By Dana Lieberman, IFF Chief Lending Officer
and Terry Young, IFF Chief Credit Officer
When IFF began making real estate loans without appraisals 33 years ago, it was considered pretty radical. Heck, it still is today. We have always believed that this approach helps create greater access to capital as well as greater equity in the lending process. But, as we’ve said in previous blogs, our approach is not perfect. Or enough.
As we’ve learned more about racial equity in lending over the last several years, we are more committed than ever to systematically interrogating all our practices, products, and services with a racial equity lens. This ongoing interrogation is methodical and data-driven. As that process unfolds, our lending team is also leveraging our cumulative experience and common sense to think of ways we can increase access to our capital right now.
One way we hope to achieve that is by instituting changes to our target market criteria to better enable smaller, newer nonprofits – which we believe to be led disproportionately by people of color – to access our financing. Our Board approved these changes in September 2021, and we will be monitoring their impact in the months and years ahead.
Here’s what we changed, and why.
Minimum Revenues
Previously, our target market was nonprofits with minimum annual revenue of $500,000. Our new target market criteria completely eliminates this minimum. We made this change for three related reasons:
- We believe this hurdle is inconsistent with our desire to serve more small nonprofits and to make loans for as low as $10,000.
- We believe this hurdle disproportionately hinders the flow of capital to BIPOC-led nonprofits.
- We believe small nonprofits can demonstrate the capacity to take on small loans in a manner that is aligned with our evaluation requirements and would not expose IFF to additional credit risk.
Audited Financial Statements
Previously, we required our nonprofit clients to have at least three years of audited financial statements, which we believed demonstrated their financial management capabilities as well as better positioned us to underwrite their loans. We made two changes to this requirement:
- For larger nonprofits (>$500,000 annual revenues), only two years of audited financials are required, and those two years of financials may be captured in a single audit. We believe this level of documentation is sufficient to inform our underwriting process.
- For smaller nonprofits (<$500,000 annual revenues), no audits are required. This reflects the reality that smaller nonprofits simply have less need to conduct an audit. Their operations are simpler, so it’s easier to verify correct financial reporting without relying on a costly, cumbersome official audit. Plus, there’s no other reason for smaller nonprofits to get an audit, so they’d be jumping this hurdle for the sole purpose of obtaining a loan – probably a small one. We want to meet smaller nonprofits where they are, and audits simply aren’t needed to credential a small loan request.
Years in Business
Previously, we worked only with nonprofits that had been in operation for at least 5 years. Now, we have changed that requirement to 3 years. We believe that years in business does correlate to a nonprofit’s ability to take on debt successfully, but we also believe three years of operations is a sufficient lookback, and consistent with our goal to increase access to capital to newer nonprofits that are responding to today’s critical needs.
We don’t yet know the impact of these three changes. But it’s worth noting that we’ve already made loans to nonprofits that were outside of our previous target market criteria in one or more of these ways – it’s just that those loans were the exception, not the rule. Now, we’re recognizing that removing these barriers for smaller nonprofits will be our new norm.
It’s been our experience that when you remove unnecessary burdens on nonprofits, they show up and prove that they are not only capable of taking on debt successfully – but using it to strategically grow their organizations and, as a result, have greater impact in communities.
Just as with our long-time use of non-appraisal-based lending, these changes will not be “enough.” This is but one step in our equity journey. We are continually trying to move the needle toward greater justice, and we are never done.