The Southern Opportunity and Resilience Fund (SOAR) launched in 2021 and was created to support CDFIs in addressing the capital needs of historically disenfranchised entrepreneurs in the South and Southeast, particularly in the context of the economic and health crisis caused by COVID-19. SOAR is explicitly focused on nonprofits and small businesses owned by Black, Indigenous and people of color (BIPOC) and women. SOAR enables CDFIs to provide recovery loans, designed and structured to flexibly support businesses and nonprofits that have a path to reopening, but face upfront expenses.  The South is the least economically mobile region in the country and the effects are more pronounced for communities of color. Even before the pandemic, BIPOC-owned businesses were more vulnerable than White-owned businesses. The social and cultural discrimination communities of color in the South have faced for decades are reflected in financial systems — entrepreneurs lack access to affordable capital and credit, which severely limits their ability to start and sustain small businesses. Small businesses are both key to the economy but also to individuals being able to create their own wealth, pass on assets to future generations and break intergenerational cycles of poverty.

 

CDFIs are considered critical to providing capital to historically underserved businesses and entrepreneurs, but in the South and Southeast, CDFIs are financially constrained, limiting their ability to help businesses considered “risky.” SOAR was created to build CDFIs’ capacity to provide flexible, affordable capital and credit, as well as technical assistance, to small businesses and nonprofits throughout the South and Southeast.

Investing in SOAR is both a way to reach underinvested communities and to build a longer-term ecosystem for accessible capital. The key innovation of the SOAR Fund is to effectively leverage balance sheets and the core skills of CDFIs. CDFIs underwrite and service the loans then sell 95% of loans to SOAR and only keep 5% on its balance sheet. This enables the CDFI to effectively make 20X the loans it would otherwise be able to make.  CDFI loans supported by SOAR are limited to businesses with 50 or fewer full-time employees.

 

 

• Geography served: South and Southeast

• Target population: Historically disenfranchised entrepreneurs, with an explicit focus on women and people of color

• Sector: Financial services

• Asset class: Credit

• Basic fund/enterprise structure: Structured loan facility

SOAR also aligns incentives. Instead of being compensated through small margins between the cost of capital they raise and the interest they charge on loans to small businesses, CDFIs are paid based on the volume of origination and ongoing servicing, their core areas of expertise. SOAR builds capacity, enabling CDFIs to work closely with local community-based organizations to provide wrap-around advisory and assistance services to borrowers.

 

In addition to supporting 13 individual CDFIs across 15 states, SOAR serves as a hub of learning and sharing of best practices among CDFIs that are facing challenges unique to the regions in which they operate. It is implemented by three highly experienced national partners: Local Initiatives Support Coalition (LISC), Calvert Impact Capital and Community Reinvestment Fund.

 

Overall, this opportunity is compelling for the following reasons:

• Strength of key organizations leading SOAR: LISC, Calvert and Community Reinvestment Fund, and their partnership.
• Capability of the 13 CDFI partners to execute and utilize deep rooted community partnerships to serve BIPOC businesses and nonprofits with the technical assistance and wrap around services required.
• Focus on supporting marginalized Black, Latinx and women-owned small businesses and nonprofits.
• SOAR provides a standardized, streamlined lending process and borrower friendly terms: longer tenors to keep payments low, flexible eligibility requirements, fixed low interest rates.
• Inflection point: SOAR’s innovative model has potential to channel capital effectively to materially influence a more equitable recovery from COVID-19 in the Deep South.

SOAR is deeply aligned with WKKF’s racial equity goals as well as its focus on the South. Yet one of the questions the team grappled with in assessing various solutions to the South’s underinvestment is that SOAR is not a locally-based lender, but a large fund implemented by national partners.

 

Several considerations convinced the team that SOAR was a strong opportunity for impact in its target communities. For one, this model — a loan facility that builds CDFIs’ capacity — had been successfully implemented in other states but hadn’t attempted to target a specific region. This was an opportunity to leverage an existing model with some early proof points to reach a new set of communities. One of the key innovations of such a fund is that it bolsters, rather than replaces, CDFIs’ existing experience and strengths, including their relationships and trust in communities. This is especially critical in places like the South that have been underserved or exploited by traditional lenders and where solutions that work for local communities may look different from conventional wisdom about opportunity and risk. Moreover, an investment in SOAR enables WKKF to get capital to small businesses that are hardest to reach, something institutional investors typically cannot achieve directly.

 

WKKF’s investment was geared at providing the hardest to raise capital (equity and subordinated debt) to unlock the senior debt already raised, as well as enabling SOAR to attract additional investors. The foundation made a $3 million PRI into SOAR’s subordinated debt (Class B). Because subordinated debt is a lower repayment priority than senior debt (Class A), the former is considered riskier and more difficult to raise, even among impact-oriented investors. When WKKF was doing due diligence, SOAR had raised $45 million in senior debt (2% interest), but only $3 million in subordinated debt (2.5% interest) and $4 million in grants for equity and loan loss reserve. It required an additional $9 million in subordinated debt to unlock the existing senior debt. The foundation also made a $1 million companion grant to LISC to function as equity and loan-loss reserve.

W.K. Kellogg Foundation
One Michigan Avenue East, Battle Creek, MI 49017