CDFIs & Community Development Loan Funds

Ignore the ungainly name, because CDFIs are one of the best-kept secrets for local investing. CDFI is short for Community Development Finance Institution, a class of financial institution that caters to underserved and often low-income communities. CDFIs are certified by the Treasury Department and can be banks, credit unions, venture capital funds or community development loan funds. They typically focus on a specific geographic region, making them a good candidate for local investors.

Community development loan funds, in particular, are a great option for investors of any means to put money to work locally. These revolving loan funds target a specific state or geographic region, making low interest loans to small business owners and entrepreneurs that might not qualify for a bank loan. Like old-fashioned bankers, this is a ‘high touch’ model. Investors in these loan funds receive a modest, fixed rate of return, depending on current interest rates and the length of investment (today that’s anywhere for 1.5% to 6%).

Community loan funds are not FDIC-insured (unless the fund is offered by a bank). But the risks are also very low, as loan funds have an excellent track record of returning lenders’ money and typically absorb any losses themselves (most raise separate rainy day funds to offset any losses). CDFIs experience very low charge-off rates, in part because they work with their borrowers to help them succeed. Rather than yank a loan at the first sign of trouble, they’ll offer assistance. Many CDFI borrowers build credit and go on to be successful banking clients.

Community development loan funds have traditionally have financed their work through grants and low-interest loans from foundations, the U.S. government and banks looking to fulfill their CRA obligations. Many CDFIs have only recently begun reaching out to individuals for funding.

At a glance:

– A CD-like investment that gets put to productive use in your region. As with a CD, you’ll be able to lock in better interest rates with a longer-term loan—1 or 2% for short term investments and up to 8% for 10-year or longer investments.

Pros:

  • Safe. Low default rate
  • Steady interest payments
  • Funds are loaned out in your region

 

Cons:

  • Interest rates are generally low
  • Most loan funds are not FDIC-insured
  • Not all loan funds accept investments from individuals

 

Bottom Line: A good place to park savings or retirement funds that you might otherwise put in a CD.

Resources:

There are more than 800 certified CDFIs in the U.S.  To locate one in your area, try the CDFI locator tool at www. opportunityfinance.net

In lieu of individual loan funds, you might try Calvert Foundation’s Community Investment Notes, which invests the money through CDFIs around the country. The notes are available from major brokerage houses as well as from Calvert. More recently, the foundation has created Vested.org, a web site that allows investors to channel their investment dollars—starting with as little as $20—to the places and causes they care about, from affordable housing to small businesses to metro regions such as Denver and Baltimore.