Archives

[Silence]

[00:00:00] Joyce Klein

Welcome, everyone, and apologies for being a few minutes late, but we’re working through a few tech things. My name is Joyce Klein, and I’m the Senior Director of the Business Ownership Initiative at The Aspen Institute. We’re part of the Aspen Institute’s Economic Opportunities Program, and it’s my pleasure to welcome you to our webinar today, which is on Metrics that Matter: Improving Financial Analysis for CDFI Small Business Lenders. As you’re hopefully expecting from the materials that you read when you registered for this, in this session, we want to talk about which metrics can help CDFIs to make well-informed decisions about their financial choices and their financial performance.

For today’s webinar, I am joined by Brett Simmons, who’s a Senior Advisor to the Business Ownership Initiative. He’s also the Principal of Blue Aster Advising. Brett’s been a longtime collaborator with our work at BOI. You may also know him as the founding CEO of Scale Link. This new approach to financial analysis was very much developed by Brett, and so he’s going to do most of the presenting today. I’ll just do a little bit of introduction here.

The first thing I just want to share is that we have two objectives for today’s event. First is we want to share a new approach to financial analysis that we think helps to support a stronger understanding of the financial performance of CDFI Small Business Lenders, and then dive into and discuss how this set of financial metrics may lead to stronger financial decisions and outcomes for CDFIs. We really want to dive into not only what are these new metrics and ways of analyzing, but how might you actually use those as CDFI practitioners.

I will share our agenda in just a moment, but before we start, I want to share a few things on the technology front. First, this is like a real webinar format, so all attendees are muted. You can use the Q&A button at the bottom of your screen to submit questions that you have, and to upvote questions from others if you think you’re good and you want us to make sure we get to them in the Q&A. We will have a Q&A at the end of the session. You can also feel free to use the chat to share your perspectives, ideas, reactions, and experiences related to the things we’re talking about in today’s session.

If you have any technical issues during the event, you can either message us using the chat function, and we have someone monitoring that. You can also email us at [email protected]. There are closed captions available for this event, so you can just click the CC button at the bottom of your screen to activate those. The other thing I want to let you know is that there’s a lot in this presentation. There’s a lot of metrics and definitions and graphs and slides. We just want to let you know that we are recording this event, and we will share the slides out and the recording via email, probably early next week.

You don’t have to worry about taking pictures or scribbling down notes of everything we say. You’ll be able to access the content. The final thing is we do encourage you as well to post about this conversation on whatever social media platforms that you use. Brett and I are both active on LinkedIn, so if you want to interact with us on that in that way, that would be great. Just a bit about our agenda. To start, I’m just going to share some context for how this work came about, and then Brett is going to present on the metrics and financial analysis and some ways that you can use it, and then to explore financial and strategic choices.

Then we’ll answer your questions, and we’d love to hear back from you about the potential value of this work and what might be helpful for your organizations, because we have some thoughts about where to take this work, but we’d love to hear what would be valuable for you. Just a bit about the context for this work and how it came about. It came out of our work with the Microfinance Impact Collaborative, which is a collaboration that BOI has been facilitating for almost two decades.

It consists of five of the six largest CDFI micro lenders. You can see who they are on the slide. What’s distinctive about them which is that they are active, they are already making hundreds or thousands of smaller-dollar small business loans each year, and they’re actively seeking to scale that work. We meet monthly now to discuss issues, trends, challenges, and areas for collaboration. I think, as we all know, these are really challenging times for small businesses. Last six years have been really hard. We’ve had COVID, we’ve had the recovery from COVID, and inflation, and rising interest rates, and supply chain issues, and challenging labor market dynamics.

Then I would say over the past two years, a very highly volatile and, in many ways, unfriendly policy context for small businesses. Then for the CDFIs that serve them, we’ve also seen a lot of, I would say, volatility and challenges. First, we saw an influx of funding and opportunities, particularly federal and state governments, and in some cases, philanthropy really sought to deal with the pandemic. Then a couple of years ago, we started to see lots of challenges emerging in small business portfolios.

I think some of that was due to the risk context and all those factors affecting small businesses that I just mentioned. I think some of it is also what we have seen before. When CDFIs often scale their lending significantly, you often see a rise in risk in their portfolios. Then, of course, we’ve seen the impact of cuts or threatened cuts to the funding for CDFIs, given the very swift about-face in how the federal government views CDFIs.

That context really has posed some big financial challenges for CDFIs small business lenders. We’ve heard that from the CDFIs that we partner with. We’ve also heard it from funders and investors who support those CDFIs, and particularly investors who, over the past year and a half or so, have really seen CDFIs running up against some of their covenants around portfolio risk and around net income, and who have been concerned about what the potential impact of federal funding cuts is going to be.

In response, within our work with the Microfinance Impact Collaborative and working very closely with scaling, we started to try to track and analyze data that would help to understand what’s happening and what the implications were for the financial strength and the financial needs of CDFIs and the MIC members, and also think about where there were opportunities for collaboration or to think about some potential strategies for navigating what the current and the near-term context might be.

In the course of doing that in-depth work and in communicating about that work with investors, we realized a couple of things. One was that if you only look at the metrics that are in covenants, investor covenants, you don’t really get a full picture of the financial status and strength and choices that these CDFIs are making. For example, many, if not all, of the lenders in the Microfinance Impact Collaborative experienced negative net income in 2020 and 2023. They had more risk in their portfolios for the most part.

Those were triggering or coming close to triggering covenants from their investors. At the same time, we did an analysis of their financials over the period between 2020 and 2025. They all actually had stronger balance sheets in 2025 than they did in 2020, even with those financial challenges, and they had also collectively delivered more than $2 billion in grants and loans in that five-year period. The question is, yes, they were weak on covenants, and they were taking the net income challenges and the portfolio challenges seriously, but the question is, is this financial performance a red flag, or maybe there are actually some signs of strength here because they were not at financial risk, deep risk at that moment, and they had really answered the call to step up?

I think we saw this beyond the Microfinance Impact Collaborative, too. I think this was really true in the context of scaling’s work. We saw that the fact that CDFIs were managing to covenants was leading them, in some cases, to make suboptimal financial or strategic choices. Specifically, we saw that they were not selling loans even though doing so would generate unrestricted earned revenue for them at a time when they were struggling to generate revenues and it would actually reduce their dollars at risk, even though– their actual dollars at risk, not their portfolio at risk metric, because they had fewer loans on their balance sheet.

Because it would increase their portfolio at risk and potentially trip covenants or potentially cause concern with investors who they were trying to raise new debt with, they would choose not to make those sales. We also heard from CDFIs when they were thinking about things like should be investing in technology or making other strategic investments that they were often not making those investments because they were trying to manage to net income or self-sufficiency covenants, even if they had net assets that could absorb those expenses.

I think clearly we were concerned that we’re not quite always thinking about this in the right way, in some cases, for good reasons, but in these times, we started to think we really need to think about how we empower CDFIs to make the best financial choices they can and the best mission choices they can, and to really have a clearer picture of their performance and financial strength. That’s really where this work came from. With that, I am going to go ahead and turn it over to Brett to take us through the approach he’s developed. Thanks, Brett.

[00:10:39] Brett Simmons

Thank you, Joyce. That’s very helpful context. We’re going to dig into all the aspects of that with a lot of graphs, a lot of math. I hope you’re ready. I think we should be showing a slide here in a moment. There is a Mentimeter. There we go. If you go to menti.com and put in 6429 9936, you can respond to this question. I’ll read it out loud just to give people a minute to digest and get logged in if they want to respond.

A 1 would be a strongly disagree, a 5 would be a strongly agree. That scale is also on the bottom. The question is, has my CDFI made suboptimal financial choices in order to meet funder goals or covenants? The second is, has my CDFI limited its mission impact because the financial ramifications were unclear? There we go. These are two questions that we’ve asked our CDFI partners in the MIC, as Joyce has pointed out. We get various answers depending on the year. The covenants don’t matter. You’re able to have all the degrees of freedom you need to make the decisions that are right for your organization.

In other cases, sometimes even if the covenant’s not being tripped, you’re making decisions that have the right optics to funders because of something you want to do next year, raise debt, and the conversations can be difficult about how to move things forward. Given that we landed right in the middle, it looks like we have people with experiences of this at both polls. I’ll be interested by the end of this, when we ask a similar question for feedback, if what we’re putting forward helps you address some of these questions more directly.

Why do we set out to do, or why do we set out to make new metrics? Why are we doing this? I think initially we didn’t set out to make new metrics. We set out to understand what’s happening with our MIC partners. What we found was that in telling the story of how their financials have changed over time, it was really difficult to just take something like net asset ratio or to take portfolio at risk and tell the full story of the trade-offs that people make where they are targeting one piece of their business model, and maybe something else changes, and how those things interact.

We realized that a lot of people use these covenants to report to their board. They’re the key things that funders look at. Are there better ways that we can show these metrics not only to tell the story to your investors and to board members, but also to just manage the business? If you can understand your business better, then you can make better choices to enhance your mission and enhance your ability to deliver for your community.

The second piece of this, once we came up with ways that we thought helped people better understand the different levers that they pull as an organization and managing KPIs and strategic metrics, we realized that sometimes those covenants still get in the way. Are there different ways that these covenants could be constructed for CDFI small business lenders to allow them to make the best choices for their organization? That piece of it is going to be a one really in-depth slide with lots of information on it, but it’s still a really important one, even though it’s going to be at the very end of this conversation.

Where do we go? We went to people’s public financials to say, like, how do other people present their financials? How do they understand them? We stole this directly from Oportun’s 10-K. If you know Oportun, they’re a consumer lender. This is how they disaggregate their business. I say disaggregate because this is literally from soups and nuts, all the major metrics that define what their P&L looks like in a given year, and it’s done in relation to their balance sheet by looking at the principal balance. I’m going to dig into each of these, so don’t feel like you have to memorize this right now.

The key here is that everything that we’re going to look at today, we’re going to be dividing by the portfolio assets under management. They call it average daily balance. A lot of people don’t even track average daily balance, but we have portfolio assets under management at year-end, and it’s a great way to understand and normalize all the information you’re seeing. The important piece is that I can take an organization with a $500 million portfolio and a $50 million portfolio or a $5 million portfolio, and I can make all of their numbers comparable when I put it based on the portfolio assets under management.

The other thing I want to point out here is that you make choices about what your portfolio looks like, and those choices have to do with how much you lend and how fast people repay, but they also have to do with whether you sell loans to raise capital or other ways that you bring capital into your organization. Rather than just taking that stuff that you sell and say, “Well, it doesn’t matter anymore because it’s off balance sheet,” we’re looking at assets under management, meaning we’re pulling all of that into this because you’re still often servicing those assets, and you just made a choice about how to finance additional loans through loan sales.

We want to capture that when we’re looking at how to normalize the information. Again, it’s portfolio assets under management. Now I’m going to walk through each piece of this, starting on what was the left side of that full picture of graphs earlier. The first two pieces we’re looking at are really the income side of this. For Oportun, they looked at loan yield and non-interest income, and they considered that all as part of what we’re calling earned revenue. That’s the first bullet.

We then take that earned revenue and divide it by portfolio assets under management to get the revenue yield. What does it tell you? It’s really how much income you’re able to generate off of your portfolio. You might have other fees that you’re charging. You have origination fees, you have interest. Most people don’t have deposits if you’re not a bank, but you have all of these means to generate income. When we’ve done this with others, we’ve just pulled out their entire earned income and stuck it in this bucket. It’s mostly interest, but that captures everything that they’re able to generate from their portfolio.

You might have other revenue streams that aren’t necessarily directly tied to your portfolio, but I would make the case for most CDFI small business lenders, their ability to generate those other streams of income really does go back to the fact that they’re a lender and have this portfolio. It really does make sense to tie everything back to that. That’s the earned revenue yield. As we move forward with each additional slide here, you’ll see that the first bullet point just references what was on the last slide. I’m just hoping, hopefully, you move through and connect these things together. We ended the last slide looking at revenue yield. That’s the first bullet here.

The second thing we’re going to look at is the cost of funds. For our calculations of this, we just take people’s total interest expense in a given year. Some of your funds in your portfolio might not have an interest expense, and that’s fine. It reduces your cost of funds. If it’s grant dollars or if you’ve sold loans, you might not have an interest expense, but that all goes into the cost of funds. We then take that cost of funds and subtract it from the revenue yield to come up with a net margin. Really, this is what is showing you your ability to generate revenue as an organization minus the cost of the capital to deliver it. That’s pretty straightforward.

Obviously, to generate that net margin, you could go out and make a lot of really bad loans, and for the first 12 months it looks really great. You’re generating a lot of interest income, and then all of a sudden you have all these losses. We don’t want to incentivize people to just boost their net margin by looking at these. We introduce something called a risk-adjusted net margin. Sometimes this is used just by net charge-offs, but we felt like the best way to picture this for organizations like CDFIs is to look at the provision itself.

The provision is adjusted based on the charge-offs that you’re having and based on how CECL is structured. Your provision should represent all the anticipated losses that you’re going to have on each loan that you’re originating. We subtract that provision expense from the net margin, and it creates this risk-adjusted net margin. Basically, if their risk-adjusted net margin is significantly less than the net margin, it would mean that a significant portion of the revenue from that net margin was through excessive risk-taking. This is a way to dampen that and try to understand how much of that revenue is really quality revenue over the long term.

The alternative here, obviously, is sometimes we see people that could take more risk and they don’t, and that means that their risk-adjusted net margin is also not reflecting that. Then we look at total portfolio returns. Basically, once you have that risk-adjusted net margin, you want to understand what it costs you to generate that revenue. To do that, you need to look at your operating expense. As you saw in those other slides, we’ve already taken account of interest expense, and we’ve already taken account of provision expense. We need to take those out of the operating expense, and then we divide that by the portfolio assets under management, and it creates what we’re calling an OPEX ratio.

To get your total portfolio returns, we just take that expense out of that risk-adjusted net margin from the last slide. Basically, every CDFI that I’ve looked at ever, and in all the data I’ve seen, the small business lending has a negative percentage once you do this. You take that risk-adjusted net margin, you subtract to that operating expense. There’s a reason that these organizations need subsidy, and it becomes very clear when every time this is a negative number.

This does include fundraising, and I think that’s important to point out, and it has to do with what I just said. Every single CDFI small business lender I’ve looked at has a negative total portfolio return after you’ve adjusted for operating expense, which means that they require philanthropic subsidy. If you require philanthropic subsidy for your business model to work, then you can’t take it out of your operating expense. It’s part of the business, it’s what makes the whole thing work, so we include it as part of the operating expense.

Obviously, this would give us just how the portfolio and the cost of doing that portfolio looks, but we all know that we need some subsidy. A typical Oportun graph, like I’ve been showing, does not have contributed revenue because they’re not out there raising subsidy, but it’s an important part of the business, so we’ve added what we call a rate of contributions. We basically take the total grant income in a given year, and again, divide it by the portfolio assets under management.

The interesting thing is that I think a lot of people don’t think about their grant income relative to their portfolio, but what’s been really clear, and once we do this division, is that it really does smooth out what that rate of contributions looks like over time. You obviously have some influxes if you get a MacKenzie Scott Award or something like that, and your numbers go way up, but most of the time, your ability to raise money has to do with the activity that you deliver as part of your CDFI mission. Most of that activity shows up in your portfolio.

It’s a great way to understand how much of your fundraising really does come from that portfolio activity, but basically, we take that total portfolio return from the last slide, we add the rate of contributions, and we get what we call a total return or loss on all activity. Some CDFIs, after we do this, they still have negative net income years, and that would result in a negative percentage year. The important part here is that once you get to this point, you’ve basically taken everything in your P&L, including your net income, and put it into a percentage that you can compare to any other CDFI.

Here’s everything in one slide. We’re really getting at the unit economics, and it’s as a percentage of the total portfolio AUM. To get this, we needed six numbers. We need your earned revenue yield, your cost of funds, your provision expense, your OPEX ratio, and your rate of contributions, and your portfolio assets under management. Sometimes I forget that one, because it divides everything.

It’s not that many variables. I can take 10 years of audits and put them into ChatGPT and get these 6 variables over the 10 years pulled out accurately in about 4 minutes, and create all these graphs and understand and compare myself to someone else. It’s a really quick way to get a sense of where you’re going as an organization, and given some of the AI tools we have now, you can do it even faster than before.

What does all this achieve? We’ve reorganized your financials to really show how everything adds up and to better tell the story, and I’m going to now show you some of the ways that you can tell that story with some different information from CDFIs we’ve worked with. It also makes it such that when you change one thing in these variables, it changes all the other variables. You can’t make a choice in isolation of the others, which is the reality of operating in one of these businesses as a CDFI, and so it really brings to light those trade-offs much more clearly. It also just shows how you got to your net income results more directly, so it shows the distance traveled to get there.

We’re going to go through this in practice. I divided these charts into three different types of organizations, so the green line is what I’m calling a credit-led organization whose average loan size is under 75,000. The orange is credit-led whose average loan size is under– Sorry, the first is over 75. The orange is under 75, and then the final pink one is what I’m calling advising-led, where the average is under 75K.

These are real organizations. I have a lot of real data, but these are not any one of those organizations. It is an amalgamation of different organizations where I’ve categorized them based on how much of their work is really focused on getting loans out the door, what their average loan size is, and then, for advising-led, if you do a lot of TA, this tends to create a difference in how your numbers looks, so it’s helpful to differentiate that.

For the earned revenue yield, it’s not surprising that organizations on the orange who are doing smaller-dollar loans tend to take higher risk and tend to generate higher interest yield from their portfolios, so their earned revenue yield typically is higher. We see some dip in that in 2020 and ’21 when people had to change interest rates given the amount of PPP and other programs that were coming online with low interest rates, so they needed to adjust to fit the current environment. Over the last three or four years, those numbers have trended back upwards.

It tends to be the case that CDFIs that are doing a lot of larger-dollar loans do have lower earned revenue yields. The cost of funds across all of the CDFIs we look at is often not a real factor in their overall financial performance. I think that’s changed for some as they’ve gone out and had to bring on capital in this period of higher interest rates, but people have done all sorts of things to avoid taking on long-term higher interest rate debt. The result is that most people’s cost of funds has trended up slightly, but, as you can see on the left-hand side, everyone is still under 3%. There’s a lot of grant dollars in the portfolio, even the debt that’s being taken on is still low cost.

The net margin doesn’t look that different from the earned revenue yield. Again, this net margin takes earned revenue yield, subtracts out cost of funds. Because cost of funds is so low, this number doesn’t actually change that much for most CDFI small business lenders. It changes a lot, though, when we start to look at risk. These look like they’re all over the place, and part of the reason that’s happening is that advising-led organizations, many that I’ve seen, took really large provisions in 2020 and reduced the amount of lending that they were putting on their books, and so you see these giant oscillations in the provision expense where they took a lot of provision in 2020, reversed some of it in ’21 because the losses didn’t come to fruition because of government interventions.

Their numbers tended to be, over the 2020 and ’21, a little bit of a roller coaster. For others, I’ve seen this number as low as 1% to 2% per year and jump to 10%, 15%. As you see, some of the credit-led organizations in 2024 took really large provisions given some of the risk Joyce was talking about. The result, when we risk-adjust that net margin, is that the lines get much closer together. The organizations that were doing those small-dollar loans were generating higher interest yields, but, to do that, they were also taking more risks than a typical large-dollar lender. They still have a higher risk-adjusted net margin at the end of the day, but it’s not nearly as pronounced once you’ve done the risk adjustment.

I’m just flipping between these two charts, between net margin and risk-adjusted net margins, just so you can see how much things change with the risk adjustment. Again, this is risk-adjusted, this is what it was before. There’s risk-adjusted again. All right, so with OPEX ratio, this is a really important one, and I want to point out how things fit together here. Advising-led, you see their OPEX ratio relative to portfolio tends to be much higher, so it can be the case that their operating expense is 30%, 40%, even 50% of their portfolio size. That’s not unexpected if you’re doing a lot of TA.

The question is whether this is a reliable source of funding over the long-term. Some of the partners that we’ve talked to about this have said, “We do a lot of TA, and we have state contracts to support that TA work, and we understand that it’s a high part of our OPEX, but we’re okay with it because of these contracts.” The interesting thing is that they also, because of those contracts, charge lower interest rates to their borrowers because government officials that they partner with on TA don’t want to see higher interest rates.

You end up with this trade-off where their risk-adjusted net margin might trend much lower than others, and their OPEX ratio is higher, but when we get to the contributed revenue, they have a lot of it because of these partnerships, so people bounce around on these numbers, but that doesn’t necessarily mean that there’s a flaw in their business model. It raises a question about whether that business model is something that they can continue to produce every year, which I think a lot of organizations that are advising-led have shown that they’re able to do.

In this case, the credit-led with average loan sizes under 75K tend to have a higher OPEX ratio than those that are doing larger loans. That does not mean that they’re less efficient in our experience. In fact, if I look at the OPEX ratio per loan, it tends to be the case that CDFIs doing a lot of loans under $75,000 are 5 to 10 times more efficient than large-dollar lenders. There’s a lot of questions that this raises about what that efficiency looks like and the kind of loans that they’re doing, but it’s an important question to ask. Like, are there certain approaches that these smaller-dollar lenders have figured out, given their scale, that could be adopted by large-dollar lenders to be more efficient and drive down that OPEX ratio?

Total Portfolio Return (Loss)

Credit Led (Avg over $75k)

Credit led (Avg Under $75k)

Advising led (Avg under $75k)

As I mentioned earlier, once we take that risk-adjusted net margin, we subtract the OPEX ratio, the numbers that we see are almost invariably negative. We’ve seen a few organizations have positive years for a few years. There’s some organizations that do much higher average loan sizes that do generate positive portfolio returns, but I think, generally speaking, we see these numbers as negative. The advising-led tend to have the highest negative numbers just because they’re not generating as much return from their portfolio, and a lot of their operating expenses going to TA.

Rate of Contributions

Credit Led (Avg over $75k)

Credit led (Avg Under $75k)

Advising led (Avg under $75k)

When we add in the rate of contributions, as I mentioned, some of those advising-led organizations make up the difference through state government support. In this case, the organizations that we had in our sample set got significantly higher amounts of grant dollars in 2020 and ’21 to support all of their work with small businesses, and that allowed them to continue this business model.

I think generally speaking, we haven’t seen a huge differentiation between small-dollar lenders and large-dollar lenders and their ability to raise grant support. I think sometimes there’s a story that microlenders raise money more effectively. I think that might be the case in some instances, but in most of the data we’ve seen, there’s actually pretty close alignment between the two types of organizations.

Total Return on All Activity

Credit Led (Avg over $75k)

Credit led (Avg Under $75k)

Advising led (Avg under $75k)

Finally, we have the total return on all activity. I think this graph for the last five years, is a little hard to understand because the last five years have been pretty crazy. When I add in years back to 2010 and 2011, they do not look like this. This roller coaster is specific to COVID and the giant influx of funding that came through the CDFI Fund and other philanthropic partners with PPP fees that they had available.

What you’ll see is if you compare where the lines are at in 2018 to where they’re at in 2025, we’ve returned to the mean in some ways. We had all these ups and downs in portfolio quality issues and dollars coming in and all these, and this helps us understand that story, but at the end of the day, total return on activity for most CDFIs is between 0% and 5% after they’ve accounted for their philanthropic subsidy coming in. These years where you see 20%, 25% and really increasing people’s net assets are not something that is sustainable over the long term.

Total Portfolio

Sum of Risk Adjusted Net Margin (Provision Only)

Open Ratio

Total Return (Loss) Portfolio

Contributed Revenue Yield

Total Return on All Activity [unintelligible 00:35:01] [unintelligible 00:35:01] [unintelligible 00:35:01]

I’ve shown you all of these independently, but when I work with clients to use this data, I tend to put several of those lines in a single graph. This is from an actual client that I’ve worked with recently. On the right-hand side, you’ll see that the axis is in millions, and that corresponds to the gray columns, which are the total portfolio assets under management. On the left side are the percentages, and that’s where all the lines correspond to.

The first one I want to point out is the sum of the risk-adjusted net margin, and it’s that purple dotted line right in the middle of the screen. This organization charges really low interest rates to their borrowers despite growing a fairly healthy portfolio, and especially over the last several years. They have continued to grow that black line at the bottom, which is the total return loss on portfolio. By grow, I just mean they’ve moved from a more negative number to a less negative number.

They’ve been able to do that because for each dollar they’ve lent, they’ve been able to do it more efficiently, and that’s what the orange line is showing. That’s the OPEX ratio. You can see that it’s trended down for the last nine years across this organization’s history. I like using this graph because it’s so easy to explain, and they’ve so successfully dropped their OPEX ratio every single year, which is a real testament to their ability to continue to grow and make investments in their people and systems so that their people can do more and not have to have as many FTEs to do it.

They have also raised a lot of money. The blue line is their rate of contributions. Part of the reason that they’ve been able to grow this portfolio so much is because that rate of contribution is so high. I do not regularly see people that are generating 25% of their portfolio- as grant dollars year-to-year, which is what this organization’s been able to achieve. That’s the blue line, and it is added to that black line at the bottom to create that solid purple line across the middle. This puts everything together. It has the portfolio on the right side so you can see how the portfolio growth is influencing the other numbers, and I think it’s the best way to show how this looks when you’re talking to your own management teams or to your board.

Why can also apply this to strategic planning

Sometimes a fancy model can get in the way of seeing the basic tradeoffs at stake (and are less likely to be updated!)

1. Stakeholder sessions confirm products and likely volume of lending. Forecast new loan receivable.

2. Reflect on balance sheet and risks. Will costs go up? Is leverage already high? Do you have enough net assets? Will you charge borrowers more or less? Forecast a risk adjusted net margin.

3. Do you have the right processes, people, and technology to grow without growing expenses as fast? Forecast an OPEX Ratio.

4. What is the funding environment? Can you expect the same results? Forecast a contributed revenue forecast.

5. In 20-30 minutes of initial thinking, you can have a first pass view of your organization’s future and the trade offs to get there.

We can really use this to historically understand an organization, to talk to funders, but we can also use it to start doing strategic planning. I have built a lot of fancy Excel models that sit on the shelf and never get used, and sometimes it’s because I made them too complicated, but sometimes it’s just because they’re not as helpful to understand an organization as just digging into some of these root percentages and ratios that really highlight how the business is performing and running. I build lots of those models. People use them to make a strategic plan for five years, and I would question whether they ever get used again.

With these percentages, you can much more quickly do scenario analysis without having to have that giant financial model. I worked with a lender recently where we forecast the new loan receivable, which is a pretty straightforward process to do. We then just looked at their current approach to lending, what their costs are, how they’re thinking of their costs of funds, what they’re going to charge borrowers, are they going to change their origination fees, and we said, “Given all that, let’s forecast a risk-adjusted net margin that looks like this percentage going up or changing.” Then we looked at their OPEX ratio and said, “Do we think we can continue to get efficiencies? If so, let’s project it going down by 2%.”

Then, “Can we continue to raise dollars from contributed revenue?” It’s always an important question. “Let’s just put something on paper that looks similar to what we’ve been able to do in the past.” It takes like 20 to 30 minutes of conversation to think about how we might look at these things, and then plug them in, and start to project what’s actually possible.

Total Portfolio

Sum of Risk Adjusted Net Margin (Provision Only)

OPEX Ratio

Total Return (Loss) Portfolio

Contributed Revenue Yield

Total Return on All Activity

On the right-hand side, these are projected loan receivables. They’re in the gray dotted lines. Then we just projected the other numbers forward. We said OPEX ratio keep going down; we’re going to charge borrowers a little more, so the risk-adjusted net margin might go up some; our total portfolio return will continue to progress to a less negative number, and let’s project contributed revenue going down some, but still staying fairly high. Again, this takes 30 minutes to do. We apply it to the total portfolio, and we get some real numbers.

Trade offs and questions easily raised to address

1. As growth rate slows and OPEX is forecasted down, can you grow while cutting OPEX per year by $400,000 by 2030?

2. The forecast requires raising between $9M and $11M per year in grants, is that possible?

3. We can generate $1.8M more in margin by 2030 but it will require charging borrowers an average of 400 basis points more and not increasing losses. Does that fit with what our community can manage?

4. Will we require much more debt? Forecast principal returns.

With these numbers down, we knew right away that in order to show what was on that graph, they actually had to cut OPEX by 2030 by $400,000 per year. They said, “We don’t actually want to do that.” That number didn’t make sense, “Let’s change what it looks like.” We also realized with those numbers that they would still need to raise between $9 and $11 million per year in grants. Said, “That’s not possible in this environment. Let’s change that assumption.” Then we thought, to generate this additional revenue that they’re thinking of, they need to charge their borrowers 400 basis points more. They didn’t think that that would make sense for community, so let’s make it a little less.

In a second pass hone in the risks

1. We will grow our OPEX ratio downwards and only require $250,000 more per year in dollar costs. We will hire 2 to 3 FTE.

2. We will assume the worst for grants and drop them gradually to $2.7M.

3. We won’t as aggressively boost the net margin. Instead, looking to increase 275 basis points.

4. With these revised assumptions, we can still generate positive net income assumptions each year.

We did these things and changed and said, “If we change the OPEX ratio and don’t make it go down, we actually make the percentage get less by growing the portfolio, so we don’t cut anyone; we grow the portfolio. I put this as growing the OPEX ratio down, which is a funny way to put it, but hopefully, it expresses to you that you’re not cutting. You’re actually increasing in some marginal sense, but you’re increasing your portfolio size faster than that increase, so that ratio is staying low. We dropped their grant dollars to just $2.7 million a year, so a massive cut. Then we decided to not boost the net margin as much, so just a 275 basis point revision. We did that in a table with all these numbers, and already have a projection of where things would go over a five-year period.

Total Portfolio

Sum of Risk Adjusted Net Margin (Provision Only)

OPEX Ratio

Total Return (Loss) Portfolio

Contributed Revenue Yield

Total Return on All Activity

This took all of an hour for us to put together, and it’s a pretty good assessment of what’s possible given their historic trajectory as an organization. Is it perfect? No. Are you more likely to do it once a year than using that fancy financial model? Certainly. This is a great way to start your scenario analysis, bring things to your board, and get feedback on how you’re doing, and what direction they want to go, and to really highlight the assumptions that you’re making, so that the board can give you feedback on whether they think that assumption is a good one or not.

“Distance Travelled” as a future addition

1. Used in school reviews to not penalize those who take on hard mission communities, and alternatively, so that already high-test score schools have incentive to still push further.

2. CDFI measures too one-size-fits-all and end up penalizing models that are simply harder to do, but mission rich, while not pushing other CDFIs hard enough.

3. We are learning how to apply our analysis in this way.

4. Benchmark data is coming this fall 2026!

Hopefully this is helpful. Again, we’re going to give you all these slides so you can go calculate them yourself. If you have questions on how to do that, we’ll have our emails at the end. Just to summarize a little bit of what we’ve accomplished and shown and what we’re hoping to show in the future: one is we want to start to think through what we’re calling a distance travel notion. This is sometimes used in school assessments. If you took two schools with very different test scores coming into a year and just compared their test scores at the end of the year, it wouldn’t really be a fair comparison.

In school assessments, they’ve come up with this distance travel notion to say, “If you started at a test score that was really low and went really far in terms of the improvement versus another school, then you’ve actually achieved a lot, even if the test scores still don’t look super great, you’ve made a ton of progress.” For CDFIs, sometimes we end up penalizing people that take on really mission-difficult approaches because we hold them to the exact same standards of self-sufficiency and target portfolio at risk.

What we think we can start to do with these different metrics is show, yes, we want people to be self-sufficient, but look at how much this organization’s been able to accomplish and the levers that they’ve been able to pull to get to still positive net income at the end of the year, given the types of products that they’re trying to provide for their community. On the other hand, I think some organizations that do really large small business loans generate a lot more long-term stable income and should likely be held to a higher standard in terms of their total performance and what they’re able to generate in net assets each year without grants taken into account.

Later this year, we’re hoping to get data to be able to provide benchmarks for this information. When I do this with other clients and with other MIC members where they’ve granted me permission to show them data from other CDFIs and those other CDFIs have agreed, I can show them their performance side by side, and they can tell their stories to each other, which is a really helpful exercise if you have another CDFI that you have that type of relationship with where you can look at your data and talk to each other about it. For others, we need these benchmarks so that you can understand your performance relative to the rest of the industry. We hope to have that later this fall.

Covenants can still stand in the way

1. Delinquency relative to the loan loss reserve AND net assets (PAR ($)/(LLR ($)+NA($))). LLR and NA represent available financial bandwidth to deal with losses and repay debt holders. AND, after loan sales, they adjust so the calculation won’t drive avoidance of good revenue strategies (sales with premiums) that boost earned revenue yield.

2. Net Income (Loss) should also be looked at relative to “excess” net assets (Net Income ($)/Excess NA($)). Excess would be net asset dollars above those needed to maintain a 20% net asset ratio. This would give an organization the ability to use net assets to fund losses and grow. Loss taking (investment) could bring mission impact faster (losses in some areas but gains in others).

Finally, I said there’d be one really long slide on covenants, and as promised, here is the one really long slide on covenants. I’ve highlighted the two calculations that are important here. Basically what we’ve done in both of these cases is tried to pull in net assets into the calculations, because right now, if you do really great as an organization and grow your net assets over time, it doesn’t matter for a lot of your covenants.

Your portfolio at risk is the same calculation. Your net income in a given year is in the same calculation. That net asset is of value to the types of risk that you might take as an organization and your ability to absorb risk. In the first case, we’ve created a metric where you take your portfolio at risk dollars and divide it by the loan loss reserve and the net asset dollars. That gives you a sense not just of what the current portfolio at risk is, but your ability to absorb losses given the net assets that you’ve accumulated from your portfolio management in the past. It pulls everything together.

The second piece is net income year-to-year, managing an organization to never take losses. If all the VCs in the world made all of their new startups and their small businesses never take losses, we wouldn’t have a ton of companies in existence today. Losses are part of managing a business. The question is, can you take those losses given your balance sheet? We’ve created this calculation, taking the net income and dividing it by what we’re calling excess net assets. By excess here, we just say, apply a 20% net asset ratio to your organization. What number would that require us to hit 20%? If you’re at 30%, then the difference between those and dollars is the excess dollar amount.

If you want to use that to make an investment, so you have a new loan management system, and it’s going to result in you taking a loss this year, do it. With this covenant in mind, it wouldn’t matter because you have the net assets to go make that investment. I think a lot of organizations would make improvements and continuous improvement in their organization if they felt like they had more flexibility to put those net assets to use.

What are other areas of financial analysis do you need new tools to better address?

We have one more Mentimeter slide here, and it should be at the same link. In fact, if you were already in the Mentimeter from the last slide, you should just be able to click forward and see this. We basically want to know, are there other areas of financial analysis that you feel like other tools would be helpful to better address your needs as an organization? This should be a live one, so hopefully people are there and putting things in. As with webinars, I can’t see you, so I can’t cajole you into responding, but we’d love to see some of this feedback.

[00:44:44] Pause

Starts that incorporate staff size.

Okay. Some interest in staff size. That is something that another CDFI I work with just added to the mix.

I like stories.

They want to see personnel expense relative to the portfolio and take that as a cut of the operating expense.

Building out more detailed projections after taking the high level analysis this does.

Monthly metrics

We can show some of the more detailed projections. That would be an interesting table to put in place, and stories. The one story I told about the state funding and interest rate changes, I think, is something that we have gotten a lot of feedback on. Next time I go through that, maybe I’ll ask them if I can use their name so that you can put a name to the story too. It sometimes makes it easier.

Standardized data similar to UBPR bank data.

And maybe number of fundraising staff specifically.

Great. I see fundraising and staff size to be incorporated, and that’s definitely something we’re looking at. We’ll include that in some of our future work.

How can we best support your work?

Please provide us with any feedback on tools and what else you might want or need. Email [email protected] or [email protected].

If you want to learn more about other loan performance data solutions, email Jonathan at [email protected].

Talk to us at OFN 2026!

Stay tuned for paper with benchmark data this fall!

All right, at this point, we are going to look at the Q&A and see what’s coming through.

[00:46:11] Joyce Klein

Okay, great. I’m back, and I’ve been looking at the Q– or I’ve been seeing what’s coming into the Q&A. We have a couple of questions. We actually have a couple of questions from people about now that we’ve put this together and we’ve talked about covenants, have we been having conversations with banks about changing the narrative and looking at it in different ways?

I’ll let you answer that in a second. The first thing I want to say is, actually, in part, this work came out of the MIC, but it also came out of some work that we actually have been doing with funders and investors to look at what’s going on with CDFIs and that the collaborative members, but others as well. I should actually give credit to the fact that a lot of this work was actually funded by JPMorgan Chase. They’ve been very supportive and involved in this work. We actually have had an ongoing conversation with funders and investors. Brett, anything else you want to say on that front?

[00:47:06] Brett Simmons

Yes, and those conversations have been really open. I would say there were seven of the largest investors in the space at our last convening at the small business finance forum, where we talked through these covenants. Generally speaking, it was interesting, people were open to them. Some said, “No one has ever approached us to try to use their net assets to make investments, but if they did, we definitely would say yes,” which was interesting.

I think the overall feedback was, “We’d love to change the covenants.” It’s going to take a long time to change covenants. What we would be interested in is if people are tripping covenants with us, if we could introduce these alternative metrics as a way to address the covenant violation. Yes, you have a portfolio-at-risk violation, but rather than having to create this whole convoluted story, can your first response be, “Here’s my portfolio-at-risk relative to my loan loss reserve and net assets, and we’re good on that. Can you waive this covenant violation?”

Really trying to short-circuit the amount of time it takes to deal with covenant issues. I think that’s the first step of trying to make changes here is to make it easier to deal with the existing covenants and maybe use some of these metrics to short-circuit what would be much longer conversations to try to understand risk.

[00:48:27] Joyce Klein

Great. Another question is, what’s the optimal amount of years that you would use to do this analysis?

[00:48:37] Brett Simmons

If I had my way, I would always try to cover two financial crises, so I would go back to 2008. Some of the organizations I work with have data back to 2008, so I can create a 2008 to 2025 and really look at how they’ve weathered different periods. I think going back to 2016, 2017, if the data is available, is helpful and great. Interest rates were a lot lower for 10 years, so it’s really hard to compare in some instances. Those early periods of like 2010 to 2019 is much different risk environment than the one we’re in now. I think the key is trying to capture those different risk environments and ultimately just to get a sense of what’s really possible.

I think sometimes we do strategic plans and say we want to get more efficient, and we don’t really have a reference number for what efficiency looks like. This would be able to point back and say, “We’ve only ever achieved 15% OPEX ratio, can we do better than that? What would it look like? What do the investments need to be?” I think it helps put a line in the sand to have that conversation, and the time period is going to be somewhat tailored to what that organization has available.

[00:49:50] Joyce Klein

Another question is, is the primary way that this approach looks at more mission-oriented CDFIs related to the risk profile of the borrowers, i.e., credit history, or are there other ways that you look at this?

[00:50:07] Brett Simmons

Once we get the benchmark data later this fall, we’re going to look at different ways to cut the information, and perhaps unique ways that we haven’t clustered CDFIs in the past. It could be based on borrower risk. I think a lot of the cuts that have been done by OFN in the past have to do with the product groupings and asset size. I’m not convinced that the asset size is a core driver of how people operate their business. You can be a very sophisticated business and very efficient and be a much smaller organization.

I’ll be interested, once we have that data, to see if there’s other ways to classify it, and hopefully, provide people a couple different ways that they could benchmark themselves. Rather than just having one where it’s like, “This is my cohort,” you could also compare yourself to much larger organizations or organizations that specialize in a different loan type to see if there are ways that you can try to target the performance that they’re able to achieve, or adopt some of the practices that they’ve already figured out to make their business model work.

Hopefully, we’ll come up with benchmarks that spur that conversation rather than just create like, “You’re either compared to this, or you’re compared to that.” I don’t think that’s really a great outcome. There’s a lot of choices being made here, and we just want to highlight those trade-offs so that people can make better choices, and the right cohorts will help us do that.

[00:51:30] Joyce Klein

I should note, when we talk about this benchmarking analysis, we are talking with OFN about partnering with them to use their side-by-side data as a way to be able to have granular data that we can use to do that benchmarking analysis. Another question is, it says, “Good work, Brett. It would be cool to look at the trends for a cohort of small business lenders for the years 2014 to 2019 and then 2020 to 2025.”

[00:52:03] Brett Simmons

We have done that with the MIC already, so we have some interesting information there. I think what we found is that the period from 2017 to 2019 for CDFI small business lenders was actually a really difficult period. People who were really close to their net asset ratios within the MIC were really looking for unique ways to bring capital on. They were also achieving some of the highest efficiency lending that they ever did with the lowest risk that they’ve ever seen. There are some really important lessons. Then 2020 happened, and we scrambled everything around and we questioned everything and people changed a lot.

I look back to the 2018/2019 period as a period rich with a lot of really important insights that I feel like some of them we’ve lost in the last six years. I think it looks like it was Mishu who brought this up. Mishu, thanks for bringing it up. I think it’s an important comparison, and really is a rich period of lessons that we need to bring back forward because it exhibits a lot of the similar challenges that we have now with total funding available.

[00:53:14] Joyce Klein

Brett, another question, we’ve got time for a couple more, “Does this alternative methodology replace the existing covenant and risk methodology, or should this be taken in concert with the current methodology to provide a more complete picture of risk?” One thing I will say before you get there, I’ll let you think about it-

[00:53:32] Brett Simmons

Yes, of course.

[00:53:33] Joyce Klein

-for a second, is one of the things I want to say about some of the metrics that we’ve been used, which are now covenants, is that I will just say, mea culpa on this, I’ve been in this field a long time, and some of the original metrics, particularly for micro lenders, were really developed out of work that we did here at the Aspen Institute 25 or 30 years ago. There were certain metrics related to portfolio at risk, related to self-sufficiency, that were really some core metrics, and we modeled that, in part, on how the international microfinance organizations looked at this.

I think, to some extent, we always knew that there were limitations in looking at a single metric or just a couple of metrics and not really being able to make connections among the metrics to understand a more complete picture and understand how certain metrics drove other metrics. I just want to say that I think it doesn’t necessarily get rid of all the old metrics, but it actually just, in some ways, allows you to connect them and hopefully use them in ways that can help CDFIs be more strategic. Brett, what would you add to that, or correct?

[00:54:45] Brett Simmons

My only hot take, which is not a hot take if you’ve ever heard me talk about this, is I hate the self-sufficiency ratio. Even if it makes sense on paper as a way to understand an organization, it just leads to conversations that aren’t actually helpful for developing and making decisions about the future of the organization. I’d much rather be in a position where we say, “Your OPEX ratio is going up faster than your portfolio each year, so you’re actually increasing your inefficiency every year rather than decreasing it.”

That’s a very easy conversation to say, “Look, your risk-adjusted net margin is almost the same year-to-year. You’ve been able to maintain that. The problem is that you’re lending less efficiently each year.” That’s a way to target something that has to do with self-sufficiency ratio, but is an actual metric that you can move and act on as a management team. I think that’s the difference here. It’s like, those metrics can still be there; those covenants can still be there. They’re still important.

What we’re trying to do is offer people, on a quarter-to-quarter basis, numbers that you could actually track and make decisions about how your organization is doing that are much more insightful than being like, “Our self-sufficiency ratio was off last quarter.” To me, that doesn’t tell you anything about how to run your business differently. This helps you dig in behind that and understand the story of the trends of your organizations. You really could monitor this month to month. I think it probably wouldn’t be as helpful as quarter to quarter.

There are just things that happen month to month that are going to make numbers look a little strange. When you look at the numbers …. they do this on a daily basis. They have a daily average balance that they’re using to calculate this. You can really dig in and look at these numbers and monitor them and use them to make management decisions. That’s ultimately the biggest benefit.

The covenants come up because they get in the way of the management decisions that are highlighted by this approach. You might have a decision that says, “I need to sell more of my portfolio to finance my growth. If I do that right now, my portfolio at risk is going to go too high, and so I can’t do it, even if it’s the right business strategy, given where your performance at or what your net asset ratio is.” Again, I think they have to exist in concert because the covenants all exist, but they’re serving different purposes.

[00:57:04] Joyce Klein

We have one more question I’m going to take, even though we’re just at three o’clock, and then I’ll wrap up very quickly. The last question is, “Do you think there’s a reason, or is there a value to differentiating between public versus private grants and contribution funding at this work?”

[00:57:29] Brett Simmons

I haven’t done that across the board with organizations to see if it’s a meaningful differentiation, so I don’t want to just answer off the cuff and say it doesn’t matter. I know that it matters in some of the stories that people have told me. It tends to be the case that people think that their government funding sources, with the CDFI fund aside, given the way that those awards are allocated, but state and local, or SBA microloan, or if you ran an SBDC in the old school way that those were funded, it tended to be a little stickier revenue. There might be a benefit of differentiating that.

Again, we don’t have the data yet to show that difference. I don’t want to say that it is or is not a worthwhile way to do it without having the data. I know the data exists, so if we have it in the benchmarks, it’s something we can definitely explore.

[00:58:19] Joyce Klein

I would also say one of the things that– Right now, it’s not that hard to pull this off of your PnL. It’s the number for contributed revenue. You don’t have to do a bunch of disaggregation. I would think part of it has to do with how integral is that contributed revenue to your model? Every year, how big a piece of your business is, and then depending on how big it is, might influence whether it’s useful.

Great. I’m going to move us to close. Thank you, everyone, so much for joining us today. We hope this is helpful. Again, we know it was a lot, but we would love to have your feedback on these tools. On the slide, and I think it’s been up for a while, but if we can maybe put it back up again, if it’s not showing for everyone.

How can we best support your work?

Please provide us with any feedback on tools and what else you might want or need. Email [email protected] or [email protected].

If you want to learn more about other loan performance data solutions, email Jonathan at [email protected].

Talk to us at OFN 2026!

Stay tuned for paper with benchmark data this fall!

You can see the emails for myself and for Brett if you want to reach out to us. The other thing is that when it comes to some of this data analysis and data work, particularly data related to loan performance, which is another really important thing to help to be able to understand and track, the team at Scale Link is developing some new tools around that. If you’re interested in that, you can reach out Jonathan at Scale Link.

By the way, I just realized brett is a .com, not a .org., so blueasteradvising.com. We’ll also be at OFN, the OFN conference. If you see us there and you want to talk about it, please do. As I said, stay tuned for a paper with the benchmarking data coming this fall. You can also reach out to us on LinkedIn if you have any questions or anything you want to share about this. Thanks again to everyone for joining us. Thanks to our team at the Business Ownership Initiative and the folks at Architects for supporting on webinar. Have a great rest of your day.

[01:00:11] End of audio

For more information about the MIC Collaborative, visit this page: https://www.aspeninstitute.org/programs/business-ownership-initiative/microfinance-impact-collaborative/