RIIF’s First Year: 5 Lessons Learned

Since its formal launch one year ago, the REDF Impact Investing Fund (RIIF) has reached a number of important milestones –  deploying over $1.8M in capital, forging a new co-lending partnership in response to COVID-19, and expanding the portfolio to include eight loans closed to-date. These growth-focused businesses are using loan funds paired with REDF’s technical assistance to employ and empower more individuals striving to chart a new course in life. 

On its first anniversary, Carrie McKellogg, CEO of RIIF, penned her reflections. With an eye toward continuously improving the loan program, below are five key lessons learned: 

Lesson #1 – Finding the Right Customer  

When we began lending to employment social enterprises, we thought demand would come from the country’s largest, most mature enterprises that were members of REDF’s venture philanthropy portfolio. In practice, most of the demand has come from earlier-stage enterprises that participated in the REDF Accelerator program, or from mission-aligned, for-profit companies referred from within our community of practitioners. 

We learned that larger, more established employment social enterprises generally have access to lines of credit or loans when needed. As nonprofits, they operate in the donation space and typically have an established base of donors, making them more likely to respond to a capital need with a fundraising campaign rather than debt capital that RIIF provides. Conversely, start-up and growth-stage employment social enterprises with limited access to capital were often managing increasingly large contracts or opportunities to grow that were hampered by a lack of access to financial resources, so the unique combination of flexible capital paired with expert technical assistance from RIIF was exactly what they needed. 

Lesson #2 – Creating the “Just Right” Loan Application

After acknowledging the patience required of some of RIIF’s early borrowers as we experimented with loan applications that were too detailed or not detailed enough, we refined our approach to create a clear two-step process. We now have a preview that is easy to fill out, while giving the RIIF credit committee enough insight into the borrower and the transaction to focus in on the key risks and mitigants in underwriting.

Lesson #3 – Never Say No to Security  

Part of the reason RIIF was created was to bridge the risk gap between more traditional CDFI lenders that require collateral or robust security to lend to employment social enterprises. While RIIF has done unsecured lending, we’ve also identified alternative ways to provide security through personal guarantees, second position liens, and other structures that get to the root of owners’ skin in the game without overburdening the finances of the transaction. 

Lesson #4 – Clarity or Consensus? 

Coming from a non-profit parent organization where collaborative decision-making is a key feature, we needed to establish clear lines of decision-making authority with respect to credit approvals while preserving our inclusive process. We decided on the risk officer function being exercised by REDF’s Chief Financial and Administrative Officer, adding rotating staff members to RIIF’s Credit Committee for more diverse perspectives. 

This process helped RIIF diligence industry, business, operational, and management risk at an objective arms-length, and subject assumptions and projections to tough scrutiny. We are breaking new ground and demonstrating to larger capital providers that it is possible to accurately identify and partially mitigate the risks so that employment social enterprises are a more attractive asset to more traditional finance providers. In order to do that, our credit standards need to be rigorous while our loan terms can be flexible and work for the specific needs of the borrower.

Lesson #5 – Competitors are Actually Collaborators

We were excited to discover that our peer competitors are also great collaborators. The impact investing community has been very welcoming of RIIF, and we’ve already navigated several successful co-lending partnerships and loan participations.  As we expand lending nationally, we’re looking to build more partnerships with mission-aligned lenders. 

What Lies Ahead – A New Generation of Funders

So what’s next? The inequitable impacts of the COVID-19 pandemic, paired with ongoing racial injustices laid bare, have reaffirmed RIIF’s aspiration to be a funder that meets the credit needs of enterprises and the individuals striving to overcome barriers that they employ. We know that the traditional financial sector played a role in creating and sustaining systemic racism by restricting credit and the resulting ability to build assets and net worth for business owners and social enterprises run by people of color.  RIIF joins a new generation of funders actively working to reverse these credit practices. This includes our formation as a non-profit to signal that we are looking for mission-aligned investors, and pursuing our Community Development Financial Institution (CDFI) certification, which we hope to receive later this year.

To provide further oversight, expertise, thought-partnership and support for RIIF’s strategic, financial, social, and equity objectives, we’re in the process of forming an Advisory Council. These sage advisors will provide another layer of accountability to RIIF’s funding activities to the communities we seek to serve as a CDFI. They’ll also provide expanded access to professional networks as we look to influence capital providers to invest in employment social enterprises. 

Currently, employment social enterprises led by people of color and/or leaders with lived experience comprise 40% of RIIF’s portfolio. We’re working to expand outreach and lending to under-resourced entrepreneurs of color by taking a hard look at our application and underwriting processes, checking ourselves for bias at every step, and exploring non-traditional credit rating methods that take into account lived experience when making a credit decision. 

RIIF was created to provide an important tool to accelerate the growth of the employment social enterprise field, and their crucial work to create a more inclusive economy for all. Humbled by our initial expectations, eager to deploy even more flexible capital, and equipped with lessons learned over the last year, RIIF is ready to join a new generation of visionary funders.