A “Justice League” for SMB lending with Nor-Cal FDC
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What
Northern California Financial Development Corporation, or Nor-Cal FDC, was founded in 1978 to help entrepreneurs and small businesses obtain financing. Working with other public and private partners, Nor-Cal FDC offers the loan guaranty or synthetic collateral to complete loans for its business clients.
Nor-Cal FDC works with 125 lenders in California to carry out its mission. More than $1.2B has been allocated to California for the State Small Business Credit Initiative over the coming years; Nor-Cal FDC completed approximately 350 deals last year valued around $50M in guarantees, up from $12M in guarantees in 2017.
The organization recently announced a partnership with fintech platform StandardC. The integration will help Nor-Cal FDC automate the application process for its business clients, letting Nor-Cal FDC carry out more deals with greater precision and with the same amount of staffing and resources.
Why
To Sanford Livingston, Nor-Cal FDC’s CEO, the organization’s work, as well as its tie-up with StandardC, helps marginalized and disadvantaged groups “meet the needs of the policy and regulations for standard banking transactions.” Entrepreneurs from disadvantaged communities—subject to racism, ageism, and other forms of discrimination—may lack real estate or other collateral to successfully receive a loan.
Through its data-aggregation efforts, Nor-Cal FDC has proven that the default ratio on its deals is lower than it is for traditional deals.
“We don't make bad deals good,” Livingston said. “We make good deals better.”
How
Key to Nor-Cal FDC’s success, including the long-term success of the entrepreneurs it supports, is what Livingston dubbed a “Justice League” of public and private partners. Local SBDCs (or Small Business Development Centers) offer technical assistance to California-based entrepreneurs and small businesses, while the federal government provides the credit needed to guarantee these loans. “We bring together all these partners to better serve the entrepreneurs in California in a way that hadn't been done before,” Livingston said.
To Livingston, this method also lets small businesses and entrepreneurs access capital at fair rates. “The only funding they could normally get was from online companies that provide capital, but at a very usury rate type of interest rate,” Livingston said. “We bring their interest rate down by over 30%; we're able to then look at them as a profitable business, and then they can get the capital they need to grow at a much less stressful rate.”
However, federal conditions make refinancing difficult. The lender has to offer an additional 50% compared to the original financing in the case of a refi, and the interest rate has to be 30% lower. “When we go to Sacramento and we talk to our lawmakers, those are the things that we're bringing up,” Livingston said. “So hopefully, those are things that will change over time.”
Despite those setbacks, Livingston said Nor-Cal FDC may significantly scale its work this year. Where it used to face a maximum guarantee of $2.5M, it now can guarantee 80% of a loan up to $5M. Livingston said the larger deal size may let it offer up to $200M in guarantees in 2023.
“We really want to do our best to help the state,” he said.
