What Is a Community Development Financial Institution (CDFI)?
How a CDFI Can Help Your Small Business
Funding opportunities for small businesses are difficult to find in the best of times, and this isn’t the best of times. If you are having trouble finding money to keep your business afloat, you might want to consider Community Development Financial Institution (CDFI) financing. CDFIs are financial organizations that offer loans to individuals and businesses in areas underserved by traditional financial institutions.
What Are CDFIs?
Community Development Financial Institutions (CDFIs) are mission-driven organizations that offer affordable loans and other financial products and services to help economically underserved communities. The CDFI program helps small businesses and other community development projects get access to funding unavailable from other sources.
CDFIs come in four types:
- Community development banks
- Community development credit unions
- Community development loan funds
- Community development venture capital funds
They fund businesses like small businesses, micro businesses, nonprofits, commercial real estate, and affordable housing.
The Treasury Department reports that there are nearly 1,100 CDFIs operating throughout the U.S. See this map of current certified CDFIs to find one in your area.
To become a CDFI, an organization must apply to the CDFI Fund for certification. Eligibility requirements include:
- Being a legal non-government entity (tribal governments excluded)
- Having a primary mission of promoting community development
- Being a financing entity
- Serving primarily one or more target markets
- Providing development services in connection with financing activities
- Maintaining accountability to its target market
CDFIs receive financial support from the CDFI Fund, which is administered by the U.S. Department of the Treasury. The fund has several programs to promote access to capital and local economic growth, including:
- The CDFI Program
- A New Markets Tax Credit Program to give tax credits to community development entities
- Native Initiatives to help Native CDFIs
- A Bond Guarantee Program that issues bonds to support CDFIs
- A Capital Magnet Fund that offers grants to finance affordable housing
A 2016 report from the Treasury Department showed the loan approval rate for CDFI loans under $1 million was 77%, and applicants had a 77% satisfaction rating for their CDFI.
Types of Loans Offered by CDFIs
CDFIs offer several different types of loans, and you may qualify for special loans, depending on the area where the CDFI is located. These include:
These are the riskiest type, and CDFIs are more likely to take these loans than are traditional lenders. In fact, a bank might hand off a startup loan to a CDFI for just this reason.
Microloans are small loans for startups and nonprofits for working capital, inventory, supplies, furniture and fixtures, or machinery. SBA microloans are typically under $50,000.
Other SBA Options
CDFIs can participate in other SBA loan programs, including the 7(a) loan. In 2020, CDFIs approved more than $7 billion in Paycheck Protection Program (PPP) loans. The SBA works with the CDFI as a lending partner to help guarantee loans and they can award funds to CDFIs to increase their services to low-income and underserved communities. You can use the SBA’s Lender Match program to help you find SBA-approved CDFIs and small lenders.
CDFIs also partner with banks to deliver loans, investments, and financial services and they sometimes jointly fund community investment projects, with the CDFI assuming the riskier debt.
Special Loan Programs
How Can I Get a Loan From a CDFI?
Here’s what you need to know and do to get a small business loan from a CDFI:
First, check the list of CDFIs to find one in your area. This list is in Excel format, so you can search by location or other variables. To receive funding, you must be in a targeted area, which can be a city, town, county, or the entire state
Then, gather your documents and make an appointment with the CDFI in your area. Some of the documents you’ll need to provide:
- Bank statements
- Tax returns (typically for the past three years)
- Financial statements (if you have an existing business), including a Profit & Loss statement and a balance sheet
- A business plan (for new and existing businesses)
You will almost certainly be required to give some kind of security (collateral) for the loan.
Pros and Cons of CDFI Funding
CDFIs accept riskier loans than traditional banks
They accept unconventional collateral
They offer training and technical assistance for borrowers in addition to loan servicing
The loan process is longer and more paperwork is required
Funding may not be available in your area if it isn’t designated as a “target” area
Some CDFI Success Stories
Need a little more encouragement? Here are some stories of how CDFIs helped small businesses:
- Two sisters’ taco shop found startup help from a CDFI in addition to bank funding.
- This Native-American owned eatery used CDFI financing and technical assistance with support from Google grants.
- A theater group received CDFI help to adjust its loan structure and adapt its business to COVID-19.
- Community Development Financial Institutions (CDFIs) are alternative lending sources in areas underserved by traditional financial institutions.
- CDFIs are lenders that are committed to providing funding for small businesses and individuals in their communities.
- CDFIs partner with the Small Business Administration and they can sometimes grant financing when traditional lenders cannot.
- These community lenders also provide training to small business owners.
U.S. Department of the Treasury, CDFI Fund. "Agency Financial Report, Fiscal Year 2019." Page 9. Accessed Sept. 24, 2020.
U.S. Department of the Treasury, CFDI Fund. "CDFI Certification." Accessed Sept. 24, 2020.
Federal Reserve Bank of New York. "2016 Small Business Credit Survey." Pages 16, 17. Accessed Sept. 24, 2020.
U.S. Small Business Administration. "Loans & Grants: Microloan Program." Accessed Sept. 24, 2020.
U.S. Small Business Administration. "$10 Billion for CDFIs to Participate in PPP." Accessed Sept. 24, 2020.