Wells Fargo Works for Small Business : Diverse Community Capital

Program Guidelines Wells Fargo Works for Small Business : Diverse Community Capital September 2017

Table of contents Background...3 Overview... 4 Parameters and guidelines...5 Potential Grant Capital uses...5 Debt Capital uses...5 Social Capital activities...5 Program eligibility requirements...6 Program selection criteria...6 Grant and loan parameters...7 Program application process...7 Evaluation and reporting...9 Questions and additional information...9 2

Background In May 2015, Gallup released a study commissioned by Wells Fargo on lending to diverse-owned small businesses. The national study was commissioned to gain deeper insight into the attitudes, needs, and motivations of diverse small business owners related to their use of credit. Gallup conducted more than 3,000 telephone interviews covering six segments: African American, Asian, Hispanic, LGBT, veterans, and women. Among the study s fndings was that diverse small business owners were more likely than their counterparts in the general small business population to: Report having personal credit challenges and be declined for business credit, with African Americans being more likely to not reapply for credit after being declined. Have annual business revenues of less than $50,000 and to have a business in the startup and growing stages. As a result, they may not qualify for many conventional bank loan products. Be extremely or very interested in learning how to build a strong business credit application. Wells Fargo developed an action plan to address needs identifed in the study, with a goal of helping more diverse small businesses become credit-ready and gain access to credit. The four point plan A credit coaching program that ofers expanded support to business owners who have been declined business credit. The program helps business owners understand why they were declined, and ofers resources that can help the business strengthen its credit profle and improve the likelihood of being approved for business credit in the future. It assists small business owners who apply for Wells Fargo Business Direct credit products (primarily credit products under $100,000). A Wells Fargo-supported Chamber Training Institute that trains leaders of diverse-segment chambers of commerce on key business and leadership topics for their members, such as how to access business credit and craft strong business plans. A nationwide referral network to help ensure business owners are aware of and accessing the full range of fnancing options available to them. Wells Fargo has established referral relationships with more than 20 nonprofts and other lenders that are participating in the U.S. Small Business Administration s (SBA) Community Advantage program in cities across the country. The SBA s program specializes in providing hands-on guidance to small businesses and ofering credit to qualifying businesses in underserved markets. The Wells Fargo Works for Small Business: Diverse Community Capital (DCC) program is focused on distributing $50 million in debt (lending) capital and $25 million in grant capital over three years to Community Development Financial Institutions (CDFIs) that serve diverse small businesses. 3

Overview The Diverse Community Capital program is Wells Fargo s commitment over three years (2016 2018) to support Community Development Financial Institutions (CDFIs) serving diverse small businesses. Wells Fargo is making available $75 million in capital for CDFIs to increase CDFI lending to diverse small businesses, with initial focus on increasing lending to African American-owned businesses, based on the study fndings in 2015. To that end, Wells Fargo will provide: 1. $25 million in grant capital 2. $50 million in debt capital 3. The opportunity to participate in activities that build Social Capital in the CDFI industry, with the objective of creating greater capital access for diverse small businesses For purposes of the Diverse Community Capital program, we defne diverse small businesses as being owned by someone who is Black or African American, Asian, American Indian or Alaska Native, Native Hawaiian or Other Pacifc Islander, Multiracial, Hispanic, Latino, female, a veteran, or LGBT. Small businesses refer to for-proft businesses ranging in size from microenterprises with fve or fewer employees (including the proprietor), to small businesses with up to 500 employees (as defned by the SBA). The goals of the Diverse Community Capital program are: To increase lending to diverse small businesses To build the capacity of CDFIs to lend to and provide development services to small businesses To strengthen the readiness of diverse small businesses to access capital To improve and transform systems for how diverse small businesses access capital and development services Program components Grant Capital: Wells Fargo will make $25 million in grant funding available to CDFIs to build their fnancial, operational, and human capacity to serve diverse small businesses. CDFIs might seek funding to expand their own net worth and operational capacity, to develop a new product or products for their diverse business borrowers, or to pay for certain operational expenses. Debt Capital: Wells Fargo will make $50 million in debt capital available to CDFIs to build their lending capital to serve diverse small businesses. Senior debt typically for amounts of at least $3 million, foating market-rate interest, unsecured or secured depending on CDFIs capital structure, three- to four-year term. Subordinate debt (equity equivalent investments or EQ2s) typically for amounts under $3 million, low fxed interest rate, unsecured, up to a 10-year term. Social Capital: The program will ofer activities to build efective support networks and social infrastructure (Social Capital) among CDFIs for the purpose of increasing lending to diverse small businesses. Social Capital activities will include mentorship programs, peer learning, Knowledge Networks, and other collaborative eforts to improve and increase the capacity of CDFIs to lend to diverse business owners. Wells Fargo will ofer the Social Capital activities through Opportunity Finance Network (OFN). 4

Parameters and guidelines Potential Grant Capital uses The purpose of the grant funding is to build CDFI capacity (capital, resources, and knowledge) to increase and strengthen lending to diverse small businesses. Proposed uses of grant funding include: Equity capital to increase lending capacity and manage risk, including additions to loan loss reserves Marketing, communications, and business outreach strategies and materials (including the development of online applications) targeting diverse small businesses Actions and programs to create trust and establish CDFI presence in racially diverse communities Development and delivery of technical assistance and business and fnancial counseling for diverse small business owners Market research and new product development targeted at increasing lending to diverse small businesses Creation of support networks for small businesses owned by people of color for peer learning, business partnership, and business development opportunities Recruitment and training (internal and external) of staf Creation of credit underwriting policies and criteria for diverse small business borrowers Formation of business partnerships that work to expand CDFI capacity to increase capital access to diverse small businesses. Such partnerships or collaborations could involve other CDFIs, small business development centers, workforce training and development agencies, diverse chambers of commerce, and/or other local partners committed to increasing capital access for diverse business owners Strategic planning activities Impact measurement programs Replication or expansion of existing diverse small business lending strategies or programs Other operational support projects/programs designed to increase lending to diverse small businesses Debt Capital uses The Debt Capital is to be used for lending to diverse small businesses. Social Capital activities The activities envisioned to help build Social Capital for CDFIs include mentorship programs, Knowledge Networks, consulting, and other collaborative eforts to further increase capacity of CDFIs to lend to diverse business owners. Activities for Social Capital include participation in: Knowledge Networks with other CDFIs to share best practices, learn from others, and explore opportunities for collaboration. Knowledge Networks includes various peer learning opportunities, including in-person meetings, webinars, mentored working groups, and online communities. Knowledge Networks will bring in outside expertise as needed and determined by the group. All awardees will be required to participate in a Knowledge Network. Working groups to develop replicable strategies (products, customer acquisition, delivering technical assistance, credit standards, etc.) for increasing lending to diverse small businesses. 5

Mentorship opportunities to build capacity to expand lending to diverse small business. Consulting opportunities to build operational capacity and capacity to lend to diverse small business Program eligibility requirements Organizations must have a primary mission of community development with a focus on serving low-income, lowwealth, and other disadvantaged people and communities; be a nongovernmental entity; and be primarily a fnancing institution that provides afordable, responsible fnancial products and services. If the organization is part of or controlled by another corporation(s), that corporation also must have a primary mission of community development. Organizations with tax-exempt status under Section 501(c)(3) of the U.S. Internal Revenue Code. Organizations without 501(c)(3) tax-exempt status can also be considered if they work with a fscal sponsor with 501(c)3 tax-exempt status. A fscal sponsorship agreement between the two parties that outlines the responsibilities and oversight of the fscal sponsor must be in place and submitted with an Interest Form. Certain organizations with 501(c)(4) tax status that meet other eligibility requirements may be eligible to apply for debt capital only. Please inquire at diversecommunitycapital@wellsfargo.com before submitting an Interest Form. Organizations must have completed at least two consecutive years of small business lending as of the date of the Interest Form. Located in and serving the United States. Program selection criteria A CDFI may indicate interest in participating in all three program components (lending capital, grant capital, and Social Capital). We believe that DCC program goals are best met by CDFIs interested in, and with the demonstrated fnancial capacity to be awarded, all three components. These organizations will receive priority consideration; however, Wells Fargo will continue to consider interest forms from organizations interested in only debt or grant capital because of their current capacity or structure. All Interest Forms will be evaluated using the following selection criteria: A compelling strategy to increase lending to diverse small businesses. Compelling strategies will be comprehensive, leverage other resources, and result in meaningful and measurable impact and change. Compelling strategies may have elements of innovation (in delivery of fnancing, technical assistance, outreach, marketing, etc.), scalability, and replicability. Strategies should include specifc and credible projected outcomes and an articulation of overall community impact over a three-year period. Acceptable CDFI fnancial performance in terms of capital adequacy, assets, management capability, earnings, and liquidity. CDFIs will provide current interim fnancial statements and the last three audits. Financial analysis will cover trends in topics such as (but not limited to): Change in net assets/change in unrestricted net assets Self-sufciency Net asset ratio/unrestricted net asset ratio Pledged/unencumbered assets Liquidity (unrestricted cash, months of operating cash) Asset-liability matching Portfolio performance (past dues, non-accruals, TDRs, charge-ofs, loan loss reserve levels) Portfolio management (policies for risk rating, borrower and overall portfolio reviews, etc.) Projections and strategic plan (especially as they relate to proposed portfolio growth) AERIS rating (if available) 6

We will consider interest forms from CDFIs serving all segments of diversity (as defned in these guidelines). We will give priority consideration to strategies which increase lending to African American-owned businesses and to interest forms submitted by CDFIs led by people of color. At this time, we are unable to consider funding to CDFIs that have already received capital through this program. Grant and loan parameters Size of grant and/or loan will depend on the organization s capacity, geographic scope, and strength of proposal. Loan size will also depend on Wells Fargo Community Lending & Investment s current exposure and other underwriting factors. Grants will generally range from $50,000 to $500,000 Loans will generally range from $100,000 to several million Program application process Interest Form CDFIs that are interested in the Diverse Community Capital program will submit an Interest Form located at https://www.cybergrants.com/wellsfargo/dcc/interestform. The Interest Form will solicit responses to: The unmet needs of diverse small businesses in a CDFI s market. The CDFI s strategy to increase lending and other services to diverse small business, how Diverse Community Capital resources would support the strategy, and the projected outcomes of the proposed strategy. Which components of the DCC program the CDFI is interested in (grant, debt, and social capital). The proposed use of Diverse Community Capital funds and how the strategy will be sustained after the resources are exhausted. The dollar and number of loans to diverse small businesses in the past three fscal years and the projected dollar and number of loans for the next three fscal years. A breakdown of lending to diverse borrowers. Portfolio performance information for three fscal years, including past dues, nonaccruals, restructures, and charge-ofs. Other fnancial metrics for three fscal years, including self-sufciency ratio, operating cash on hand, net asset ratio, and unrestricted net asset ratio. CDFIs will also be asked to upload a copy of the last three years of audited fnancial statements and the most recent interim fnancial statements. 7

Invitation to apply After reviewing the Interest Forms, Wells Fargo will invite selected CDFIs to apply for a grant and/or debt capital. Wells Fargo will inform all applicants of one of the following: The applicant is invited to apply for a grant and/or debt capital in the current round. The applicant is deferred to be reviewed in the fnal round of the program. Deferred organizations will have the option of updating their Interest Form. The applicant is declined. Social capital activities will be determined and organized based on needs identifed by Wells Fargo and OFN and levels of interest by program participants. Grant application process All CDFIs that have been invited to ofcially apply for a grant will be directed to submit an online application. The online application will include, but not be limited to: An opportunity to more fully explain the organization s strategy for serving diverse small businesses with Diverse Community Capital resources Form 990 A detailed budget for the requested grant funds A borrower success story A list of board members with afliations Demographics of the individuals served Full grant applications are submitted electronically. No paper or email applications will be accepted. Debt application/process Wells Fargo Community Lending and Investing will supply CDFIs invited to apply for debt capital with an application form that requests additional information on fnancial and portfolio performance, lending policies and procedures, capital structure, and organizational and management structure and capacity. CDFIs will submit completed applications via email. Timeline Announcement of Round 4 awards November 2017 Round 5 program opens November 1, 2017 Interest Forms due November 21, 2017* All CDFIs are informed the results of Interest Form review January 26, 2018 Full Grant and Debt Capital applications due February 15, 2018 Announcement of Round 5 awards May 2018 Round 6 program opens May 1, 2018 Interest Forms due May 21, 2018* All CDFIs are informed of the results of Interest Form Review July 20, 2018 Full Grant and Debt Applications Due August 10, 2018 Announcement of Round 6 Awards November 2018 *Interest Forms are due by Midnight Pacifc Time 8

Evaluation and reporting The program evaluation will measure how well the program has accomplished the Diverse Community Capital program goals: To increase lending to diverse small businesses To build the capacity of CDFIs to lend to and provide development services to small businesses To strengthen the readiness of diverse small businesses to access capital To improve and transform systems for how diverse small businesses access capital and development services In addition to standard fnancial reporting associated with a grant and/or loan award, CDFIs will need to provide: An annual report for the term of the grant and/or loan which includes data on lending and technical assistance provided to diverse small businesses Two borrower success stories during the grant period Questions and additional information CDFIs can send an email with questions to diversecommunitycapital@wellsfargo.com. 2017 Wells Fargo Bank, N.A. All rights reserved. IHA-4950101