Ignore the ungainly name, because these institutions can provide a lifeline for entrepreneurs. A Community Development Finance Institution, or CDFI, is 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 loan funds. CDFIs are very focused on community, targeting their funding on small businesses, micro-enterprises, nonprofit organizations, commercial real estate, and affordable housing within a particular geographic region.
Of particular interest to small business owners, many CDFIs operate revolving loan funds that make low interest loans to small business owners and micro-entrepreneurs that might not qualify for a bank loan. Like old-fashioned bankers, this is a high touch model, and funding often comes with mentoring and other support (that’s one reason why CDFI loan portfolios held up relatively well throughout the financial crisis compared to bank portfolios).
CDFIs typically raise the money they lend through grants or low-interest loans foundations, the government or banks looking to satisfy their CRA requirements. They’ve even partnered with Starbucks, which raises money for CDFIs through its Create Jobs For USA fund.
CDFIs also participate in SBA(7) loans through the SBA’s Community Advantage program for loans up to $250,000.
Some CDFIs also maintain venture capital funds that provide equity or royalty (revenue-share) funding. More here: http://cdvca.org/
- Great for entrepreneurs and organizations that cannot access bank loans or other capital
- High touch model includes mentoring support and training
- Can prepare small businesses and micro-entrepreneurs to be bankable
- No predatory practices
- Wide coverage across the U.S.
- Loan amounts may be limited
- The application process may involve a lot of face-to-face time
The two main CDFI umbrella groups are the Opportunity Finance Network http://ofn.org/ and the CFDI Coalition http://www.cdfi.org/
The Opportunity Finance Network, a network of CDFIs, provides a CDFI finder: http://ofn.org/cdfi-locator
The Treasury Dept.’s CDFI Fund also offers a searchable database at: http://www.cdfifund.gov/awardees/db/index.asp
Association for Enterprise Opportunity is a membership organization of microfinance organizations, including CDFIs: http://www.aeoworks.org/index.php/site/