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Small and new businesses that have struggled to qualify for a business loan from a bank, credit union or online lender might want to consider a third option: community development financial institutions (CDFIs).
CDFIs have the highest rate of acceptance compared to other popular alternatives. But only around 14% of small businesses applied for financing through one in 2017, according to a Federal Reserve survey.
A CDFI is a private financial institution that provides loans and other types of financial services to underserved businesses and individuals. This typically includes businesses in low-income or underdeveloped areas, as well as those owned by or serving women or minority populations.
Though it helps, you don’t necessarily need to fall into any of these categories to take advantage of what CDFIs have to offer. They’re also one of the few places that offers financing to nonprofits.
CDFIs can be banks, credit unions, loan funds or venture capital funds. They’re certified by the US Treasury Department’s CDFI Fund, which gives these organizations awards to help them offer low-cost financing and services. Currently, there are around 1,000 CDFIs operating in the United States.
CDFIs offer several types of business financing, including:
While any small business might benefit from a CDFI, these institutions are designed with the needs of specific businesses in mind. CDFIs often offer programs specifically for certified minority- or women-owned businesses (MWBEs). And being a member of or serving a low-income community can also be a requirement for unlocking the most favorable rates and terms.
While CDFIs might have more flexible requirements than other lenders, you could have trouble getting a business loan unless you:
There are four types of institutions that can be classified as CDFIs, with each serving a slightly different purpose.
Community development banks are local banks that dedicate at least 60% of their loans and services to low-income communities. They’re for-profit corporations, but are required to have local representation on their board of directors to keep their status. Community development banks are often the most experienced with government-backed funding and might be the first stop if you’re interested in an SBA or USDA loan.
Community development loan funds are the most common type of CDFI. They specialize in providing loans for small businesses in low-income areas, though some also offer services to individuals.
Loan funds often have online applications that you can quickly complete, though you might not be able visit a physical location. Like community development banks, they’re required to have local representation on their board of directors.
Community development credit unions are member-owned, nonprofit financial institutions that offer services primarily to low-income and minority communities. They’re often not as experienced with government funding as banks, but they could be a good resource for conventional term loans and lines of credit.
Community development venture capital funds are either for-profit or nonprofit organizations that invest or provide loans to small businesses. They’re rare, only making up around 1% of all CDFIs. But if you’re able to find one, it could help you grow your business without taking on debt — though you’ll lose some stock in your company.
Interested in applying for financing from a CDFI? Follow these steps:
CDFIs typically ask for the following documents and information before you get started on the application:
On top of financing, CDFIs may also offer the following services to small businesses:
There are community development financial institutions in every state. Depending on your area, you have some within close distance. Others allow you to apply for financing online, making it less important how close you are to the physical branch. Browse our CDFI list by state resource to find one near you.
In addition to business financing, many CDFIs offer personal loans, auto loans and mortgages. CDFI personal loans are often smaller than what you’d find at a traditional bank or even an online lender, often only going up to around $10,000 or $20,000.
Some CDFIs also offer payday and installment loan alternatives for borrowers of all credit types. To qualify, you might be required to live in a certain area or work for an affiliate employer. These tend to have the same interest rate for everyone and often come with an incentive to start saving.
If you’d like to speed up the application process and get your funds faster, consider an online lender.
CDFIs could be a great resource for established small businesses that have trouble meeting revenue requirements or providing collateral. Minority- and women-owned businesses and those located in low-income areas might want to take a particularly close look at these lenders.
However, they’re not ideal for startups and businesses that need emergency financing. To learn more about your other options, read our guide to business loans.
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