By Tamra Thetford, VP of Impact Evaluation
Small business lending is crucial in America as it fuels economic growth, job creation, and community development. Small businesses build wealth, particularly for underserved borrowers, by generating income, accumulating assets, and fostering financial stability. Mission-driven lenders play a vital role by providing access to capital and financial services for these underserved businesses, often overlooked by traditional lenders. But how do mission-driven lenders know if their work is effective, if the businesses they lend to are successful and create positive outcomes for the business owner, their family, and their community?
CNote works with a broad range of mission-driven lenders including Community Development Financial Institution (CDFI) loan funds, banks, and credit unions as well as banks and credit unions that are Minority Depository Institutions. A review of our portfolio turned up insights into the straightforward and more cutting-edge practice institutions are using to assess the effectiveness and social impact of their small business lending.
What are lenders tracking?
Mission-driven lenders commonly track standard metrics like business survival, revenue, and jobs created to assess small business outcomes. Other metrics becoming standard include the change in household income of the business owner, part-time/full-time jobs supported, wages, benefits, and credit score improvement.
What do these metrics reveal?
Business survival indicates longevity, revenue reflects financial health, and job creation shows community impact. Measuring household income, wages, and benefits reveals direct economic effects on owners and employees. Tracking credit scores can assess financial improvement. These metrics collectively offer a comprehensive view of small business success and mission-driven lending effectiveness.
What do these metrics leave out?
The mission-driven lenders in CNote’s network know that jobs and household income stats are important markers of a business’ success. But they also know these metrics don’t tell the entire story.
We’ve identified the following novel approaches to business lending impact measurement that some in CNote’s network are using to gain a more nuanced understanding of small business lending’s social impact:
Goals/Motivations of Small Business Owners: By identifying borrowers’ personal goals and definitions of success, lenders can better measure wealth creation and tailor support. Resources like the ICA Fund’s data on entrepreneurial motivations can further refine these metrics.
Financial Health: Beyond the financial success of the business, financial health measures can provide a holistic measure of both the business as well as the business owner’s overall financial well-being. The Financial Health Network offers frameworks for assessing both individual and business financial health.
Assessing Core Business Skills: Some institutions track clients’ perceived growth in business acumen, while others evaluate the formalization of functions like HR and accounting. These approaches acknowledge that business success depends on more than just funding.
Business Confidence and Community Connection: Measuring business owners’ sense of confidence and community integration reveals the psychological and social impact of lending.
Providing Needed Services and Hiring from the Community: These practices are emerging as valuable metrics to highlight the role of small businesses in community development and local employment.
The landscape of impact measurement in mission-driven lending is evolving. While traditional metrics like job creation and revenue remain important, lenders are increasingly recognizing the need for a more nuanced understanding of social impact. By incorporating innovative measures that capture the holistic picture of business success, lenders can better tailor their support, track progress, and ultimately enhance the effectiveness of their lending practices. This shift towards a more comprehensive approach to impact measurement not only benefits the lenders and borrowers but also strengthens the overall impact of mission-driven lending on communities and the economy.
Tamra Thetford is Vice President of Impact Evaluation at CNote, a women-led technology platform that provides corporations, institutions, and individuals a simple, effective way to invest in under-resourced communities at scale. A community finance industry veteran with more than 25 years of experience, Thetford comes to CNote after leading impact data collection and analysis work at Justine Petersen Housing and Reinvestment Corporation and the Aspen Institute.
