Michigan's 0.5% CDFI loan waits on $20 million from banks and foundations

The loan the Michigan Strategic Fund approved last month ^[4] cannot be drawn until the Michigan CDFI Coalition builds the pool to $30 million ^[9], so banks and foundations have to put up $20 million before the state's money moves ^[1]. At the coalition's $50 million goal ^[10], the state would supply one dollar in five ^[2]. At the $30 million floor it would supply one in three ^[3]. Michigan is capping its stake at $10 million and taking the first-loss position ^[8]. The other $20 million to $40 million is left to national banks, regional banks and foundations ^[1][10].

The rate is 0.5%, well below what CDFIs typically pay to borrow, according to American Banker ^[7]. At that rate the state collects $50,000 a year on $10 million ^[4]. Each percentage point between 0.5% and a CDFI's usual borrowing cost is worth $100,000 a year to borrowers on the state's share alone ^[5]. The article does not give the rates banks or foundations would charge on their portion, so the pool's blended cost cannot yet be worked out.

That blended cost decides whether the program delivers what it was designed for, a cushion for CDFIs against swings in interest rates ^[14]. "In this high-interest-rate environment, it's really hard for us to access enough low-cost capital that we can make affordable loans to small businesses," said Elissa Sangalli, president and CEO of Northern Initiatives ^[3]. Her CDFI has no deposit funding and lends about $9.5 million, she said ^[13]. David Meninga of the Michigan Economic Development Corp., which provides administrative services to the fund, described the flow: "Those leveraged funds can then be pooled and loaned to their participating CDFIs" ^[19].

CDFIs had three decades of support from both parties in Washington, and that changed under the second Trump administration, which has derided them ^[2]. Most state programs came earlier, set up in the Biden era as states dealt with pandemic fallout ^[11]. They have gained importance as CDFIs lost support in Washington ^[12], and the trend is centered in blue and purple states ^[15]. Sangalli, who chairs the three-year-old coalition ^[20], said: "That's come into question at the federal level in some ways this last year, but we've been able to really retain bipartisan support" ^[16].

Michigan's pool can end three ways. The coalition reaches $50 million and each state dollar draws four outside dollars ^[6]. It stops at $30 million and the ratio is two to one ^[6]. Or it stays short of $30 million and the state's $10 million never leaves the fund ^[9]. I think the pool reaches at least the floor, because a bank lending behind the state's first-loss position ^[8] takes less risk than one lending to a CDFI on its own. The counter-case is scale: if the state's loss exposure is limited to its own $10 million, it covers the first fifth of a full $50 million pool ^[2], and the coalition is still seeking commitments ^[10]. Mary Scott Balys of the Opportunity Finance Network said the group wants to "support our members across the country, to be able to replicate this in their own states" ^[17]. If Michigan cannot raise the first $20 million ^[1], the version other states copy starts below the four-to-one leverage its supporters planned ^[5].