Merchants searching for business financing in many cases are faced with a hard choice: obtain a financial loan (that are low-cost but time-consuming and difficult to obtain) or an online loan (that have higher approval rates and faster applications but could be very expensive). However, some business owners might not be aware that there is a third option: financing from the Community Development Lender (or CDFI, for short).
CDFIs — not-for-profit banking institutions focused on facilitating community development in disadvantaged areas — are useful and frequently overlooked financial tools for certain types of businesses. They’re typically easier to be eligible for a than loans from banks and carry lower rates of interest than other sources of financing.
Is a CDFI suitable for your business? Where are you finding one? Continue reading to find out!
What Is really a Community Development Financial Institution (CDFI)?
Short for ‘Community Development Financial Institution’, a CDFI is a lender with a mission to facilitate community growth by giving financial assistance to businesses and consumers in low-income or disadvantaged areas. CDFIs, typically not-for-profit or nonprofit organizations, may include these institutions:
- Banks
- 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 provides a number of financial programs along with other help 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've loaned a lot more than $34B to businesses and consumers since 2003.
Given the main focus on community, you won’t be amazed to listen to that most CDFIs don’t operate on a national scale. The CDFIs you have access to will be different with respect to the area you reside 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 you installment loans. These are the types of loans most borrowers are familiar with — you have a lump sum payment of money and repay the borrowed money plus interest fees in incremental installments on the fixed period of time.
Some institutions may need that you simply secure your loan with a few sort of collateral, whereas others might offer unsecured business loans. The particular details, for example interest rates, term lengths, and extra fees, will vary according to the CDFI and your business or organization.
Some CDFIs will offer you specialized installment loans, which follow:
- Microloans: These are small loans which are widely used for young businesses and startups. Typically, a microloan is going to be $50,000 or less and also have a relatively short term length. Because of the small borrowing amounts and quick repayment time, microloans are thought low-risk, so many businesses and organizations will qualify, even when they are not yet profitable or have a good operating history.
- Startup Loans: Some lenders are averse to lending to startups, some CDFIs are willing to result in the investment. As stated above, most startup loans will be microloans — that's, they'll be for $50,000 or less. While some institutions offer startup loans, be aware that they're more difficult to locate, even among CDFIs. To receive a loan, you may be necessary to share business plans, take part in leadership development training courses, or fulfill other time-consuming requirements.
Small Business Administration (SBA) Loans
Some CDFIs have fun playing the SBA’s small business home loan programs. The SBA, a government agency with a pursuit to maintain and enhance the economy by helping small businesses, provides a quantity of low-cost home loan programs for businesses. Typically, the SBA helps by lending money to the partners or guaranteeing a portion of the loan, while the partners have the effect of 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 widely used loan program, 7(a) loans can be used for most business purposes. 7(a) loans are funded by the partner institutions, however the SBA backs a portion of the loan so that they are considered less risky. The SBA also sets limits around the interest rates, meaning 7(a) loans are simply about as inexpensive as possible. Take a look at our guide to SBA loan rates for current interest rates or find out more about SBA 7(a) loans within our complete guide.
- SBA Express Loans: Getting an SBA loan could be a slow process; Express loans are made to speed up the process whenever possible. Express loans are a kind of 7(a) loan, but the maximum amount you are able to borrow is $350,000 and the interest rates might be slightly higher. Learn more within our guide to SBA Express Loans.
Curious concerning the other individuals offered by the SBA? Head over to our complete guide to SBA loan programs.
CDFI Benefits
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, overall, are earning progress toward becoming unbiased (partly due to the increased reliance upon technology), research has shown that banks along with 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 lured to borrow from risky, high-interest lenders. A CDFI is a much safer bet.
Many CDFIs understand 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 especially 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 take steps to ensure that their underwriting practices are not biased against certain categories of people.
Startup-Friendly
Typically, startups have a difficult time finding financing. Because young businesses haven't yet proven their stability, financing a startup is recognized as risky — and many traditional lenders will not take that risk. However, as the Opportunity Finance Network (several over 200 CDFIs) states, “We see possibilities where others see risk.”
Many CDFIs are prepared to extend money to startups, incubator businesses, or other very young businesses. You still have to prove that you’re creditworthy, but the chronilogical age of your company is certainly not a barrier to achieving financing.
Relatively Low Rates & Fees
Although CDFIs have a tendency to carry higher rates of interest and fees than bank loans, they sometimes have lower rates than online lenders, charge cards, or payday loan lenders.
According towards the CDFIs we surveyed, rates can range anywhere from about 4% to 36% APR, but many offer rates within the low- to mid-teens. This is how CDFI rates compare to other sources of financing:
- Banks and Credit Unions: 4% – 9%
- CDFIs: 4% – 36%
- Online Installment Lenders (for example Fundation and Lending Club): 6% – 36%
- Personal and Business Charge cards: 12% – 30%
- Merchant Payday loans and Short-Term Loans: 6% – 99%+
- Payday Loans: As much as 400%
CDFIs are often cited as affordable alternatives to short-term loans, merchant payday loans, or payday loans. As you can see, CDFIs will often have significantly lower rates than the alternatives.
It’s worth noting when your company is experiencing high-cost debt, many CDFIs offer refinancing programs. You might be able to replace your high-interest or frequent payment debt for a financial loan with lower interest or fewer payments. Head over to our guide to consolidating small business debt to find out more.
Flexible Borrower Qualifications
If you can’t obtain a loan using their company sources — due to low (or nonexistent) credit scores, no collateral, as well as other reason — you may be able to get a loan from a CDFI. You’ll still need to prove that you’re creditworthy and also have a legitimate business, but CDFIs can frequently use businesses that would be turned away from traditional financial institutions.
Educational Services
Many CDFIs do more than lend money; they also offer educational services on business and financial topics. Some stipulate that you simply attend the academic programs in order to get a business loan, whereas others simply offer the programs being an additional community service. Regardless, CDFI educational programs could possibly help you bring your business one stage further.
CDFI Drawbacks
CDFIs really are a useful resource, however, many businesses may want to look elsewhere for financing for several reasons.
Higher Rates Than Banks
As previously stated, CDFIs offer cheaper financial products than some other sources, but their rates still tend to be higher than those of loans from banks. Merchants who have strong, creditworthy businesses should see if they qualify for a loan from the bank before seeking out a CDFI in their area.
Long Application Process
The entire application will vary based on the CDFI, your business, and also the time that it goes to gather the necessary documents. Regardless, CDFI application processes tend to take longer compared to those of some other business loan sources (such as online quick installment loans or short-term loans).
The whole application procedure could take between a week and two months. Along with asking about personal and business information, lenders will request to determine numerous business documents. Each lender requests different documents, however the following are generally 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 necessary documents online. The earlier you’ll have the ability to gather the necessary documents, the faster the applying process will go.
Services Vary By Location
Most CDFIs operate on a local scale. These products and services you have access to will be different depending on the area you live in.
That said, you will find over 400 CDFIs operating round the United States. Odds are, you'll have access to at least several financiers that will help out your business via loans, other lending options, webinars and academic programs, or other services.
Where To Find A CDFI
Community Development Financial Institutions vary by area, so you’ll need to find the organizations that are operating in your neighborhood. There are a number of ways to go about carrying this out, but the easiest is by using the CDFI locator around the Opportunity Finance Network or CDFI Fund websites.
Once you have some CDFI’s in your mind, you’ll want to consider the types of services they offer and whether those services align together with your needs (whether they offer SBA loans, for example). You may also make use of the CDFI Fund website to determine what years the institutions received monetary awards and how much they received. This could provide you with a sense of their history using the program and how active they’ve experienced the past few years.
If you've got a good rapport with them, you may even wish to consult with other small business owners in your community to obtain a feeling of their experiences with local CDFIs.
Final Thoughts
Although they are often overlooked, CDFIs are a useful tool for smaller businesses nationwide. Even though you operate a business that is traditionally underserved (like a woman- or minority-owned business or a startup), a CDFI might be able to extend financing for your business.
Check out these sources for additional info on CDFIs:
- Opportunity Finance Network: A network well over 200 CDFIs.
- CDFI Coalition: An advocate and support service for CDFIs.
- CDFI Fund: A government program accountable for certifying and providing assistance to CDFIs.
- CDFI Lists: Locate the CDFIs in your area via the Opportunity Finance Network or CDFI Fund websites.
