A photo of an entrepreneur meeting with a bankerA photo of an entrepreneur meeting with a banker
Ecosystems + Economies

CRA Funds: The Overlooked Funding Source Every ESO Should Know About

This money could be a stable and bountiful funding source for your organization—if you know how to unlock it.

Anyone who has gone through the early stages of starting a business knows that getting a startup loan is difficult. In fact, it’s nearly impossible. Most banks don’t want to grant loans to unproven entrepreneurs. It’s too risky, and the likelihood of big payouts down the road is unknown.

This is a problem that entrepreneur support organizations (ESOs) can help solve. Although connecting startups with angel investors is one way to help, that approach only works with a very limited selection of small businesses. There are actually much more flexible resources for financially supporting new small businesses, such as the Community Reinvestment Act (CRA).

Put simply, the CRA, enacted in 1977, requires banks to dedicate portions of their cash reserves to meeting community needs in economically depressed areas. But many banks don’t have the time or relationships to employ these funds effectively. Their job, after all, doesn’t normally include giving out low-interest loans to entrepreneurs who may not be able to pay them back.

Krista Covey, a recovering banker turned entrepreneur advocate, believes that ESOs can help. “Since banks are required to make loans in economically depressed areas,” Krista says, “ESOs give them a way to deploy the funds and help build bankable companies.”

Everyone benefits from this arrangement. Banks don’t have to worry about allocating CRA funds themselves, and they no longer bear the risk of granting loans to companies that may or may not succeed in the long run.

Perhaps more importantly, ESOs can help establish connections between banks and startups. Thus, when the businesses are successful enough to qualify for traditional business loans, there are already connections in place to make the process quick and easy.

Startups also benefit from this arrangement because they are far more likely to repay loans when they have an established relationship with an economic development organization. Receiving loans directly from organizations that have helped kickstart and support their journeys gives startups a greater sense of responsibility for repaying their loans.

Furthermore, this process builds community for ESOs and startups. It’s not just about the money,” said Krista. “It’s about mentoring, coaching, and accountability. People are much more likely to repay loans, because those funds are then deployed to other folks.”

So how do you access CRA funds as an ESO? For one thing, not all banks have CRA funds to allocate. A good rule of thumb is that regional banks in areas with a below average annual wage are likely to have CRA funds.

But it’s not enough to simply find a bank and ask for money. Relationships are vital in this process. Community leaders looking for CRA funds should begin by establishing relationships with business bankers, perhaps over coffee or lunch. Oftentimes, these relationships open doors that allow community leaders to meet with a local CRA director.

Another important aspect of relationship building is showing banks that your organization is experienced and has a plan. “Even if your plan is half-baked,” Krista says, “at least come in with a framework and a goal to show the bank, and that will benefit them immensely.”

ESOs should consider one final thing before requesting CRA funds—how much money do you need to effectively help local startups? It’s important to think about how many startups you’re looking to help as well as the average loan size that startups in your community need.

At the end of the day, working to nurture a strong community matters most. Good relationships with banks often result in their donation of CRA dollars to loan programs. Having strong connections with new business owners will increase their sense of communal responsibility for repaying their loans. As with everything in economic development, community comes first.

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