Can Fintech Fix What's Broken in Community Lending?

CDFIs don't get nearly enough credit in the fintech conversation. They're filling a gap the traditional financial system either can't fill or won't, and they're doing it with cobbled-together technology that was never built for them. In this episode, Roland sits down with Kyle Lovell, Chief Lending Officer at Business Impact Northwest, for a ground-level look at how CDFIs actually operate, where they fit in the broader lending ecosystem, and why the technology gap inside these organizations is one of the most underexplored partnership opportunities in fintech right now.

Guest

Kyle Lovell, Chief Lending Officer, Business Impact Northwest businessimpactnw.org

What We Cover

• [0:00] What CDFIs are and how they fit into the financial ecosystem alongside banks, credit unions, and fintechs
• [3:22] Why CDFIs view themselves as a stepping stone, not a forever lender, and what that means for their bank and credit union partnerships
• [4:17] How CDFI underwriting differs from traditional lending, including approving borrowers with sub-600 credit scores by weighing the full picture rather than requiring strength across all five C's of credit
• [6:43] The speed problem: CDFIs personalize every loan decision, and that takes time. Where fintech can help close that gap
• [13:23] How Business Impact NW funds its loan portfolio without deposits, pulling from federal, state, and local grants alongside low-interest debt from banks and credit unions
• [15:57] The rise of guarantee programs and how they allow CDFIs to take on higher-risk borrowers without putting the organization at risk
• [21:11] Why merchant cash advances are, in Kyle's words, the scourge of her existence, and how they hide in underwriting if you're not looking for them
• [22:41] Cash flow underwriting as the next frontier: Business Impact NW is integrating Laser Credit with Salesforce to automate financial spreading and accelerate time-to-yes
• [24:28] The SBA microloan program: 40% of Business Impact NW's loan volume by count, the lowest rates they offer, and the most manual work in the portfolio

Resources and Links

Business Impact Northwest: businessimpactnw.org

Related Episodes

If this episode got your wheels turning, these are worth your time:

🎙️ Why Most Digital Transformation in Banking Fails | ICBA's Justin Dunmyer — CDFIs aren't the only ones struggling to modernize. Justin Dunmyer breaks down why transformation initiatives stall and what community banks are doing about it.

🎙️ Fintech PR Demystified: Costs, Relationships, and the AI Trap — If you're a fintech founder eyeing the CDFI space as a market opportunity, this one covers how to build credibility and get press without torching your budget or your reputation.

🎙️ Cringe Valley to Growth Engine: The Power of Video Content — Kyle mentioned wanting to get faster and more visible. This episode is about how fintech brands use video to build trust before a borrower or partner ever picks up the phone.

The Propagate Fintech Podcast is produced by Propagate, a fintech marketing, branding, and PR agency. propagatefintech.com | #fintechmarketing #bankingpodcast #fintechpodcast

Want to work with Propagate Fintech? Fill out a contact form at www.propagatefintech.com

Want to work with Propagate Fintech? Fill out a contact form at www.propagatefintech.com

Transcript

SPEAKER_00 0:00

What's up, y'all? Welcome back to the Propagate FinTech Podcast. I want to talk today about a category of letter that doesn't get nearly enough credit. CDFIs, you've probably already heard this acronym, but knowing what they are and understanding what they actually do on the ground are two very different things. These are the organizations hitting communities all across the country. They're scrappy, mission-driven, and they're filling a gap that the traditional financial system either can't fill or won't. My guest today is Kyle Lovell, Chief Planning Officer at Business Impact Northwest, right here in our own backyard. Kyle and her team have been doing this work on the ground in the community and for the fintech and banking folks in this audience listen closely to this one because CDFIs are out here running a called together ecosystem, patching tools together that were never built for them. And that is not a criticism. That really is an opportunity. So if you are building lending technology, this conversation is going to tell you exactly where some white space is. And here's the interview. Kyle, thank you so much for being on the show. Let's go ahead and jump right in. So I think a lot of fintech and banking listeners are not really very familiar with CDFIs. You guys play a super important role in the ecosystem. Do you want to give us a quick kind of whistle stop tour on what you guys do and how you show up in the community?

SPEAKER_01 1:18

Yeah, for sure. Because yeah, I mean, CDFIs inherently are the other end of the spectrum than you know what fintechs are. So CDFI stands for Community Development Financial Institution. Um, we've been around for a long time and we basically exist in order to get people to a place where they can access traditional financing, but they can't yet for any number of reasons. So I come from the lending side, but we also have an education component. Um I'll speak mostly about lending today, but really, whether it's time and business, uh derogatory credit history, lack of collateral, we really work to overcome hurdles on the way to financing for small businesses. So banks are the tried and true traditional method of funding a business, but they're regulated and structured. And a lot of people don't quite fit their credit boxes that are still, you know, valuable parts of our community and good investments. And that's where CDFIs step in. So we don't really want to be your forever bank. You know, we really are view ourselves as a stepping stone on the way to that traditional financing, and we can help um, you know, overcome whatever those banks perceive as hurdles on the path there. And, you know, more than just money, um, which, you know, everyone wants money, but uh, we'll couple that money with um education and advisory services that can really help um guide small business owners because, you know, they they're expected to wear all of the hats, right? They have to market their business, they have to run their business, they have to design their business. So just having um, you know, a coach that you can bounce ideas off of or help you run numbers with things of that nature can really um also help streamline a business through periods of growth and planning and things of that nature. So yeah, we try to be the whole package, I guess.

SPEAKER_00 3:01

Got it. So you guys are you guys are interested in being that stepping stone provider that's gonna help them get from uh declined to you know getting the loan to replace the pizza oven or uh you know the tools that they need to run their business. I think that's awesome. You are you you guys aren't gonna try to get a bank charter like everybody else's these days?

SPEAKER_01 3:22

No, it can't hold us down. Um we we enjoy the the flexibility that comes with a CDFI status. And you know, we are our strongest partners are credit unions, banks, and things of those nature. They are really strong referral sources for us as far as who our clients are and they can point um people in our direction. But I think the we both need to exist. You know, I think a cohesive environment, maybe with fintechs joining along, um, you know, I think we each can do what we do well, and then that increases increases access for all of our small business owners because they'll find the place they fit, hopefully.

SPEAKER_00 4:01

So uh, Kyle, one of the things that I'm excited about in this episode with you is people are going to get a lay of the land for what a CDFI does in their role in the financial ecosystem. What's in it for banks and credit unions in partnering with CDFIs?

SPEAKER_01 4:17

We get them clients that wouldn't otherwise exist without us as a stepping stone, right? So because we can we have the luxury of funding startups. So typical underwriting, which is that risk analysis component that banks do, we do a very similar way. Like we collect uh, you know, personal taxes, business taxes if they exist, projections, we run personal credit. So we collect a lot of the same information, but we can view it with an eye of context of like maybe there was a medical bankruptcy. Maybe they had to take care of a family member and had to shut down the business for a while so it didn't have a profitable year. And we are allowed to add kind of life's outside factors into our small business analysis uh analysis, right? We can lend to people that banks just can't even touch. You know, we have approved many loans, including a couple this month and last, with people with an under 600 credit score. Um, because I think that we still look at all of the components of a small business loan. You know, those five C's of credit um historically are kind of what uh banks look at. And we still look at all of those five C's, but we can overcome a weakness in one with strength in another, right? Whereas banks require you to have all five.

SPEAKER_00 5:31

Um so you guys are still looking at like many of the same KPIs and many of the same metrics and you know, debt to income, you know, so on and so forth. But you guys have a like an additional kind of gut check, instinctual uh like read on the borrower and their business plan and kind of how they're showing up.

SPEAKER_01 5:51

Yes, exactly. Like, and we can um, you know, if we have a borrower that has a fantastic opportunity to move into a new location and they need inventory to fund that, but the cash flow shows that that business debt can't be supported. But we really truly believe that with this new plan and this new location and funding that inventory, that they will in turn be able to afford the debt, we can look at it in kind of that future uh view as opposed to looking at just the past, looking at just actually what happened. Um, so yeah, we can we have, yeah, we have that inherent flexibility. And I also this is the caveat of a CDFI is we're slow. And I think that is really the uh a huge headache for us is because we individualize and personalize all of these options and really take our time. Oh, go ahead.

SPEAKER_00 6:42

Oh no, I was just saying, sure. Yeah, yeah.

SPEAKER_01 6:43

Yeah. Take our time to know borrowers. We're not quick, right? And we're like, and I think balancing the expanded access that we provide by being able to build trust and you know, get to know our clients and whatnot, but also being aware of what they need and need quickly is kind of the crux of where CDFIs are right now. And I hope that's where, you know, a fintech involvement can be beneficial to us and where we can still serve communities and hopefully do it faster. So that's why I'm here today. That's my ulterior motive.

SPEAKER_00 7:18

Hey, fair enough. You gotta that's one thing that I love about CDFIs and just smaller organizations, is that you really do have to be scrappy. What so you mentioned fintechs, and you know, obviously fintech is in the name here. What are there any fintech providers that you guys are working with that have been just like really awesome partners for you guys?

SPEAKER_01 7:38

I think that's still it's fintech is such an emerging field still, and we're such an antiquated field that at least in my experience, we haven't come together yet, right? I think Scrappy is the name of the game when it comes to CDFIs and what we do. You know, we um we're not a depository, so we don't have bank accounts to lend from. So we have to source all of our loan funds. So we're really, you know, constantly looking for money to bring into the organization and then also looking at ways to get it out of the organization in the form of loans. So um, you know, that's been, and we've been doing that for years. I think CDFI is the CDFI fund was started by the Treasury. I mean, I'm gonna be quoted wrong here in print, but like I think the 1950s, like I think it's been around for a while.

SPEAKER_00 8:26

Okay.

SPEAKER_01 8:27

And so I'm hoping with some integration of you know, the AI, the fintech space, that I mean, because like I said earlier, our strongest loans come from our referral sources of banks. And I think that if we can come up with a referral source to and from fintechs and make it a cohesive, communicating environment, like we don't replace each other. We can only help each other, right? And so that's what I'm hoping to get from, you know, more talking to more people and understanding more, to be honest. Because I, you know, I am an antiquated girl living my antiquated world. So I also have a lot to fun.

SPEAKER_00 9:08

Well, it's a real challenging time because it's such a a moment of change. And, you know, AI is this thing that we all have to learn and like in find a way to integrate it into our day-to-day lives in the office and like how we execute. And the challenge with it is that it's so vast and there's and it's so complicated. And like I know this is a cheesy analogy because like this is a bank, you know, and financial services themed podcast, but I love golf, and I feel like one of the biggest challenges is that uh you have really have to figure out how you're going to learn because there's noise coming from like the guys that you're and gals that you're on the T-Box with are telling you like how to change your swing or more this or more that, and then there's YouTube, and then there's golf teachers, and there's such a high volume of things to work on, and also sources of information. You really have to like pick a way you're gonna pull it off. I think the term is pedagogy, but then also like what you're gonna learn, which I guess is you know is the curriculum. Have you guys found what you're gonna work on from an AI perspective in terms of integrating it into what you guys do?

SPEAKER_01 10:31

We have we have determined our next step, but like, yeah, like you said, our next step is a baby step because one, it's a little terrifying, right? What if you pick the wrong lane and it emerges in this other place? Or like what if the tool that you've been dreaming of comes out six months from now and you've already spent your money on this other tool that now seems of the past?

SPEAKER_00 10:54

I know. An agent or, you know, whatever it may be. Yeah.

SPEAKER_01 10:58

And also, like, I mean, I work for a mission-based organization. We exist for more than just um profits and getting money out the door. We exist to like help underserve small businesses, and they often require a level of hand holding and touch that I really don't want to lose. So, so I think that, you know, the emergence of cash flow underwriting, which is um something the banker nerds will uh really dig into.

SPEAKER_00 11:25

We we covered this recently with um with American bankers and Melinda Husband, actually, about the rise of cash flow underwriting. It's a really like kind of you know, maybe more inclusive way, comprehensive way to look at the borrower.

SPEAKER_01 11:38

It's the new jam. I'm I'm really into it. And I think this is where AI can be of an essential service to us, right? Because it can do casual underwriting and create uh, you know, financial statements from bank account data. And if you give, you know, with this with this open banking, if you give access to your banking data of your small business bank account, what I imagine is that will help us get to a yes faster with like, I don't know what to call them, but like the gimme clients, right? The people that are surefire wins. Like the business can support the debt. They have shown they're responsible with their personal debt, and the business is established long enough to have that cash flow history, right?

SPEAKER_00 12:21

Like one of the big challenges that larger banks and credit unions have is that they find themselves spending the same amount of time on a $250,000 loan that they do on a $10 million loan because of the antiquated processes and the manual kind of fallouts and the inclusion of uh spreadsheets. And so I know that that's a big kind of challenge for people when they're trying to work with small business. Um, you know, you're chasing around a lot of artifacts and documents and things that maybe you know the business owner uh misplaced or you know doesn't know how to find and they need coaching and help. And um it's it's a tough one. I wanted to draw you out a little bit on your guys' capital because you obviously are paying a much higher price for capital because you don't have deposits, right, to leverage. Uh how do you guys go about raising money? Because I know that you've had challenges in just the entire CDFI industry has had challenges from legacy sources of funds.

SPEAKER_01 13:23

Yeah, the legacy source of fund being the federal government. I mean, that was seen as the gold star financing for a long time. Because it was, I think that um as much as, you know, getting a great grant is wonderful, consistency is really what helps us build an organization because we can plan. And we had consistency from federal grants for many years. Um, and you know, those are, yeah. So basically the way it works is we get money from a multitude of different sources, um, federal grants, state, city, county money, um banks and credit unions that will lend us low interest debt. And we in turn kind of pool this money and then lend it out to small businesses. Um, so it's always going to be a little bit higher than your conventional banks, right? It's because we because the banks, we pay for the bank's money and then they pay for the loan money, right? So it's always kind of that's that's a spread is on top. Um but that's again why we consider ourselves a stepping stone is we don't have prepayment penalties. Uh, you know, we really want to see you go capture less expensive financing when you're ready for it. And we help coach you to get you there. Um, but the you know, the the loans that we have are anywhere from usually five to ten years. And so we're constantly looking to fill our coffers of money to lend out, right? And so that's one challenge is getting, you know, actual loan capital to get out the door. But then also I mean, it takes a lot to do what we do as far as time goes. So we need to pay for the staff to do that as well. So we need capacity grants as well as dollar grants in order to lend out, you know, effectively. Um, and like and keeping our mission and you know, all those things in check and running these grants and doing the reporting. And, you know, we have a it's a pretty complicated system for what is inherently a community need, a community service in a lot of ways.

SPEAKER_00 15:24

So it gets harder than it feels like it should be.

SPEAKER_01 15:27

My God, it's so hard.

SPEAKER_00 15:30

Yeah, why is it so hard to do the right thing?

SPEAKER_02 15:32

Yeah, it's absolutely it becomes yeah, it's exhausting to do the right thing sometimes.

SPEAKER_00 15:38

Is there like a diversification? Like there's such a rise in private capital right now. I have a a group of friends who are putting together a fund to issue collateralized loans. And these are uh business owners who have capital that they're putting together to issue these loans. Is that an opportunity for a CDFI or is yeah?

SPEAKER_01 15:57

Yeah, you're actually the second person I've talked to this week about a guarantee program. So the way that works is it allows us to um take on higher risk loans, right? Because the guarantee program, what it does is it collateralizes the loan, basically. So it allows us to still do our due diligence and still make sure that we believe the loan will get repaid. Um, but if it doesn't, it lessens the hit on us as an organization and allows us to continue to exist. So we do it for childcare programs up on Whitby Island in Washington. Um, and so we've been members of a couple different guarantee programs. It doesn't solve our problems of capacity as far as lending and um manpower behind it, but it allows us to do our job better because it allows us to kind of take one um maybe risky attribute and it lessens the blow there. So we still would look at the capacity of the business owner, the financials, the business plan, the projection. So we still do our due diligence because I think we take our responsibility really seriously seriously. The last thing we want to do is give out a loan that can't be repaid. Stressful for us, stressful for the borrower, the community, you know, all of that jazz. So we really, you know, make our our mission to make sure that we're doing everything we can to make sure it can be repaid, but to not have to worry about collateral, which is what happens with guarantee programs, is a huge lift off of our, you know, um considerations because we're dealing with a lot of people that don't have generational wealth, which means they might not own their home. They might not, you know, uh have the assets it takes to um be able to secure larger debt. Um, so it's really helpful. I know I just kind of hated on the changing funding in the federal government, but one program they do that I really love is the SBA's Community Advantage Guarantee, which helps bolster under collateralized loans as well. So it helps with security for the organization. Again, it doesn't give us money, but allows us to do our jobs more effectively, basically.

SPEAKER_00 17:55

Okay, got it. How do you guys do business development? Are you guys hanging at the Chamber of Commerce, going door to door? What does that look like for you guys?

SPEAKER_01 18:02

We get certain grants from like a chamber of commerce in order to come in and deliver a certain, you know, educational opportunity targeted at a certain group of people sometimes. Like we did um a food and farmer uh programming where it was just based around people that wanted to uh sell and grow foods and like local farms in King County, Washington. So it can get pretty hyper-local. But in general, um, people will just come to us for advisory services and we can pair them with a coach who will get to know who they are and what they want to do and kind of one-on-one, and you can set some short-term or long-term goals and really just help be there to guide the person down that path to help achieve those short-term or long-term goals, including like loan readiness. Um, I understand that applying for a small business loan is not easy. And so having someone to help you kind of prepare for that in order to put your best foot forward, I think is, you know, can help you be more successful. But maybe you just want to know whether you should hire someone or not or start an HR department, or maybe you need to open up a new revenue stream. It's just really helpful to have someone working with you on that as opposed to going it alone. No one likes to live, you know, in an echo chamber alone.

SPEAKER_00 19:13

Totally. Yeah. And, you know, I think a lot of times business owners are this is preaching in the choir here, but they're great at their business. They're a great baker, they're great carpenter, cabinet maker, you know, whatever it may be. But this whole finance world is a whole different animal.

SPEAKER_01 19:26

They don't want to do their financials, and I get it. It's everyone's last priority. And I totally understand I would be the same way, but it is like my favorite thing when someone can produce a profit and loss and a balance sheet that's like relatively recent. I'm always like, that's that's a really good sign for me.

SPEAKER_00 19:42

So that's awesome. When you when you look at your entire supply chain in terms of how you guys get from an application coming in, you know, your team analyzes it, reviews it, and you guys get to a yes or a no. What's if you could pick one thing to totally automate to get the human being like out of the mix on, what would you do? Would it be spreading? Would it be debt to income?

SPEAKER_01 20:07

It would maybe be spreading those year-to-date um financials because so often, you know, we can rely on taxes, but those are a point in time. And also, you know, sometimes people want to keep the tax man out of their business and they do a bunch of write-offs in order to make, you know, I like I get the pr different perspective of business owners have it at different times. And you don't always know you're gonna apply for a loan the year prior. So you don't know to make yourself look profitable on your taxes, you know. Hindsight's 2020. And also I understand that. So I think that, yeah, I'm really excited about this cash flow-based underwriting because we can see what comes in and out of a bank account and know whether you can support the debt by those financial statements, which are one gonna be accurate because the number of inaccurate financial statements we be through is pretty incredible. Um, it can also identify debt that we maybe don't see showing up on a personal credit report.

SPEAKER_00 21:07

Um, like buy an hour pay later stuff.

SPEAKER_01 21:11

Yes. Or, or what is my the scourge of my existence is the merchant cash advance loans. You know, your squares, your intuits, your things of that nature. Um I hate them. I understand that they're easy and accessible, but I also think they're really predatory. I think they hide fees. They're not technically loans, so they can use factoring rates. So the APR is out of control. It's because it's based on cash flow. If you do really well, you end up paying back even more. And it can just like really pinch businesses' cash flow and you can end up stacking. So you, if you get one, your odds are you're gonna get another, and then it can start to snowball. And they're my most hated thing that exists right now. Um, because they're for small businesses, there's no consumer protections around them. So the rates they can. Charge are crazy high. But we also want to be able to identify them when we're lending because if you don't disclose those on a balance sheet and we don't see them show up on your personal credit report, those can really easily also slip under the rug during underwriting. And, you know, odds are they'll be found eventually. But also we don't want to put you through the loan process to get to a no. It's a lot of work, right?

SPEAKER_00 22:28

So you so we're talking about cash flow underwriting. Is this like a newly enabled tool for you? Did you subscribe to something from like Equifax that's now allowing you to do this? Or how is this now available to you?

SPEAKER_01 22:41

It is, it's a something we're implementing. So we are currently updating our loan management system. And then once that update is complete, I think it's called Laser Credit or LaserPro, we're going to um connect them with our with Salesforce and our loan management system. And we can we could always look at people's banking. We've we used um plaid for our uh bank identification just to make sure that because we're a small business lender, we can't do consumer loans. So we can't give money to a personal account, right? So we need to verify that it's a business account that it's going to and it's fra fraud prevention. We need to make sure it's the business we're dealing with, right? Um, so we've always had access to bank account information, but this is actually going to the time that is going to be saved and the accuracy, no more human error ideally, um, that's going to be created by having this kind of automatically reviewed is going to be incredible. We, I mean, I hope only two underwriters. Like it's a small team. Sure. Yeah. And so, you know, if we want to do more than 10 loans a month, they can't be bogged down in 12 months of of bank statements trying to sort what's going in and out. So it'll be yeah, I'm looking forward to to that immensely. Goal is end of this year.

SPEAKER_00 24:02

So you guys are installing Laser Pro or maybe Decision Pro the Finasra product, right?

SPEAKER_01 24:08

It's laser, it's definitely not Decision Pro. It's laser credit, I want to say, then. But yeah, there's a couple things we're we're integrating that we're excited about.

SPEAKER_00 24:18

Got it. Okay. And then uh and then how do you guys do documents, like compliant documents? Is that um are you guys using like attorney generated documents?

SPEAKER_01 24:28

Are you Yeah, they're attorney generated documents, but we can change the templates and they're just created through our loan management system. They they pull all the details from um the CRM and just pop populate the loan docs with those. So um and we use Adobe sign. Except for the SBA who still requires a wet signature. So old school. We're an SBA micro lender. Um, those are loans that go up to $50,000. And I think I think like 40% of our loans by number are microloans. So they're competitive interest rates, they're the cheapest loans we have, right? They're the lowest interest rate. Um, but boy, howdy are they the like the most work in order to kind of make sure you're checking all the boxes.

SPEAKER_00 25:18

Oh yeah. Oh yeah. That's wild that it's still so uh manual and there's so much human intervention in the mix like that.

SPEAKER_01 25:27

Yeah, it's yeah, it's like crazy, and like they prefer blue ink signatures at that. So it's not even just a white signature, they prefer that you're not black, that they're blue ink. So but I mean, also with that, the caveat is the SBA microloan is one of my favorite grants because they give us inexpensive loan capital and also, you know, they will pay for our capacity. Like I said earlier, they pay for payroll, they pay like they pay wages for the loan officers, the underwriters, the servicers to kind of get that stuff done. So without those arduous loans, it would be much harder for us to exist.

SPEAKER_00 26:00

Well, Kyle, it's been it's been great having you on the show. Where can people learn more about what you guys are doing?

SPEAKER_01 26:06

Let's see. So businessimpactnw.org. Uh businessimpactnw.org. And then I don't know, hit me up anytime. We're doing events, we're around. Okay. We are a Seattle-based company. So a lot of the events we do are based in the Seattle area. Um we were born out of a Seattle dream, right? That we used to be called the Seattle Economic Development something or other. Um, but since we've expanded, uh, we're trying to have more events in the other three states. And yeah, but I would recommend starting the website. All the good stuff is there. And I just updated my headshot, so I look better than that.

SPEAKER_00 26:41

Did you uh did you find it? Did you go the AI route? Did you hire somebody?

SPEAKER_01 26:45

Put it through AI. Oh, busted. Yeah, we did the same thing. So and it had to give me a necklace. I had to give me like a gold chain necklace.

SPEAKER_00 26:58

Dang, ball in. Okay, cool. Basically. Nice, nice. Yeah, no, the um the headshot photographers that are, I think they're a dying breed, unfortunately.

SPEAKER_02 27:09

Yeah, there's a lot of changing uh yeah, things in in markets right now that's a little bit ridiculous.

SPEAKER_00 27:17

Well, awesome to have you on the show. Thanks so much for being here.

SPEAKER_01 27:19

Of course, yeah, really nice to speak with you, and yeah, see you soon.