Many small business owners and entrepreneurs struggle to get the funding they need to grow, especially if they come from underserved communities. Fortunately, community development financial institutions (CDFIs) can assist them in getting the funding they need. Keep reading to learn what a CDFI is, how it works, and what you need to know before applying for financial assistance.
What is a CDFI?
As the name suggests, a community development financial institution (CDFI) is a private financial institution focused on creating economic opportunity for entrepreneurs in underserved communities. CDFIs traditionally provide financial assistance to those who might be denied by a mainstream financial institution, usually by providing CDFI grants or through a CDFI loan fund.
These community facilities began to appear shortly after the passage of the Community Reinvestment Act of 1977, which was drafted to help ease economic inequality in distressed communities. However, the Act was revised in 2020 in an effort to help stop predatory practices like redlining and to make financial products more widely available in low-income communities.
Today, these institutions can take the shape of a community development credit union, a community development bank, or a community development loan fund. They can receive funding from the U.S. Treasury's CDFI Fund, as well as from private sources like a venture capital fund, provided that they use the funds to increase community representation.
How can you apply to receive financial assistance from a CDFI program?
As an entrepreneur, you may be eligible to receive real estate financing from a CDFI program if you are part of an underserved community. In that case, it's simply just a matter of finding the right program and applying. The U.S. Treasury's CDFI Fund has an award database to help you get started. However, you can also check out the Opportunity Finance Network's CDFI locator tool.
While the exact application process will vary by CDFI program, in general, the process will be a lot like applying for any other investment financing. You'll need to provide information about your personal and business finances, including tax returns, bank statements, and balance sheets.
What are the pros and cons of financing through a CDFI program?
Similar to any type of financing, applying for a loan or grant through a CDFI program has its pros and cons. Read them here to get a better sense of what this financing process looks like.
- Better chance of approval: The goal of CDFIs is to promote economic growth among communities that have been overlooked by traditional financial institutions. If you've had trouble obtaining funding before, you may have a better chance with a CDFI.
- Straightforward financial products: CDFI products are meant to minimize the borrower's risk. With that in mind, you can likely expect to find a variety of programs that offer fairly straightforward loan terms.
- Better interest rates: All CDFI funding benefits from something called the CDFI bond guarantee, which allows these community facilities to offer long-term financing at below-market interest rates.
- Borrower qualifications: As mentioned above, these loans are not for everyone. Specifically, they are for people from distressed communities. If you are not lacking in opportunities or resources, this may not be the right type of funding for you. You may be better off with a traditional real estate loan.
- Smaller loan limits: While the exact loan limits your face will vary by program, in general, CDFI financial products tend to be on the smaller side. This is not necessarily a negative, but it's something to consider if you need a bigger loan.
- Longer funding times: While larger financial institutions can often fund a loan in a matter of hours or a few days, the process may take longer with a CDFI. These organizations' bandwidths are usually stretched thin from trying to support the need in their communities, so it may take longer to get a response.
The bottom line
If you are an entrepreneur or small business owner who is part of a low-income or underserved community, a community development financial institution may be the answer to getting the funding that you need. Armed with this knowledge, you should have a much better idea of whether getting financial assistance from a CDFI is the right fit for you.