What Is A Community Development Financial Institution (CDFI) & Is A CDFI Loan Right For My Small Business?
Merchants looking for business financing are often faced with a difficult choice: apply for a bank loan (which are low-cost but time-consuming and hard to get) or an online loan (which have higher approval rates and faster applications but can be very expensive). However, some business owners might not be aware that they have a third option: a loan from a Community Development Financial Institution (or CDFI, for short).
CDFIs — not-for-profit financial institutions dedicated to facilitating community growth in disadvantaged areas — are useful and often overlooked financial tools for certain types of businesses. They’re typically easier to qualify for than bank loans and carry lower interest rates than other sources of financing.
Is a CDFI right for your business? Where do you find one? Keep reading to find out!
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What Is A Community Development Financial Institution (CDFI)?
Short for ‘Community Development Financial Institution’, a CDFI is a financial institution with a mission to facilitate community growth by providing financial assistance to businesses and consumers in low-income or disadvantaged areas. CDFIs, typically not-for-profit or nonprofit organizations, can include these institutions:
- Credit unions
- Loan funds
- Venture capitalists
To be considered a CDFI, organizations must be certified by the CDFI Fund, a government agency that is part of the US Department of the Treasury. The CDFI Fund also offers a number of financial programs and other assistance to currently operational CDFIs.
In their modern form, CDFIs have existed since 1973. According to the CDFI Fund, there are over 400 CDFIs in operation and they have loaned more than $34B to businesses and consumers since 2003.
Given the focus on community, you won’t be surprised to hear that most CDFIs don’t operate on a national scale. The CDFIs you have access to will vary depending on the area you live in.
Types Of CDFI Loans
Business loan offerings vary greatly based on the institution, but you can expect to come across the following types of loans.
Business Installment Loans
Many CDFIs will offer installment loans. These are the types of loans most borrowers are familiar with — you receive a lump sum of money and repay the borrowed money plus interest charges in incremental installments over a fixed period of time.
Some institutions might require that you secure your loan with some sort of collateral, whereas others might offer unsecured business loans. The specific details, such as interest rates, term lengths, and extra fees, will vary according to the CDFI and your business or organization.
Some CDFIs will offer specialized installment loans, such as the following:
- Microloans: These are small loans that are commonly used for young businesses and startups. Typically, a microloan will be $50,000 or less and have a relatively short term length. Because of the small borrowing amounts and quick repayment time, microloans are considered low-risk, so many businesses and organizations will qualify, even if they are not yet profitable or have a solid operating history.
- Startup Loans: While most lenders are averse to lending to startups, some CDFIs are willing to make the investment. As stated above, most startup loans will be microloans — that is, they will be for $50,000 or less. While some institutions offer startup loans, be aware that they are more difficult to find, even among CDFIs. To receive a loan, you might be required to share business plans, take part in business training courses, or fulfill other time-consuming requirements.
Small Business Administration (SBA) Loans
Some CDFIs participate in the SBA’s small business loan programs. The SBA, a government agency with a mission to maintain and improve the economy by helping small businesses, offers a number of low-cost loan programs for businesses. Typically, the SBA helps by lending money to its partners or guaranteeing a portion of the loan, while the partners are responsible for evaluating the applications and originating the loans.
The most common SBA loans you’ll come across are SBA 7(a) Loans and SBA Express Loans.
- SBA 7(a) Loans: The SBA’s most popular loan program, 7(a) loans can be used for most business purposes. 7(a) loans are funded by the partner institutions, but the SBA backs a portion of the loan so they are considered less risky. The SBA also sets limits on the interest rates, which means that 7(a) loans are just about as inexpensive as you can get. Take a look at our guide to SBA loan rates for current interest rates or learn more about SBA 7(a) loans in our complete guide.
- SBA Express Loans: Getting an SBA loan can be a slow process; Express loans are designed to speed up the process as much as possible. Express loans are a type of 7(a) loan, but the maximum amount you can borrow is $350,000 and the interest rates might be slightly higher. Learn more in our guide to SBA Express Loans.
Curious about the other programs offered by the SBA? Head over to our complete guide to SBA loan programs.
Specific loan products, borrower qualifications, additional services, and other factors vary by institution, but in general, CDFIs come with many benefits.
Women- & Minority-Friendly
Although lenders, on the whole, are making progress toward becoming unbiased (in part due to the increased reliance on technology), studies show that banks and other financiers still favor white men over women and minorities.
Due to a lack of finance opportunities from traditional sources, many women and minority business owners are tempted to borrow from risky, high-interest lenders. A CDFI is a much safer bet.
Many CDFIs are aware of the lending disparity, as well as the importance of women- and minority-owned businesses, and seek to fill the gaps left by other lenders. CDFIs may offer loan programs specifically for women and minority borrowers, create products that solve common problems experienced by women- and minority-owned businesses, offer educational programs for such businesses, and/or simply take steps to ensure that their underwriting practices are not biased against certain groups of people.
Typically, startups have a difficult time finding financing. Because young businesses have not yet proven their stability, financing a startup is considered risky — and most traditional lenders are not willing to take that risk. However, as the Opportunity Finance Network (a group of over 200 CDFIs) states, “We see possibilities where others see risk.”
Many CDFIs are willing to extend money to startups, incubator businesses, or other very young businesses. You will still have to prove that you’re creditworthy, but the age of your business is not necessarily a barrier to achieving financing.
Relatively Low Rates & Fees
Although CDFIs tend to carry higher interest rates and fees than bank loans, they typically have lower rates than online lenders, credit cards, or payday lenders.
According to the CDFIs we surveyed, rates can range anywhere from about 4% to 36% APR, but most offer rates in the low- to mid-teens. Here is how CDFI rates compare to other sources of financing:
- Banks and Credit Unions: 4% – 9%
- CDFIs: 4% – 36%
- Online Installment Lenders (such as Fundation and Lending Club): 6% – 36%
- Personal and Business Credit Cards: 12% – 30%
- Merchant Cash Advances and Short-Term Loans: 6% – 99%+
- Payday Loans: Up to 400%
CDFIs are often cited as affordable alternatives to short-term loans, merchant cash advances, or payday loans. As you can see, CDFIs usually have significantly lower rates than the alternatives.
It’s worth noting that if your business is struggling with high-cost debt, many CDFIs offer refinancing programs. You might be able to replace your high-interest or frequent payment debt for a loan with lower interest or fewer payments. Head over to our guide to consolidating small business debt to learn more.
Flexible Borrower Qualifications
If you can’t get a loan from other sources — due to low (or nonexistent) credit scores, no collateral, or some other reason — you might be able to get a loan from a CDFI. You’ll still have to prove that you’re creditworthy and have a legitimate business, but CDFIs can often work with businesses that would be turned away from traditional financial institutions.
Many CDFIs do more than lend money; they also offer educational services on business and financial topics. Some stipulate that you attend the educational programs in order to receive a business loan, whereas others simply offer the programs as an additional community service. Regardless, CDFI educational programs might be able to help you bring your business to the next level.
CDFIs are a useful resource, but some businesses might want to look elsewhere for financing for a number of reasons.
Higher Rates Than Banks
As stated above, CDFIs offer cheaper financial products than some other sources, but their rates still tend to be higher than those of bank loans. Merchants who have strong, creditworthy businesses should see if they qualify for a loan from a bank or credit union before seeking out a CDFI in their area.
Long Application Process
The length of the application process will vary according to the CDFI, your business, and the time it takes you to gather the necessary documents. Regardless, CDFI application processes tend to take longer than those of some other business loan sources (such as online installment loans or short-term loans).
The whole application procedure could take anywhere between a week and two months. In addition to asking about personal and business information, lenders will request to see a number of business documents. Each lender asks for different documents, but the following are commonly required:
- Bank statements
- Tax returns
- Legal documents
- Profit and loss statements
- Balance sheets
- Debt schedule
- A/R aging report
- Business plans
Some CDFIs might list the required documents on their website. The sooner you’ll be able to gather the necessary documents, the faster the application process will go.
Services Vary By Location
Most CDFIs operate on a local scale. The products and services you have access to will vary depending on the area you live in.
That said, there are over 400 CDFIs operating around the United States. Chances are, you will have access to at least a few financiers that can help out your business via loans, other financial products, webinars and educational programs, or other services.
Where To Find A CDFI
Community Development Financial Institutions vary by area, so you’ll have to find the organizations that are operating in your community. There are a number of ways to go about doing this, but the easiest is to use the CDFI locator on the Opportunity Finance Network or CDFI Fund websites.
Once you have some CDFI’s in mind, you’ll want to consider the types of services they offer and whether those services align with your needs (whether they offer SBA loans, for example). You can also use the CDFI Fund website to learn what years the institutions received monetary awards and how much they received. This can give you a sense of their history with the program and how active they’ve been in recent years.
If you have a good rapport with them, you may also want to speak with other small business owners in your community to get a sense of their experiences with local CDFIs.
Although they are often overlooked, CDFIs are a useful tool for small businesses across the nation. Even if you run a business that is traditionally underserved (such as a woman- or minority-owned business or a startup), a CDFI might be able to extend financing to your business.
Check out these sources for more information on CDFIs:
- Opportunity Finance Network: A network of over 200 CDFIs.
- CDFI Coalition: An advocate and support service for CDFIs.
- CDFI Fund: A government program responsible for certifying and providing assistance to CDFIs.
- CDFI Lists: Locate the CDFIs in your area via the Opportunity Finance Network or CDFI Fund websites.