Starting and expanding a small business is hard, and the difficulty is compounded when you serve a community that has been marginalized and underfunded over the decades.
Community Development Financial Institutions (CDFIs) are funding options that have been around since the 1990s but continue to grow in popularity because they offer funding for organizations in less-advantaged communities.
If you’re a small business owner, you should consider how a CDFI might be able to help you expand.
CDFIs are financial institutions, like banks or credit unions, that offer affordable lending products to small businesses, nonprofits, and other community organizations. CDFIs focus on lending in underserved, low-income, and low-wealth communities.
Each CDFI is certified by the United States government—the Department of the Treasury, in fact. The Treasury Department is the entity that provides the funds to CDFIs through several programs. This money is then loaned to businesses through the CDFIs.
The federal government’s CDFI Fund was established in 1994 by the Riegle Community Development and Regulatory Improvement Act. This act specifies CDFIs as financial institutions that, broadly speaking, focus on community development in a targeted market. CDFIs must provide development services and are accountable to the communities they serve.
“The CDFI Fund is responsible for not only designating whether organizations can call themselves CDFIs but also for providing financial support for their work,” the Opportunity Fund, a prominent CDFI, explains. “Over the past 2 decades, the CDFI Fund has helped make tremendous impacts in communities in nearly every corner of the country.”
Small businesses, microenterprises, and nonprofits can apply for loans from a CDFI, as can commercial real estate and affordable housing ventures. Some CDFIs even offer low-cost mortgages to homebuyers.
CDFIs usually have options for loan applicants with less-than-stellar credit scores. In this case, while the interest rates offered by a CDFI will probably not be as good as you could expect with a traditional term loan from a bank, the terms will be much better than other options like payday lenders.
The overall goal of the CDFI Fund is to make the American business landscape more equitable and open up funding to individuals and businesses that have historically been shut out of the system.
“What we know about disadvantaged businesses owned by lower-wealth entrepreneurs in low- and moderate-income communities is that there’s a lack of both access and experience when it comes to preparation for financing, but—also after you receive financing—the expertise and the sort of exposure and the involvement or need to effectively manage through the financing venture,” Ted Archer, who leads small business philanthropy at JPMorgan Chase & Co, said in an interview with Black Enterprise.
If your business operates in an underserved community, you probably qualify for CDFI funding. The Treasury Department has a search tool to find a CDFI and see what options are available.
Beyond utilizing a CDFI for a mortgage or other financing in your personal life, CDFIs are great for small businesses. This is true whether you are just starting out or if you are looking to expand. CDFIs also offer funding to tiny microenterprises, like sole proprietorships, that require small amounts of money to reach the next level.
“Any business-related expense that helps you start or grow a business, including, but not limited to, inventory, equipment purchases, vehicle purchases, payroll and material costs, marketing, buying the assets of an existing business, refinancing debt, and hiring expenses,” DreamSpring suggests.
Importantly, many CDFI lenders don’t provide loans for paying past due bills or tax bills.
While there are many ways you can use a CDFI loan, it is a good idea to think about how funding could help your business grow in specific ways—just like you should when applying for any funding.
When you are just starting your small business and are strapped for cash, even a small amount of outside funding can help you grow steadily and responsibly. This is doubly true if you are operating in a historically underserved community.
Many traditional lenders, like banks, have strict lending requirements and only offer large loans with repayment periods that span decades.
However, a small loan can quickly balloon out of control if the terms aren’t reined in. Unfortunately, many of the options easily accessible to young businesses, like credit cards or payday loans, can become stifling burdens. CDFIs exist to offer lending options at far more reasonable rates. The institutions will also focus on working with you not just to repay the loan but to help your business and community thrive.