When small business owners think of seeking small business loans, many think immediately of banks as the best sources for financing. However, depending on the needs and challenges a small business is facing, it may benefit most from working with a Community Development Financial Institution – or CDFI – that specializes in small business lending and also provides business support resources.
Unfamiliar with the CDFI industry? This article will provide you with a brief history of CDFIs, how they support small business owners, and how you can connect with one in your community.
What are CDFIs?
CDFIs are organizations that direct capital into historically underserved communities and businesses. In fact, more than 400,000 small businesses have started with help from a CDFI.
With roots dating back to the early 1970s, the industry has grown and evolved over the decades, leading to the formation of the CDFI Fund in 1994. The CDFI Fund, which operates within the U.S. Department of Treasury has the mission to expand economic opportunity for underserved people and communities by supporting the growth and capacity of a national network of community development lenders, investors and financial service providers.
Today there are more than 1,000 CDFIs nationwide, all working to fill gaps in the mainstream financial system and serve small business owners, affordable housing residents and others. Over the decades, CDFIs have deployed more than $74 billion in capital to small business owners.
How can CDFIs help my small business?
Whether you’re an established business owner looking for a flexible loan to expand your business or a budding entrepreneur just looking for advice on getting started, CDFIs are a great resource to contact.
Because CDFIs are mission-driven, many can make loans that other traditional financial institutions cannot. For example, CDFIs often have the flexibility to look beyond a credit score and take the time to listen and understand your story to help you secure the resources you need. CDFIs work to help small businesses and communities thrive, offering transparency and responsible financing and resources.
If you’re not quite ready for a loan or just need some advice, CDFIs also often provide entrepreneurs with hands-on training and industry-specific educational support resources. While specific services can vary by CDFI, examples of this support could include assistance creating a business plan, management of complicated financials, mentorship programs or other business services.
CDFIs are deeply connected to community
Entrepreneurs face unique challenges in each community, but because CDFIs are deeply connected to local small business support ecosystems, they are well-positioned to provide relevant resources. This often means that entrepreneurs can find support for very specific industry or community related challenges. The combination of responsible capital and hands-on advisory support helps small business owners focus on growing their businesses and creating wealth in their communities.
Many CDFIs use a community-centric approach to understand and target the needs of local economies and small business environments.
Community engagement is particularly important in this work. As mission-driven organizations dedicated to equitable access to financing, CDFIs create specialized programs, products and services that reach under-represented and under-resourced businesses by working with community organizations that specialize in working with diverse small business owners.
What CDFI is best for you?
With more than 1,000 different CDFIs across the country, it may be daunting to identify the one that best suits your small business needs. Luckily, you can narrow down the list of options by first identifying the type of CDFI you want to work with.
While there are several different kinds of CDFIs, each providing unique services, they all adhere to the same mission-driven purpose: expanding economic opportunity and improving the quality of life in communities that are under-resourced.
Here’s some basics about the four types of CDFIs:
CDFI Banks
CDFI banks are federally insured and regulated depository institutions that are organized like traditional banks and offer a wide range of services. CDFI bank customers include individuals, small businesses, nonprofits and real estate developers.
CDFI Credit Unions
CDFI Credit Unions are federally insured financial cooperatives that provide services to their members. Designated credit unions make take deposits from nonmembers, and depending on their charter, some may make loans to small businesses.
CDFI Loan Funds
CDFI loan funds make up the largest segment of CDFIs. These organizations are non-depository financial institutions and may provide lending to small businesses, nonprofits, individuals and other organizations.
CDFI Venture Capital Funds
CDFI Venture Capital Funds provide equity and equity-like investments in small and medium-sized businesses in underinvested communities. These CDFIs provide comprehensive business advisory support to the organizations in which it invests.
While your specific small business needs will determine the type of CDFI best suited for you, don’t worry if you pick the wrong one. Many CDFIs work closely together, regardless of type, and can likely refer you to a partner that can help.
How can I connect with a CDFI?
Want to connect with a CDFI in your community? Here are a few resources that can help you find one that’s right for you.
Opportunity Finance Network (OFN) has a CDFI locator on its website to help small businesses find financing in their states and communities. The CDFI Fund also has a locator feature for small businesses looking to connect with local CDFIs.
If you’re ready to apply for a loan, visit Connect2Capital, an online marketplace that matches small business owners with mission-driven CDFI lenders.
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