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What’s a community development financial institution?
Affordable financing with flexible requirements for businesses in underserved communities.
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.
What’s a CDFI?
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.
What types of business financing do CDFIs offer?
CDFIs offer several types of business financing, including:
- SBA loans. Community development banks in particular typically offer these business loans backed by the Small Business Administration (SBA) with competitive rates, large amounts and long terms.
- USDA loans. Loans up to $10 million backed by the US Department of Agriculture for businesses in rural areas.
- Term loans. Many CDFIs offer term loans with lower rates and more forgiving eligibility requirements than you’d find at a traditional bank. These include both unsecured and secured term loans — like commercial real estate loans and equipment financing.
- Lines of credit. Most CDFIs also offer lines of credit for ongoing projects that are relatively easy to qualify for.
- Working capital. Community development loan funds in particular offer working capital options like merchant cash advances, invoice factoring, revenue-based financing and short-term business loans.
- Equity financing. Community development venture capitalists give qualifying businesses funds in exchange for partial ownership of the company.
Who can benefit the most from a CDFI?
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.
Who qualifies?
While CDFIs might have more flexible requirements than other lenders, you could have trouble getting a business loan unless you:
- Are cashflow positive
- Have been around for at least two years
- Have a credit score of 640 or higher
The 4 types of CDFIs
There are four types of institutions that can be classified as CDFIs, with each serving a slightly different purpose.
Community development banks
- Best for: Government-backed loans
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
- Best for: Saving time on your application
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
- Best for: Conventional business loans
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
- Best for: Equity funding
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.
How to apply for a CDFI loan in 5 steps
Interested in applying for financing from a CDFI? Follow these steps:
- Compare CDFIs in your area. Not all CDFIs offer the right kind of financing for every business. Compare a few near you to get an idea of what’s available.
- Get in touch. Many CDFIs require you to call or visit a branch in person to get started — even community development loan funds. During this step, you’ll find out if your business is eligible and how to complete the application.
- Fill out the application and submit documentation. Depending on what type of funding you’re applying for, this could take between a few minutes and a few weeks. SBA and USDA loans might require more work than other types of financing.
- Review your loan contract and sign it. If you have questions about the terms of your loan, ask your account manager before signing off on it.
- Wait to receive your funds. Since CDFIs have fewer assets than traditional banks and credit unions, it can take longer to get your funds — sometimes weeks.
What documents and information will I need?
CDFIs typically ask for the following documents and information before you get started on the application:
- Your personal credit score
- Up to three years of business and personal tax returns
- Six months of business and personal bank statements
- Updated balance sheet
- Updated profit and loss statement
What other business services do CDFIs offer?
On top of financing, CDFIs may also offer the following services to small businesses:
- Legal assistance. Some CDFIs offer free legal services for establishing new businesses, as well as tax advice.
- Accounting. Small businesses that don’t have an accountant on staff can use a CDFI to help put together financial statements and sort out your books.
- Business planning. CDFIs can help you write and perfect your business plan so that it’s ready to present to investors.
- Training. Many CDFIs provide free training programs to small businesses on topics like software and marketing.
- Consulting. If you can’t qualify for a loan just yet, many CDFIs give free advice on how to improve your business so that it’s ready for financing in the future.
- Credit repair. When your credit score is the main factor that stands between you and business financing, many CDFIs offer programs to help you get your personal finances back on track.
How do I find my local CDFI?
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.
CDFI personal loans
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.
Compare financing options you can apply for online
If you’d like to speed up the application process and get your funds faster, consider an online lender.
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Bottom line
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.
Frequently asked questions
What's a CDFI investment area?
A CDFI investment area is a region that the US Treasury Department has identified as needing CDFI resources based on income, poverty, unemployment and other factors. CDFI investment areas must meet at least one of the following criteria:
- Poverty rate of 20% or more.
- Unemployment rate at least 1.5 times the national average.
- Median family income at or below 80% of the state or national average for cities or non-metropolitan areas.
- Located in a government-designated Empowerment Zone or Enterprise Community.
- County population loss of at least 10% between the last two census periods in cities.
- County population loss of at least 5% over the last five years in non-metropolitan areas.
What is the CDFI Fund?
The CDFI Fund is the branch of the US Treasury Department that certifies and provides financial assistance to CDFIs.
Are all CDFIs nonprofit?
While CDFIs aren’t necessarily nonprofit organizations themselves, profits come second to providing affordable economic services for small business owners and individuals. This often means higher approval rates, reasonable rates and access to larger amounts of funds than you might find elsewhere.
Can I get a car loan from a CDFI?
Yes, some CDFIs like Capital Good Fund offer auto loans and refinancing. These often come with less-strict eligibility criteria and lower rates than traditional banks and even online lenders.
What's an alternative to taking out a CDFI loan?
You might also want to consider borrowing from a microfinance institutition (MFI). These are nonprofit financial organizations designed to help underserved individuals and businesses gain access to funding. You can learn more about how they work with our guide to MFI loans.
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