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Exploring alternative funding options: What is a CDFI?

Are you a small business owner looking for alternative funding options beyond a traditional bank loan? A CDFI loan might be the answer you’ve been looking for.

While traditional bank lending is down, organizations called community development financial institutions, or CDFIs, are stepping up to fill the void by focusing on supporting small businesses and local economies in a holistic way. So what is a CDFI?

CDFIs are financial institutions that cater specifically to underserved entrepreneurs and low-income communities. CDFIs, which are certified by the U.S. Treasury Department, can be banks, credit unions or nonprofits. They raise the capital they lend, and they get investing power through grants or low-interest loans provided by the government or banks.

CDFIs, sometimes also called mission-driven lenders or local microlenders, typically serve a specific geographic region and are focused on revitalizing their local communities. Because of this, their funding is primarily focused on serving nonprofits, affordable housing developments and local small businesses.

CDFIs offer financing for small businesses in underserved communities that have been unable to get a traditional bank loan. CDFIs take the time to understand your business’ financing needs and use a comprehensive approach to loan underwriting, beyond just looking at your credit score. They help small businesses navigate the right finance tools for success, and often pair financing with one-on-one mentoring and business assistance support. Since most CDFIs are active in their local communities, they also connect their clients with other local programs or lenders for additional help.

It is important to consider both the pros and cons of CDFIs.

Pros

On the plus side, CDFIs are a great option for entrepreneurs unable to secure traditional bank loans. They offer competitive rates, and the one-on-one business assistance support is an added benefit.

Cons

As for cons—while CDFIs offer different levels of loan programs, some only lend up to $250,00, which might not be sufficient for some small businesses. Also, the application time can be lengthy, and personal collateral is often required to secure a loan.

 

Our Entrepreneurship Program has more details about CDFIs and can help you find a nearby lender. Additionally, you can sign up for one of our access to capital webinars or in-person events! Also check out Opportunity Finance Network, a national network of CDFIs, for more information. 

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