loans can be up to $100,000, while relief grants range from $5,000 for the businesses with the smallest
revenues to $25,000 for those with the largest eligible revenues.
Lessons Learned from Small Business Lending During COVID-19: A Case Study of the California Rebuilding Fund   12
relatively quickly to provide loan capital to small businesses during the pandemic and had a
conversation with Calvert Impact Capital and Community Reinvestment Fund, USA (CRF), who
structured and operationalized the City of Chicago and New York funds. 10 At the same time, a set of
faculty at the business school at the University of California, Berkeley, was developing a program that
would use local funds to support small businesses in Berkeley (and was having similar discussions with
other local entities). Meanwhile, a set of private citizens (the CASE Task Force) had been compiling a
resource guide and holding online “office hours” for affected small businesses while simultaneously
trying to develop a loan product for these businesses. As each of these groups developed proposals,
they were introduced to one another and eventually combined under the CASE Task Force name. These
actors continued to work together, meeting weekly as a group and more often as subcommittees.

The CASE Task Force, which started with individuals volunteering their professional expertise to support
small businesses in need, included experts in corporate finance, structure, and governance; economic
mobility and economic development; impact finance; and fundraising. They were intentional about
expanding their expertise, focusing on partners in their networks who were similarly mission-driven and
willing and able to work as a set of loosely connected volunteers. The group was flexible and inclusive:
their conversations around how to respond to the crisis led them to others working on similar proposals,
and these individuals joined the group, combining ideas and efforts rather than creating competing
initiatives. Some of the Task Force’s earliest connections were to philanthropic networks in the Bay Area
and to CDFIs, some of whom had already begun fundraising around a small business response. They
were quickly connected to a set of UC Berkeley professors at the business school working on a similar
effort who brought additional expertise in structuring the loan product. They reached out to possible
owners and administrators for the fund and eventually settled on Kiva Microfunds as both the owner
and administrator of the fund. A founding member of the CASE Task Force is a partner at the law firm
Morrison & Foerster; this project became part of their pro bono work and involved both pro bono and
volunteer hours from many members of the firm. As the group began to scale, it realized that it needed
professional capacity and expertise on fundraising and capital aggregation; it eventually hired Calvert
Impact Capital for this role and brought in CRF as the technology services provider.

The group’s earliest efforts included putting together a resource guide with links to local, state, federal,
and nonprofit assistance programs. It also held regular office hours in partnership with a TA provider,
where a set of volunteer lawyers was available to answer legal questions around applying for funding,
negotiating with landlords, and other concerns of small business owners. The office hours also provided




10
     CRF was involved in both the Chicago and New York funds, while Calvert worked only on New York.
Lessons Learned from Small Business Lending During COVID-19: A Case Study of the California Rebuilding Fund   13
a forum for impacted small businesses to feel connected. These efforts were happening in tandem with
those of the group working on developing the CARF structure and doing the initial fundraising.

Part of the conversation around serving small business borrowers focused on technical assistance. The
work with TA providers and small business advocates was also part of the CASE Task Force’s coalition-
building. In addition to building a coalition of CDFIs aligned with the program, TA providers and the
Black, Hispanic, and Asian chambers of commerce in California were involved in spreading the word
about this program to their members and in voicing their support when the program was presented to
the IBank Board. One CDFI participant described the work with TA providers and chambers of
commerce as mimicking how they typically operate—a lending and advising model. They saw these
partnerships as important in reaching small businesses and in building up the TA capacity for the CARF.
One TA provider pointed to the value of this coalition, saying that it was important that small businesses
hear about this program both from the top (the government) and from below (organizations like theirs,
which are embedded in the community).

CDFIs

CDFIs were selected as the originating lenders to small businesses through the fund for several reasons.
The CASE members wanted to particularly target underserved small businesses and had their eyes on
lessons learned from the PPP, where reporting suggested that woman- and minority-owned
businesses, microbusinesses, and those without existing banking relationships had particular difficulty
accessing the program. CDFIs have always served this segment of the market and have deep expertise
and relationships within their communities. According to one interview, CDFIs were approached as
lending experts in this space and were asked to help identify small business needs and underwriting
parameters. Interviewees noted that CDFIs are already engaged and trusted intermediaries in their
communities, and several others emphasized that having a broad geographic network of CDFIs helped
them reach communities all around the state. Using nonprofit CDFIs as the final lender also simplified
some of the legal hurdles related to state lending laws.

Few interviewees expressed a desire for lenders other than CDFIs. Several described CDFIs as hidden
gems—organizations with which they had been unfamiliar prior to working on the CARF, but which they
saw as well-suited to reaching underserved business owners. One interviewee suggested that perhaps
the program could be expanded to other lenders in the future, though this person noted that there
would need to be additional rules if fintechs were included. Another noted that while some fintechs
may be able to work in the program, most are not rooted in these communities and would exacerbate
accessibility problems for businesses that were struggling to complete applications online. One
participant, however, pushed back on limiting the program to CDFIs and suggested that it should have

Lessons Learned from Small Business Lending During COVID-19: A Case Study of the California Rebuilding Fund   14
been available to a wider set of nonprofit lenders or TA providers who had experience with local grant
programs; another interviewee agreed that it could have been expanded to include other mission-
based lenders.

Pacific Community Ventures and Accion Opportunity Fund were the first CDFIs involved in the CASE
Task Force as a result of their connection to other CASE members. Outreach to other CDFI participants
focused on reaching all portions of the state. CDFI participants in the fund include both statewide
lenders and CDFIs that focus on smaller, targeted geographies; one interviewee noted that there was
an effort to ensure that each county was served both by a statewide CDFI and a regional one. This
interviewee suggested that the statewide CDFIs have more scale and efficiency but that the regional
ones can have a nuanced approach that is specific to their geographies. There is also significant
overlap between the CDFIs that were already participating in the IBank’s Disaster Relief Loan
Guarantee program and those that are lenders through the CARF. Interviewees indicated there were
no specific criteria (in terms of asset size, existing portfolio risk, etc.) for CDFIs interested in joining the
CARF. However, many who were asked also indicated that they were unfamiliar with what the process
for new CDFIs to join the coalition might be or why others had not participated, and one interviewee
suggested that it might have been better if a clear set of selection criteria existed.


The California Rebuilding Fund

Structure of the CARF

The structure of the California Rebuilding Fund (CARF) was designed to address the limited availability
of credit to small business owners and the constrained ability of CDFIs to issue additional small business
loans. It did so by operationalizing these problems into two main concerns. First, how to provide small
business owners with loans at a very low interest rate? Second, how to provide this capital at a low cost
(e.g., without incurring significant ongoing fund management and compliance costs)? Traditional
private and philanthropic capital providers contributed the bulk of the loan capital. However, given the
risk profile of small businesses generally and the uncertainty about economic recovery under COVID-
19, additional support was needed to attract these lenders and keep interest rates low. The state of
California, through the IBank, provided the risk protection for these traditional lenders that facilitated a
low interest rate for the small business borrowers. Grants and donations from a variety of philanthropic
sources (foundations, individuals, donor-advised funds) helped to cover other fund structuring and
operating costs, and CDFIs served as the originating lenders to the small business borrowers. The
creators of the CARF were also aiming for speed; other structures would have necessitated different
types of registration and compliance, which would have required additional time and financial


Lessons Learned from Small Business Lending During COVID-19: A Case Study of the California Rebuilding Fund   15
resources. One key designer of the CARF described its structure as the “fastest, least cost of capital,
[and] most flexible.”

Typically, public-private lending facilities have either bundled and sold loans or have set up a loan
fund. The CARF sits in between these two types of structures (though called the California Rebuilding
Fund, it is not, in fact, a fund). The CARF is a public benefit limited liability corporation (PBLLC), which
loans money to CDFIs, who then make loans to small business borrowers (on-lending). This on-lending
structure differentiates the CARF from the NY Forward Loan Fund, where loans are sold to a loan
purchase facility. According to interviewees, there are two ways in which a CDFI may draw funds from
the CARF. The CDFI may first borrow money from the fund and make a small business loan. It then
transfers the majority of the asset (the small business loan) to the CARF to repay the borrowing within a
period of days or weeks. CDFIs may also fund an eligible loan and then transfer the majority of the asset
and be refunded. In both cases, the CDFI continues to service the loans. This structure is unique to
California because of the state’s lending license laws.

Kiva Microfunds owns 100 percent of the PBLLC that is the CARF and additionally serves as the CARF
administrator. Kiva was selected as the owner and administrator of the fund for several reasons. It had
experience in lending to intermediaries, like CDFIs, and was also seen as “Switzerland” (as described by
an interviewee) because it was not competing with CDFIs to make small business loans. Additionally,
because Kiva and the participating CDFIs are all public charities, the fund’s on-lending structure is able
to operate within lending laws that apply to public charities. Calvert Impact Capital is the aggregator
for the CARF. CRF is the technology services provider for the CARF and manages the front-end platform
and matching technology behind the loan application portal.

One motivator behind the creation of a collaborative small business fund was to give philanthropy and
investors who wanted to support small businesses a way to easily do so, rather than needing to
coordinate directly with institutions, like CDFIs. Similarly, it gave CDFIs the ability to raise capital at a
larger scale and not need to individually negotiate with institutional lenders and philanthropy. One
interviewee described the collaboration as the sum of the parts being larger than the whole: by coming
together and raising funds together, CDFIs in California could collectively operate at a meaningful
scale to respond to the economic crisis facing small businesses. At the same time, the CARF did not want
to compete with CDFIs for philanthropic capital, which is one reason why the CARF is composed
predominantly of loans from investors, rather than grants.

Two related, but distinct, funding structures exist within the CARF, each held within its own special-
purpose vehicle (SPV). Each SPV is governed by its own set of documents and allows for different types
of capital and capital arrangements to support the same type of small business lending. Currently, in
each SPV there is some form of government capital that provides insulation against loss and private
Lessons Learned from Small Business Lending During COVID-19: A Case Study of the California Rebuilding Fund   16
capital, which is the first to be repaid. The first SPV also accepted grants and donations that helped
support the CDFIs’ fees and keep the borrowing costs low for the small business borrower. The CARF
has contractual agreements with the lenders providing the capital and additional contracts with each
CDFI participating in the CARF. See Figure 1 for a representation of the CARF’s structure.

The first SPV is the Guarantee Facility. Small business loans made from this facility are backed by the
IBank’s Disaster Relief Loan Guarantee program, which guarantees 95 percent of the loan should the
borrower fail to repay it. The IBank agreed to guarantee up to $100 million in loans (allowing for 2:1
leverage of $50 million in state funding). The first SPV was $50 million to leverage the guarantee
capacity that was still available at the time of the SPV’s launch. The fund is capitalized by private and
philanthropic capital in two tranches—a senior tranche and a junior (or program-related investment
[PRI]) tranche. As described above, grant money is also contributed to the fund, which helps support the
guarantee fees and the CDFI’s origination fees. The loans to small businesses are made by CDFIs but
must be approved by a financial development corporation (FDC) 11 affiliated with the IBank to secure the
IBank guarantee.

The second SPV is the Blended Facility. In this facility, there are three classes (A, B, and C) of lenders;
Class A lenders will be the first to be repaid, while Class C lenders will be paid last and are most likely to
sustain losses if the small business borrowers default on their loans. In the Blended Facility, there is no
guarantee, but the IBank has provided $37.5 million in Class C capital, which helps insulate private
lenders from loss. This $37.5 million can then be leveraged with $87.5 million in private lending for a $125
million fund. Class A lenders are more traditional institutional investors, such as banks and insurance
companies, while Class B lenders are more likely to be mission-driven investors, such as foundations
providing capital in the form of PRIs. In April 2021, the IBank Board approved allowing its $37.5 million
contribution to be withdrawn from the IBank in increments so that the entirety of the private capital did
not need to be raised before loans to small businesses could be disbursed; the 30:70 ratio between the
IBank’s contribution and private capital will be maintained as the fund grows. The blended facility
allows for more leveraging of public dollars. The Blended Facility does not involve the FDCs, which
decreases the cost and time from the perspective of the CDFIs and the small business borrower.




 FDCs are mission-based organizations that were created to assist the IBank in administering its loan guarantee
11


programs.
Lessons Learned from Small Business Lending During COVID-19: A Case Study of the California Rebuilding Fund   17
Figure 1: Structure of the California Rebuilding Fund (Blended Facility)




Note: This image describes the Blended Facility, but the structure is similar for the Guarantee Facility. The main
difference is in the credit agreement with lenders, where there are two tranches of investors and the state’s
guarantee position.
The subservicer box describes the role of the CDFIs; it does not indicate a separate entity.
Source: August 2020 IBank public meeting, “8a CA Rebuild Fund Resolution-No.-20-15,” Exhibit B.


Lessons Learned from Small Business Lending During COVID-19: A Case Study of the California Rebuilding Fund     18
Originating CDFIs hold 10 percent of the loan in the Guarantee Facility and 5 percent of the loan in the
Blended Facility. The Guarantee Facility guarantees 95 percent of the loan, which is shared pari-passu
between the portion held by the CDFI and the portion held in the facility. In the case of the Blended
Facility, the CDFIs transfer 95 percent to the SPV and do not have loss protection on the portion that
they hold. This is partly so that CDFIs have “skin in the game,” and it sends a signal to other investors that
the CDFIs stand behind their underwriting of these loans. The CDFIs obtain an origination fee of 4
percent (or a minimum of $500) per loan and servicing fees of 1 percent of loans outstanding or $175 per
loan, annually, whichever is greater.

The SPV structure allows for later rounds of funding to be slotted in as additional SPVs. Because each
vehicle is distinct, terms can be modified in subsequent SPVs. This capital flexibility has also allowed for
investments from local governments. Santa Clara County was an early contributor to the fund (making
a Class A loan); its funds are used to support loans in the county and boost the county’s regional
allocation within the CARF. In July 2021, the City of San Francisco launched a $12 million, 0 percent
interest rate loan program through the CARF. These small business loans were made possible by San
Francisco’s providing a Class C loan and additional grant funding to buy down the interest rate.

Fund administration and governance

Though Kiva is the owner and administrator of the CARF, decisions for the CARF are made by the
Governance and Allocation Committee (GAC). The GAC is made up of neutral parties (with exceptions
for representatives from lenders to the CARF and from the owner/manager of the fund) and includes
members representing nonprofit, philanthropy, lending, and governance perspectives. At the time of
the interviews, the GAC had seven members, though membership can change over time. The
independent governance structure was important to the CARF designers. The selection of different
types of stakeholders (nonprofit, lenders, philanthropy, etc.) is dictated in the terms of the CARF
approved by the IBank; this variety of members is meant to ensure a holistic perspective. The CARF itself
is also intentionally distinct from Kiva and also not beholden to any particular set of funders.

The GAC formally began operations on September 18, 2020; prior decisions about the fund were made
by the CASE Task Force. Post-creation, the GAC handles decisions specific to the fund. The CASE Task
Force continues to meet, focusing on the broader ecosystem around the CARF, such as policy, how the
CARF interacts with other programs, and how to support the small business ecosystem. The GAC is
charged with making any needed changes or adjustments to the CARF (e.g., loan terms or decisions
around which CDFIs participate), and it also manages the allocation of money from the fund to various
CDFIs based on the goals of the fund. The CARF designers were explicit in their goal of equitable
distribution of funds across the state; they wanted to avoid a situation where urban areas
outcompeted rural ones, or where one region of the state received a disproportionate share of the

Lessons Learned from Small Business Lending During COVID-19: A Case Study of the California Rebuilding Fund   19
funding. As a result, the GAC monitors the geographic distribution of loans being made and can adjust
allocations to CDFIs or make recommendations to CDFIs on where to target lending if it becomes
geographically unbalanced. Additionally, although the CARF does not have (and legally cannot have)
quotas or requirements to reach different demographic groups, it is monitoring the demographics of
applicants and can press CDFIs to consider how to reach underserved populations. Kiva and Calvert
provide regular reports to the GAC, which facilitates its work. The GAC also serves an oversight
function, monitoring both the capital flowing into the CARF and the performance of participating CDFIs.

Application process, loan terms, and eligibility

Small business borrowers initiate an application through a centralized platform, Connect2Capital
(C2C). At this stage, the borrowers provide an initial set of information and are screened for eligibility. At
the end of the process, if they meet the eligibility criteria, they are matched with one or more CDFIs.
Behind the scenes, C2C matches borrowers with CDFIs based on geography and other criteria selected
by the CDFIs, such as loan size. Upon reaching the match page, the borrower has the ability to choose
which CDFI it would like to work with; the page includes a blurb about each matched CDFI. Once the
applicant’s information is at the CDFI, the borrower then provides the full documentation required for
the loan, and the CDFI determines whether to make the loan. Though the CARF sets the loan terms and
the guidelines for eligibility and basic requirements, each CDFI is responsible for underwriting the loan
and uses its own underwriting process. Some borrowers will not match with any CDFI on the application
portal. The page alerting applicants that they have not matched with a CDFI also lists resources for
borrowers, including TA providers.

To be eligible for the CARF’s loans, businesses may not have more than 50 employees and must have
gross revenues of less than $5 million per year; there is a limited set of industries that are ineligible for
the loans. Because the CARF designers knew that demand would far exceed the supply of funds
available, the CARF was envisioned as a rebuilding fund that could allow businesses that had been
successful prior to the pandemic to get back on their feet. As a result, businesses are required to have
been profitable in 2019, self-certify a certain decline in revenue due to the pandemic, and demonstrate
that revenues have started to grow again. Initially, new businesses (those that were started after 2019)
were ineligible for the program, but they became eligible in the spring of 2021. However, the amount of
the CARF that can be allocated to new businesses is limited to 15 percent.

The small business loans provided through the CARF are below-market for what is typical in the small
business lending sector. As outlined in the term sheet from the April 2021 IBank Board meeting (Appendix
1), at the time of this writing, the loans in the Blended Facility have an interest rate of 4.25 percent; if
interest rates rise in the future, the interest rate is pegged to WSJ Prime + 1.0 percent. The loans include a

Lessons Learned from Small Business Lending During COVID-19: A Case Study of the California Rebuilding Fund   20
12-month interest-only repayment period before becoming fully amortizing, which gives the small
businesses some time to recover before needing to make full loan payments. Costs to the borrower
(beyond interest) are restricted to a limited set of third-party fees and expenses. Loan size is limited to
the lesser of $100,000 or an average revenue for a three-month period prior to the pandemic.

Early interviews suggested that the CARF is reaching a broad array of borrowers, with large shares of
the applications coming from small businesses that are very small (fewer than 10 employees) and from
businesses owned by women and people of color. Though the GAC has the ability to rebalance
allocations to ensure that all regions of the state are being served proportionally, the interviews
suggested that outreach had been successful in prompting applications from all parts of the state and
that more formal mechanisms for allocation had not been needed.


Reflections on the CARF

Design constraints and structural advantages

The development of the CARF faced two main sets of constraints. The first set was legal constraints.
Lending is regulated at the state and federal levels, and there are additional laws that govern loan
pools or funds. Interviewees with legal backgrounds stressed that the program design was particular
to California, and though the structure can be replicated elsewhere, state laws could require state-
specific changes. Interviewees also mentioned that California has antidiscrimination laws that include
provisions against affirmative action, in addition to needing to follow fair lending laws that exist
nationwide; this meant that while the program was designed with underrepresented and underserved
borrowers in mind, it could not be explicit in targeting lending to specific demographic communities.
These legal constraints affected how the fund was structured and what institutions could serve as
lenders for and owners of the fund. Finally, California also has strict data privacy laws, which affected
how the application portal and referrals through it were designed.

The second constraint the CARF faced was aligning the terms to accommodate the needs of the
lenders to the fund while staying true to the goals of the group and the way that CDFIs do small
business lending. As in any public-private partnership, there is a tension between reaching as many
borrowers as possible by keeping costs low and eligibility requirements expansive while having
sufficient incentives to induce the participation of private investors who seek additional return with
increased risk. The IBank also had its own set of requirements for guaranteed funds and their first-loss
capital. In this case, there was an added hurdle because the default risk was unclear: small business
loans are typically perceived as riskier than loans for larger firms in a normal year, but it was
particularly difficult to predict how these businesses would adapt to uncertain economic conditions

Lessons Learned from Small Business Lending During COVID-19: A Case Study of the California Rebuilding Fund   21
induced by COVID-19. In addition to having a disparate set of private and philanthropic investors agree
to terms, CDFIs also had to come together and agree on a uniform product, something that is relatively
uncommon among CDFIs. Ultimately, interviewees typically stressed that they were not far out of
alignment when it came to goals for the CARF. However, ironing out the details was still complicated,
given the number of parties to the transaction.

Although the loans have favorable terms, compared with what is typical in the small business market,
CDFI interviewees regularly commented on aspects of the credit box that they felt were too restrictive
or dissimilar to how they would lend outside of the program. One CDFI interviewee suggested that the
private lenders were the source of the credit tightness noted by many CDFIs and that these lenders’
concerns and parameters pushed whom the program was designed to serve—parameters were
“investor-driven rather than need-driven.” This CDFI interviewee was also frustrated by what they saw
as a lack of transparency between the investors and those negotiating with them, while
acknowledging that they appreciated there was a third party managing the investor relationship.
Other CDFIs mentioned that there were negotiations with the lenders to the fund; however, they were
less pointed in suggesting that it fundamentally changed the customer base, while acknowledging that
it did often result in tighter underwriting than the CDFIs typically do. Interviews indicated that many
individuals involved in creating the CARF view small business lending as less risky than traditional
investors do, and that CDFIs, because they are used to serving this segment of the market, felt that they
could safely lend with wider parameters than those set by the program. One CDFI interviewee said
they were not surprised by the investors’ framing, but that it was fundamentally different from how
CDFIs think. Another interviewee suggested that the initial product was not able to reach the most
underserved borrowers, but that this was necessary to get all of the actors on the same page, and as
the second round of funding was secured, the product could be adjusted. Conversely, one interviewee
suggested that meeting the parameters of the IBank guarantee program affected the design of the
credit box more than the requirements of private investors.

At the same time, the CARF structure has several advantages. It created a pipeline through which large
investors and philanthropic institutions could reach small business borrowers while keeping the small
business borrowers engaged with local lending institutions. Although the CDFIs had to agree to a
standardized set of eligibility and underwriting guidelines, they were able to access a large pool of
capital without needing to individually fundraise and negotiate the terms with each philanthropic or
institutional investor. The agreements and structure of the fund are relatively sophisticated; by acting
together, the CDFIs could rely on a joint pool of experts rather than needing to have that expertise in-
house (or needing to contract for it). The interest rate to the small business borrower is low because the
IBank has provided guarantees or first-loss capital, and other grants to the CARF subsidize the fund as


Lessons Learned from Small Business Lending During COVID-19: A Case Study of the California Rebuilding Fund   22
well. Several interviewees stressed the flexibility of the fund structure. The CARF design itself, with the
overarching PBLLC and separate SPVs, is a flexible design that allows for additional rounds of funding
to be accommodated in the larger structure. This flexibility also allows for changes in the product (such
as eligibility or loan terms) in later rounds of funding. Although the IBank is providing the first-loss capital
in California, it need not be a government entity providing this capital; the funding structure can
accommodate different forms of investment from other government or philanthropic actors, as
indicated by the investments made by the City and County of San Francisco and Santa Clara County.

Fundraising experience

Many interviewees expressed surprise at the difficulty in securing both philanthropic and investment
capital. Part of the challenge was aligning all the moving pieces simultaneously: public, private, and
philanthropic capital were needed to support the effort, but actors were hesitant to sign on when their
counterpoints were still pending. CASE members had significant connections into Bay Area
philanthropic networks and were able to secure initial seed funding, but raising the philanthropic
capital that was needed for the full fund was more challenging. Several CASE Task Force members who
worked with philanthropy expressed that this effort required more upfront communications with
potential funders to educate them about how this type of product worked and about CDFIs as lenders.
The members suggested that small business efforts did not fit as cleanly into traditional foundation
“buckets” (such as climate, for example). One interviewee noted that despite looking for innovative
ideas, many philanthropic funders were ultimately risk-averse. An interviewee suggested that many
philanthropists are not used to providing investments, rather than grants, and another noted that they
initially targeted funders who were more sophisticated and familiar with a variety of funding vehicles.
Interviewees also mentioned that philanthropic funders neither wanted to duplicate federal efforts nor
fund something that would be ultimately eclipsed by federal efforts.

Similarly, conversations with bank investors went more slowly than expected, despite the guarantees in
the initial fund that would essentially insulate investors from losses and a large first-loss position by the
state of California in the second SPV. One interviewee noted that multiparty deals are always difficult
to execute and that everyone was overstretched in 2020, which made the situation all the more
challenging. The CARF also did not have an anchor investor who signed on first and dictated the terms;
the CASE Task Force was pursuing several large investors at once and trying to come to terms that
worked for all of the investors. One interviewee noted that while the group creating the fund was
mission-driven, the investors they approached treated it like any standard commercial deal.
Additionally, the product was new, which may have caused more trepidation among institutional
actors. As time went on, fundraising also became more challenging—potential investors’ feeling of
urgency to assist small businesses was lessened relative to mid-2020, when CASE members first started
Lessons Learned from Small Business Lending During COVID-19: A Case Study of the California Rebuilding Fund   23
discussing the CARF with funders. Fundraising efforts shifted to focus the narrative not just on COVID-19
relief but on long-standing gaps in access to credit for small businesses.

Fundraising efforts on both the philanthropic and private capital sides have focused on finding funders
who are a good fit with the CARF in terms of alignment with strategy, structure, and motivations.
Though the names of CARF investors and donors have appeared in press releases and on the CARF’s
website, some CASE Task Force members felt the list of supporters had not been transparent and had
resulted in fundraising missteps. One interviewee was critical of the opacity in fundraising efforts and
suggested that stronger use of the state’s bully pulpit, combined with broader advertisement of CARF
investors to nudge similar investors into participating, would have been a better strategy to raise
capital. Another interviewee similarly suggested that ideally the fund would have had a bigger launch,
with large initial investors creating a signaling effect to crowd in other big players.

How the CASE Task Force operated

As described previously, the CASE Task Force was a group of disparate actors, each working in parallel
to try to support California’s small business community, who joined efforts as they were introduced to
one another. The group was compelled by a sense of urgency because of the pandemic. And in some
ways, the pandemic and shelter-in-place order also facilitated the group. The scale of the crisis and the
importance of acting quickly to stem small business losses provided the motivation for a large volunteer
commitment from CASE group members. One interviewee commented that in some ways CASE
members had more time because all of their meetings were happening on Zoom, while previously many
group members had spent much time on airplanes. Several noted that replicating this model—either in
other states after the immediate crisis ends or as a mechanism to leverage funding for other types of
lending—may be challenging without an urgent impetus, such as the pandemic, to provide the
motivation for the hours of intense volunteer work that this project required.

The group operated at the “speed of trust,” an expression used by several of the interviewees.
Individuals dictated their own involvement, volunteering for as much or as little as they were interested
in or had bandwidth for. Central to the groups’ functioning was trust—trust in their colleagues’ areas of
expertise and trust that tasks would be accomplished by the person who volunteered to do them. The
relationships with Calvert, Kiva, and CRF were also based on trust. Calvert is paid an arrangement fee
by the CARF when new commitments are closed in. In the beginning, however, when there was no
entity to hold a contract with, Calvert worked on a volunteer basis. Kiva and CRF worked with CASE in a
similar way, volunteering their efforts and expertise until they were selected as the administrator and
technology services provider, respectively, of the CARF and until the fund was formalized (along with
the administrative and technology services fees).

Lessons Learned from Small Business Lending During COVID-19: A Case Study of the California Rebuilding Fund   24
This trust was particularly important because the group made a deliberate decision to side-step
questions of structure and governance for the CASE Task Force itself. This was due to a fear that setting
up governance structures for the task force and its volunteers could take months, delaying the design
and implementation of a product to help small businesses. The task force instead prioritized speed by
avoiding creation of a governance structure. One interviewee described this as operating with a focus
on outcomes rather than process: starting with a desired outcome and then working backward to
figure out what processes would support that outcome. Another said they were working toward a
mission rather than building an organization. One advocate of this no-governance structure stressed
the importance that this effort was not “top-down”; it was designed by stakeholders and with its target
audience—small businesses and CDFIs—in mind, rather than designed around ease of fundraising or
other goals. Though its structure was not formalized, the task force met weekly as a group and was
also organized into subcommittees for specific roles, each with individual leads. Most interviewees
highlighted this flexibility and motivation in moving the project forward and in being able to leverage
the diversity of participants’ experiences, since there were many leads in different workflows. And
despite the lack of formal structure, interviews with early CASE members indicate unity and cohesion in
how they saw themselves, their relationships with each other, and their roles in moving the product
forward. Though the CASE members, for the most part, appreciated this lack of structure, comments
from interviews suggest that it also required a specific type of person to be successful. Several
respondents noted that there were “no egos,” and another suggested that “high EQ” people were
needed.

One respondent, however, pushed back strongly on the lack of structure for the CASE Task Force (both
to the task force members and in an interview). This individual argued that the lack of a structure for the
CASE Task Force and the fact that it operated by consensus made for a slower and more “clumsy”
decision-making process; they suggested that greater management and accountability would have
improved the group’s ability to make decisions. Additionally, they believed that the lack of governance
would constrain the CARF’s ability to grow and be effective, due partly to a lack of accountability to a
body such as a board. (Although the GAC is supervising the fund and has reporting obligations to
investors and the IBank, this interviewee did not believe this was sufficient.) The interviewee
acknowledged that speed could take priority over governance structure early in the process but
believed that ultimately the project’s ability to scale and sustain itself was limited by its lack of
governance and accountability structure. Another interviewee suggested that the flexible structure
worked only because a task force member stepped into a project manager position to ensure that
nothing fell through the cracks. They stepped into this role when they observed bottlenecks, and they
noted in an interview that more structure would have eased some of the “bumps” the group
encountered. This respondent suggested that there might be a middle ground between formal, stiff

Lessons Learned from Small Business Lending During COVID-19: A Case Study of the California Rebuilding Fund   25
bureaucracy and no governance, noting that the flexibility and fluidity the lack of structure facilitated
was beneficial to the outcome and the speed at which they operated. The lack of a formal structure,
rules, or bylaws also produced some uncertainty during the process: several interviewees stated that
they were unsure how particular decisions were made or how decisions around program expansion
could happen and expressed a desire for more transparency in some of the decisions. This less
formalized process worked to get a product together quickly, but some interviews suggest that
questions of structure and governance needed to be resolved as the product entered its next iteration
(in the summer of 2021) and actors consider whether to allot more funding to the CARF (though one
interviewee believes that the Governance and Allocation Committee is sufficient).

CDFI motivations and challenges

CDFIs had various reasons (beyond their mission-driven goals) for participating in the CARF, though the
reasons varied from CDFI to CDFI. One key advantage of participating in the CARF was liquidity. By
being able to transfer the bulk of the loans to the CARF, CDFIs were able to do more lending than if the
loans had stayed on their books. CDFIs serving small business borrowers have historically struggled to
come together on a standardized product that would allow them to securitize or otherwise generate
liquidity by taking loans off their balance sheets. 12 The CARF (and other similar pandemic loan funds)
serves as a demonstration that CDFIs are able to do so while still serving the small business borrowers
they specialize in reaching. Interviewees from one CDFI additionally noted that the risk-sharing with the
CARF allowed them to make loans to borrowers that they otherwise would not have been able to serve.

CDFIs also saw other advantages to participating in the CARF. One interviewee suggested that their
CDFI saw this as an opportunity to expand into some local markets where it had a more limited
presence. Additionally, this CDFI saw participating in the CARF as a way to experiment with selling
loans, since it had been interested in that possibility for some time (though as noted in the Structure
section of this report, the loans are not actually sold to the CARF). Many CDFI interviewees noted that
CDFIs have very limited marketing budgets and that often small business borrowers know little about
them. By partnering together and participating in a government program, they were able to essentially
outsource their marketing (for this particular lending product) to the CARF.

Although there are advantages to participating in the CARF, becoming a participating CDFI lender was
not necessarily an easy lift for the CDFIs. The structure of the CARF was new, and the contracts required




 Brett Simmons, Jonathan Brereton, and Joyce Klein, “Addressing the Capitalization and Financial Constraints of
12


CDFI Microlenders,” Community Development Innovation Review 15 (1) (2021): 43–60.
Lessons Learned from Small Business Lending During COVID-19: A Case Study of the California Rebuilding Fund   26
to participate were not always familiar to CDFIs. Using the IBank guarantees requires partnership with
one of seven FDCs that process the loan guarantees; if the CDFI had not already been working with the
IBank guarantees, it would have needed to establish this process and relationship. CDFIs also needed
to create underwriting guidelines in line with those of this program. One CDFI noted that the
underwriting for the CARF was ultimately similar to the underwriting that the CDFI had developed for
lending during the pandemic, but had it not been, it would have taken 30‒45 days to establish the
processes for new underwriting. CDFIs also needed to hire additional staff to deal with processing the
loans. One CDFI interviewee stated that their organization had used funds raised elsewhere to hire
additional loan officers to be able to process loans quickly, and another noted that they had partnered
with an external vendor to handle increased call volumes. One of these interviewees suggested,
however, that not all organizations would have the ability to hire additional staff before additional
funding (from origination and servicing of the loans) started coming in. Another CDFI shared that it
initially accepted applications from only a few counties because it was concerned about whether it
would have enough capacity to process the loans from a wider geography. One of the challenges of
developing capacity, however, was uncertainty around how long the program would last. There are
hopes that the CARF will be extended beyond the two facilities currently approved by the IBank; if
those do not come to fruition, however, it would not necessarily make sense for a CDFI to make long-
term investments. Additionally, several CDFI interviewees expressed that their participation in the CARF
is break-even, at best, under the current fee schedule for origination and servicing. One CDFI
interviewee suggested that their CDFI’s ability to standardize its processes had allowed it to lower
costs and maintain a high loan volume, but they expressed that this may not be true for all participating
CDFIs. Another CDFI interviewee suggested that their origination costs were being covered by the
current fee structure but that that they did not expect to break even on servicing the loans (though
perhaps they would with higher loan volumes). This second CDFI interviewee proposed the use of a
central servicing agent to help scale and achieve cost-effectiveness. Two CDFI interviewees suggested
(in different ways) that while a break-even product may be the right way to respond to an acute
economic crisis, it will not allow CDFIs to grow and sustain themselves over the longer term. Participants
stressed the importance of supporting the small business community as driving their participation but
noted that they did not see the product, as currently structured, as sustainable for the participating
CDFIs.

Many CDFIs suggested in interviews that the credit criteria required by the CARF were too strict. As
CDFIs began to make loans, they discovered ways in which businesses that appeared well-suited for
the program were falling through the cracks regarding eligibility. CDFIs are able to request individual
exceptions for borrowers from the CARF administrator, and in areas where several CDFIs have
identified issues, eligibility criteria have sometimes been modified for the second loan facility. However,

Lessons Learned from Small Business Lending During COVID-19: A Case Study of the California Rebuilding Fund   27
many CDFIs continued to suggest in interviews that the borrowers they are serving through the CARF
often have stronger financial records (absent COVID-19) than their traditional borrowers. Several CDFIs
noted that this underwriting process was more rigid than their traditional way of operating. One larger
CDFI that often originates slightly larger loans, however, indicated that the underwriting process for the
CARF was abridged relative to its traditional underwriting and that the CARF program allowed it to
lend to borrowers who would not have otherwise met its credit box.

Beyond the underwriting process and criteria, the CDFIs noted other ways in which this product could
look dissimilar from their typical loans. One CDFI reported that it typically makes smaller loans than
those allowed by the CARF, while another CDFI that often makes SBA loans noted that its typical
portfolio consisted of larger loans than those it was making with the CARF. Additionally, CDFIs must
serve low- and moderate-income populations and other target populations or geographies as part of
being a certified CDFI. However, the CARF does not have eligibility requirements for target populations,
nor does the C2C matching algorithm allow for screening based on these criteria. One CDFI noted that
it has been challenging to stay within its mandated thresholds with the CARF loans; another CDFI
shared that it set additional eligibility criteria and would direct borrowers that did not meet its target
populations/geographies to other lenders. In the short term, CDFIs may be able to balance these goals
(participating in the CARF and meeting CDFI certification requirements), but this may become more
challenging if the program is extended and begins to comprise a large share of their lending volume.

One CDFI reflected on the tradeoff between its traditional, more flexible underwriting procedures and
this standardized product: while the CARF loans have more rigid requirements, they require less
intervention on the part of the CDFI, which allows it to serve more customers. This CDFI also noted that
the CDFI industry has often contended that these small business borrowers who are not able to obtain
lending from traditional banks need more assistance throughout the process. Although discussions with
TA providers did suggest that some borrowers are struggling to apply for the program even through its
simplified and centralized portal, this CDFI found that a large majority of borrowers were able to
navigate the online application with no assistance, which ultimately allowed the CDFI to serve more
borrowers. TA providers and CDFIs both noted that it was during the process of providing all of the
documentation required for the loan where many small business borrowers needed more help. Another
CDFI interviewee, when asked whether losing flexibility in underwriting was worth it to access the CARF
product, answered, “Yes, and…,” noting that it continues to have flexibility and make loans outside of the
CARF.

CDFIs are seeing different loan volumes through the matching portal. Although the program itself has
had a high volume of applications, one interviewed CDFI suggested that it was seeing much lower
lending volumes than expected. This CDFI additionally noted that it had funded a relatively low share of

Lessons Learned from Small Business Lending During COVID-19: A Case Study of the California Rebuilding Fund   28
applications. When asked why, it suggested that, both within and outside of the CARF, potential
borrowers are filling out many applications, shopping around, and viewing different products. Thus, not
all applications are likely to result in a loan. Other interviewees also noted this behavior.

Technical assistance

The ways in which technical assistance (TA) providers were engaged and the timing of that
engagement were influenced, in part, by CASE members from CRF and Calvert, who had worked with
the New York Forward Loan Fund and brought suggestions with them as to the types of TA that had
been needed in that effort. They found that small business borrowers often needed multiple outreach
efforts to engage with the fund and often needed assistance with understanding the program and the
documentation required (something confirmed in interviews with TA providers for California as well). In
addition, the CASE Task Force had deep connections to the small business support ecosystem in
California through volunteers from Small Business Majority and the California Association of Micro
Enterprise Opportunity and were able to leverage these networks while also leaning on TA expertise
from these members and participating CDFIs. TA organizations were engaged before the launch of the
CARF, including many train-the-trainer events to familiarize TA providers with the program and its
requirements. TA providers, in turn, did outreach in their networks to provide webinars for small
businesses, informing them of the fund and assisting them in applying. Part of the assistance to
businesses also involved helping them negotiate which of the various streams of capital that were
available to them (the CARF, the 2021 round of PPP, California relief grants, etc.) were right for them.
CASE Task Force members held regular calls with TA providers and business groups to hear feedback
on how the program was going and to provide a forum for questions; questions raised during these
calls were then shared with the larger CASE team.

Though the CARF coordinated more with TA providers from the outset than previous funds (according
to interviewees), this coordination was about directing borrowers to the CARF and making sure TA
providers could support them in applying. At the time of the launch and for several months afterward,
there was no formal integration with TA providers on the back end—particularly for borrowers who
were not matched to a CDFI. Some TA providers expressed a desire to receive contact information on
declined borrowers so that they could reach out to offer assistance or services and expressed
frustration that there was no process in place to connect TA providers with declined borrowers directly.
They noted that borrowers were being left behind at this stage. There are two main reasons, according
to interviews, for why this was not a feature of the online portal. The first is that California has strict
online data privacy laws and applicants would need to consent to their information being shared. The
second is a related concern: one of the early members of the CASE team expressed a desire to contain
the applicant data to the platform and the matched CDFI so that the program would not appear to be
Lessons Learned from Small Business Lending During COVID-19: A Case Study of the California Rebuilding Fund   29
selling applicant information or using applicants’ information in a way the applicants would not have
anticipated. The CASE team was eventually able to design a way to reach unmatched borrowers while
still complying with California privacy laws. On a monthly basis, unmatched applicants are sent a
communication with resource partners that can assist them. Through that communication, unmatched
borrowers are able to opt into being matched with a TA provider to receive further assistance.

Despite the centralized online platform and the designers’ intent to simplify the process as much as
possible for small businesses, interviews with TA providers revealed that there is still a subset of small
businesses that struggle to apply. Digital access and documentation are often roadblocks. Multiple
interviewees mentioned that, despite running successful businesses, not all business owners could
easily get online or were tech-savvy. One interviewee gave an example of organizations setting up
drive-throughs where employees scanned documents on behalf of small business owners, and another
noted that they did outreach door-to-door in a rural community because business owners did not
necessarily have email. Several interviewees noted that language barriers were challenging some
businesses. Although the CARF application can be (and has been) completed in multiple languages, one
interviewee noted that the Spanish version had not worked properly on their computer. CDFI and TA
partners have language services available to potential borrowers, and informational webinars were
held in more than one language; however, not all English-limited business owners will know how to find
these services. Interviewees also noted that there were drop-offs in the application pipeline once
potential borrowers reached the documentation stage and that this was often where they needed
assistance. Although interviewees noted that this was not atypical for small business lending programs
generally (with one interviewee suggesting that CARF was an easier application process than other
programs due to the TA outreach and engagement that occurred), it does suggest that there are still
small business borrowers who struggle to access credit even when programs are designed with them
as a target audience. It is possible that with more assistance, the CARF can reach additional borrowers,
but absent significantly reduced documentation and eligibility requirements, some of the most
vulnerable small business owners may not be capital-ready. One TA provider suggested, however, that
it would not redesign the programs to serve these left-out borrowers; rather, it saw its role as needing
to educate small businesses—about how the program worked, about how to apply, about how to keep
the records needed for these types of programs, about the existence of CDFIs as an alternative to other
lenders. Another interviewee noted that neither CDFIs nor TA alone were sufficient; what was needed
was a “strong ecosystem of support” and further integration of TA into the design of new versions of the
program.




Lessons Learned from Small Business Lending During COVID-19: A Case Study of the California Rebuilding Fund   30
Challenges due to timing and uncertainty

The CARF came together relatively quickly during a time of extensive uncertainty and continually
moving pieces, as the economy ebbed and flowed in response to waves of COVID-19 and related
government mandates, and local, state, and federal policymakers created and adapted programs.
Both the speed of development and the uncertainty of the economic and policy environments affected
the CARF’s design and implementation.

Some of the challenges of the CARF reflect the fact that “we were building this plane as we flew it,” as
noted by one interviewee. The CASE Task Force focused on speed, wanting to design a product that
could start making loans as quickly as possible, all while designing a new program. Though it drew from
lessons that the Calvert and CRF teams brought from the New York and Chicago funds, those programs
were also still new, and the CARF had its own unique elements. Improvements based on early learnings
from the program have already begun to be incorporated. For example, some modifications in eligibility
were made between the first facility (first SPV) and the second, and a workaround was designed to
provide unmatched borrowers with TA resources.

Uncertainty about other parts of the pandemic response also complicated efforts. The CARF was, in
some ways, overshadowed by the California Small Business COVID-19 Relief Grant Program and the
2021 round of federal PPP funding, which effectively “compete” with the CARF; as a result, these may
have decreased initial demand for the program, given their relatively concurrent timings. Small business
supporters, including TA providers and CDFIs, had to develop messaging to help small businesses
navigate which program was the best fit for their needs and to distinguish the utility of the CARF from
the other programs. Many interviewees, however, stressed that they view these programs as
complementary. Small business capital needs during the pandemic were so deep that no one program
was likely to meet all small businesses’ needs. Interviewees expressed hope that small businesses would
take advantage of grants and the PPP (which is effectively a grant if the loan is forgiven) and
acknowledged that these programs could disburse funds quickly. They viewed the CARF as a longer-
term resource that would help businesses rebuild or pivot, and it would remain available long after the
grant money had been disbursed. Interviewees acknowledged, however, that the influx of many types
of available lending and grant programs made messaging more difficult and confusing; several noted
that, if they had to do it over again, they would have wanted the grant program and the CARF to have
been more coordinated. One interviewee suggested that they could act as a “continuum of capital”
and that even though they were not planned together, they could still be messaged in this way.




Lessons Learned from Small Business Lending During COVID-19: A Case Study of the California Rebuilding Fund   31
Looking Forward
Most interviewees expressed hope that support for small businesses would outlast the pandemic. Many
noted that the lending landscape was already challenging for small businesses prior to March 2020,
especially in low-income communities and among underserved business owners. Several interviewees
stressed that although the need for assistance was acute among small businesses during the
pandemic, it is important to support small businesses outside of the current moment and advocated for
a stronger small business infrastructure in the state of California. One interviewee who provides
training and education to small businesses noted that the focus is often on setting up small businesses
for success, but that the sector does not always prepare small businesses for a downturn. Similar points
were made in reference to CDFIs. Several interviewees noted the importance of CDFIs in serving small
businesses who may not be able to obtain other types of financing from more traditional lending
institutions and hoped that CDFIs would continue to receive support. One interviewee suggested that
CDFIs and minority depository institutions are being asked to fill a gap left by the decline of the
community banking industry in recent decades; they noted that something more lasting than
pandemic-response programs would be needed to support these and other community-based
institutions’ ability to lend in their communities and scale to meet the need.

Many interviewees expressed a hope that the CARF would live on beyond the pandemic economic
recovery as part of an ecosystem to support small businesses in California. The continuation of the
CARF would require renewed commitments from the IBank, either in the form of guarantees or first-loss
capital, or from other government or philanthropic actors who could provide first-loss capital. One
opportunity for a renewal of this funding is the State Small Business Credit Initiative (SSBCI), passed as
part of the American Rescue Plan Act in March 2021. In general, approaches like the CARF, where public
and private capital are pooled and public funds absorb some of the losses, are possible under SSBCI,
but adherence to SSBCI program rules may require changes to programs like the CARF. Though
renewed funding for the CARF is not an explicit component of California’s SSBCI application, a
conversation with the IBank director indicated that it is keeping California’s programs under SSBCI
flexible and that additional funding for the CARF may occur, depending on the state’s needs in 2022.
Similarly, the state budget passed by the legislature and signed by the governor in July 2021 includes
$50 million for IBank small business lending programs, which could include the CARF. It would also be
possible to rely on another entity for first-loss capital: the Southern Opportunity And Resilience (SOAR)
fund, created after the CARF in 15 southeastern states, relies solely on philanthropic support rather than
on government capital for the first-loss position.

An extension of the state’s support of the CARF and the creation of a more permanent (or at least
multiyear) program would change some of the financial calculus around the CARF. On the one hand,
Lessons Learned from Small Business Lending During COVID-19: A Case Study of the California Rebuilding Fund   32
several interviewees expressed concern that outside of the pandemic moment, it may be harder to
fundraise for the private and philanthropic capital needed for the fund as investors move on to other
topics, and, as noted in the Fundraising section, fundraising became more challenging as time went on.
Several individuals (in agreement with the authors of a Little Hoover Commission report on the CARF 13)
suggested that the state needed to use its platform to draw more investors to the fund, and one
interviewee noted that additional state commitments would be needed. At the same time, the extension
and recapitalization of the CARF might create a different funding strategy, as it could begin to target
fundraising at scale. Currently, the CARF has approached investors one by one, but to fundraise at
scale, it would pivot to issuing a product. These types of approaches, if successful, access different
forms of capital. Interestingly, one interviewee suggested that the challenge is always in raising the risk
capital (the capital that sits in the lowest tranche); by continuing its commitments to the CARF, the state
of California would be eliminating the largest funding hurdle, in the eyes of this interviewee. Another
interviewee suggested that fundraising at scale could make it attractive for governments to continue to
invest in these types of structures because they provide large amounts of leverage to government
funds. Combining the perspectives of these two interviewees, it is possible that successful fundraising
due to an initial continued commitment from the state of California could produce a feedback loop.
Funding that was guaranteed for several years would also provide the CDFIs with the certainty needed
to invest in additional staff or other resources needed to originate more loans. Using these types of
funds (and pushing loans off their balance sheets) is not the way CDFIs typically fund their activities;
within these types of funds, CDFIs rely on origination and servicing fees, while the traditional CDFI
financing model for small business loans relies more heavily on interest income. It is possible that with
multiyear funding commitments and a higher volume of loans, the financial calculus for CDFIs could
improve as they are able to adapt to this strategy (though changes in the fee structure may still be
needed).

If additional rounds of capital are raised, the CARF can continue to iterate on the eligibility, loan terms,
subordination structure, and so on to “right-size it to the current situation.” An interviewee noted that
the group expected the interest rates offered to small businesses in the CARF to climb closer to
traditional CDFI rates, noting that it did not “want to distort the market for too long” after keeping it very
affordable during the acute period around the pandemic. This same interviewee noted that the cost of
capital would need to change to be able to scale and to maintain sustainability of the fund. Finally, if
the CARF were to continue to be funded and became a significant share of CDFIs’ total lending, CDFIs
may need to be careful to ensure that sufficient applications come from their target markets in order to




13
     Little Hoover Commission, “First Steps Toward Recovery.”
Lessons Learned from Small Business Lending During COVID-19: A Case Study of the California Rebuilding Fund   33
continue to meet CDFI Fund obligations; the CARF may need to allow CDFIs to screen based on these
criteria or change its own eligibility requirements to facilitate this.

Absent a continued capitalization of the CARF, there are other opportunities to expand on the CARF’s
structural design, both within and outside of California. The financial structure of the CARF, with its
overarching PBLLC and individual SPVs, is flexible to various forms of capital and can be adopted with
any type of entity providing the risk capital. This type of structure could also be used for other types of
lending: several interviewees mentioned the model’s possible utility in responding to natural disasters.
Beyond this structure, both the C2C platform and the unification of CDFIs under one lending product
provide opportunities to advance CDFI small business lending. The centralized application platform is a
major innovation of the CARF and other similar funds. CRF, the CDFI that designed and manages the
C2C platform, sees the emergence of this type of online platform (whether through C2C or another
platform) as important in helping CDFIs compete with online and fintech lenders who have larger
marketing budgets and show up higher in search results. CRF created an online platform several years
ago but was still working to expand its partnerships and use of the site. Its goal was to improve the
consumer experience and to help CDFIs reach small business consumers by centralizing what it could
but still keeping the local relationships (e.g., loan servicing, loan workouts, business advisory services)
that are key advantages of CDFI lending. When COVID-19 hit, CRF thought its platform could work well
with aggregated pools of capital and multiple CDFI partners and was working with Calvert Impact
Capital. It adapted the platform to meet various funds’ needs, first in the City of Chicago, then in New
York, and then for the CARF, learning and improving the platform in each iteration. The number of CDFI
partners using the C2C platform has grown substantially with the participation in these funds, and CRF
hopes that the platform will become an industry tool that will continue to be used beyond these funds.
Interviewees from a CDFI appreciated clients’ ability to self-serve on the online platform and see this
type of self-service as necessary to serve larger numbers of small business customers. Other CDFI
participants were interested in this type of platform, but several cautioned that its utility would depend
on referral volumes and the cost of participating in the platform (C2C has waived its referral fees within
the CARF but has historically had them).

The unification of CDFIs under one lending product also presents an opportunity. The bespoke nature of
CDFI loans has been touted as a strength of the sector, and there has often been resistance to
standardization. 14 However, standardization of lending terms and underwriting facilitates the use of a
common application platform and expands lending and creates liquidity by getting loans off balance




14
     Simmons, Brereton, and Klein, “Addressing the Capitalization.”
Lessons Learned from Small Business Lending During COVID-19: A Case Study of the California Rebuilding Fund   34
sheets, whether through a mechanism like in the CARF or through loan participation sales or
securitization. CDFIs’ experience with this common product through the CARF acts as a pilot and may
increase willingness to participate in common programs in the future. Finally, one interviewee noted
how challenging it can be to align organizations outside of crisis moments and was hopeful that the
relationship-building between the state, CDFIs, and other actors in the CARF could facilitate responses
to future problems. Another interviewee echoed this sentiment and hoped that they would find a way
to continue to use the infrastructure and synchronization across organizations going forward.

The eagerness of other states to replicate this model or of California to continue to fund it may
ultimately depend on what efforts are undertaken to assess the program’s impact. To date, the CARF
has been successful in serving mainly historically “un-banked” small business customers, 15 one of the
CARF’s primary goals. In the short term, the CARF is collecting information on the number of businesses
served, the number of jobs created, and the kinds of businesses that are accessing the program.
According to one interview, it is also planning a deeper qualitative analysis to understand the small
businesses using the program in the medium term, as well as a micro- and macroeconomic analysis
once the program has ended to understand the impacts on the small businesses themselves and
spillover effects from the businesses receiving the loans. However, as other regions look to this program
when considering how to respond to continued economic constraints for small businesses, they are
limited to public reporting on the number of loans disbursed and the average profile of businesses
served. Additionally, estimating the effects of this program (and others like it) beyond measuring
outputs, like number and types of businesses served, can be challenging. One interviewee noted that
the existence of the California Small Business COVID-19 Relief Grant Program would also complicate
the ability to evaluate whether the CARF was working well.

Finally, though not a challenge for the CARF itself, finding a similar set of stakeholders with the capacity
and bandwidth to undertake this type of project may limit replication in other contexts. The CARF came
together due to a group of heavily invested volunteers who were also relatively well connected to
philanthropic and government networks. The COVID-19 pandemic created a sense of urgency, but it
also, in some ways, created space in the schedules of these professionals to tackle a large volunteer
activity. One interviewee suggested that relational capital was important in the success of the group
that put the fund together and stressed the importance of building the right coalition. An interviewee
who is concerned about governance and scalability does not believe the effort is duplicable because
of its reliance on this particular set of volunteers, rather than a clear model (outside of the financial




15
     “New Funding Program Available For State’s Smallest Businesses,” Escalon Times, September 23, 2021.
Lessons Learned from Small Business Lending During COVID-19: A Case Study of the California Rebuilding Fund   35
structure of the fund) for another state to follow. A related issue is complexity and legal cost. Though
the CARF and other related funds may be able to serve as a template for programs in other states or in
response to future crises, the complexities of lending laws and variation in these by state means that a
considerable legal effort is needed to create these types of funds. In the case of the CARF, Morrison &
Foerster provided a large amount of pro bono legal work; one interviewee familiar with this work
suggested it would have been prohibitive to pay for all of it. The state of California was also a
meaningful player in the fund’s coming together; had it chosen to be more conservative in its willingness
to take risks (by, for example, allocating less first-loss capital), the program would have needed to raise
more philanthropic capital to secure the same amount of investment dollars. Many interviewees,
however, stressed that this model was replicable in other contexts.


Conclusion
The pandemic shone a spotlight on small businesses and their struggles in accessing credit. Many have
suggested that these struggles were present prior to the pandemic, in a financial system that hesitates
to make small-dollar loans, particularly for microbusinesses and businesses led by women, people of
color, immigrants, and low-income individuals. As the economy began to rebound, small business
owners faced new challenges—like labor shortages and supply-chain disruptions—in addition to
continued concerns around pandemic safety and when the economy and consumer habits would
“return to normal.” Small businesses will need continued access to credit in order to respond to these
disruptions and rebuild from the economic losses they suffered during the pandemic. The CARF, and
other funds like it, provide one possible model for increasing lending to small businesses, particularly to
those who struggle the most in obtaining lending from traditional lending institutions. These funds
provide access to affordable capital through the use of government or philanthropic subsidy while
leveraging these public and philanthropic dollars with private investment capital, allowing them to
reach more small businesses than purely public programs. The public and philanthropic support also
lowers the risk to the private capital, enabling investments that have not historically been made.




Lessons Learned from Small Business Lending During COVID-19: A Case Study of the California Rebuilding Fund   36
Appendix 1 – Loan Terms; Blended Facility
 Interest rate                   4.25% fixed interest based on WSJ Prime + 1.0%; should the WSJP rate
                                 change during the availability period of the Blended Credit Facility, this rate
                                 may be adjusted to reflect WSJ Prime + 1.0%.
                                 Interest may be paid either by the small business borrower or by Kiva to the
                                 extent there is a grant agreement in place providing Kiva funding to buy
                                 down interest of certain underlying loans.
 Repayment term                  A. 60-month term
                                 • 0‒12 months: Interest-only payments, paid monthly
                                 • 13‒60 months: Interest and principal payments with flat payments on a 48-
                                 month schedule, paid monthly
                                 OR
                                 B. 36-month term
                                 • 0‒12 months: Interest-only payments, paid monthly
                                 • 13‒36 months: Interest and principal payments with flat payments on a 24-
                                 month schedule, paid monthly
 Prepayment                      Borrower may prepay the loan at any time without penalty.
 Loan amount                     Lesser of (a) $100,000 or (b) up to 100% of average revenues for a three-
                                 month period prior to the COVID-19 outbreak; the three-month period can
                                 be any three-month period from 2019 or January to March 2020.
 Loan proceeds                   • Working capital including payroll, operating and emergency maintenance,
                                 property taxes, utilities, supplies, rent, etc.
                                 • Refinancing of an existing community lender loan is not permitted, but
                                 refinancing high-cost debt is permitted.
                                 • Loan applicant will be required to detail anticipated use of funds when
                                 they apply.
 Security                        • A UCC lien filing is required.
                                 • Personal guarantees will be required for individuals who own 20% or more.
 Fees                            • Minimal third-party fees and expenses (UCC filing fee, application fees,
                                 credit report costs, etc.) can be capitalized into the loan up to $250.
                                 • No other fees paid by the small business.
Source (lightly edited for clarity and editorial style): April 2021 IBank public meeting, “3.d. CA Rebuild Fund
Financing Agmt. Approval Exhibits to Attachment A to Resolution No.21,” Exhibit E-1.




Lessons Learned from Small Business Lending During COVID-19: A Case Study of the California Rebuilding Fund       37
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