Community development financial institutions (or CDFIs) provide a great service to small businesses — but many potential borrowers don’t know they exist. CDFIs finance businesses in low-income urban and rural communities that would otherwise have difficulty obtaining capital. More than 1,000 CDFI organizations operate throughout the United States. They can be found in the form of banks, credit unions, venture capital funds, or nonprofit community lenders.
CDFIs are chartered under a CDFI U.S. Treasury program that provides direct investment in and special tax credits to community institutions that work under the program. It requires participating organizations to not only make loans to eligible businesses, but to also provide extensive training, counseling, and technical support. CDFI counselors can assist businesses with everything from writing a business plan and validating market assumptions to making financial projections.
In large cities, several CDFIs may serve the community, while in rural areas and low-population states one CDFI might serve the entire state. The U.S. Treasury maintains a list of all CDFIs.
Are You Eligible for CDFI Financing?
Businesses may be eligible to receive CDFI funding if they’re in a distressed urban or rural community and aren’t likely to receive funding from other local institutions. Minority- and woman-owned businesses receive special consideration, and one CDFI program specifically assists Native American communities.
CDFIs fund companies that will improve a community by creating jobs or providing goods or services. Some CDFIs finance startup companies while others assist those that have been in business for several years. Each organization maintains its own criteria, so it’s best to find the CDFIs in your area and contact them directly to learn more about their requirements and find one that fits your situation. Keep in mind that if you live in a rural area you may need to reach beyond your city or county borders to find a certified CDFI. Refer to the list of certified CDFIs for more information.
How Much Money Is Available?
Businesses can receive anywhere from $2,000 to $300,000 in CDFI financing. Once a company demonstrates the ability to execute its plan with the first loan’s proceeds, the lender may make additional loans over time up to the CDFI’s loan limit. CDFIs also work with other banks and credit unions to give borrowers access to a larger amount of capital. For example, a bank may be willing to make a $400,000 loan to a business if a CDFI lends the business an additional $300,000. The borrower gets two loans totaling $700,000, and the CDFI lender has a subordinate position in the collateral to the primary lender.
Each CDFI prices its loans based on risk and whether it’s a business’s primary or secondary lender. Interest rates vary but range from the lowest best market rates to 4 percent to 5 percent above the best market rate.
Sam Thacker is a partner in Austin, Texas-based Business Finance Solutions.