CDFI Loans for Small Businesses: What They Are and How to Find Them

Due to banking deserts and strict lending qualifications, business owners in underserved areas often face unique challenges in accessing capital. For example, only 20% of Black-owned small businesses were approved for funding requested in 2022, according to a 2023 report released by the Federal Reserve.^[0]

Community Development Financial Institutions (CDFIs) are banks or non-bank lending institutions whose mission is to provide resources, including loans, to underserved communities. Small Business Loansa CDFI loan may be a good option for you.

a Community Development Financial Institutions (CDFIs) are mission-based financial institutions that provide loans, training and business assistance to communities that have difficulty obtaining capital from traditional lenders. CDFIs are certified by the U.S. Treasury Department and represent a variety of lenders, including banks, credit unions, nonprofit and for-profit loan funds, and venture capital funds.

CDFIs raise capital through a combination of government and private sector funding from the U.S. Treasury and Commerce Departments, traditional financial institutions, faith-based organizations, and corporations. This allows CDFIs to offer unique loan products that are tailored to their target markets and also eliminate traditional barriers to accessing capital, such as personal loans. Credit scoretime in business or collateral Requirements. Currently, there are more than 1,300 CDFIs operating across the country.

Low interest rates: Interest rates on CDFI loans are competitive when compared to rates available from traditional lenders such as banks. For example, interest rates on CDFI loans in fiscal year 2021 ranged from 4% to 9%, depending on the type of loan, according to a July 2023 report commissioned by the CDFI Fund.^[0]

Many CDFIs Alternative LendersWith regard to interest rates, Online Money Lendersis another type of alternative lending institution that often offers higher interest rates than traditional financial institutions.

More likely to be approved: CDFIs are mandated to lend to underserved communities, including rural and low-income urban areas. This means that their eligibility criteria are often looser than traditional lenders. For example, Axion Opportunity Fund It has no minimum credit score requirements and offers small business loans after only three months of business.

Business Development Support: CDFIs provide technical assistance and training programs to help small businesses start and grow sustainably. Some CDFIs also offer mentoring and advisory services, and some provide workspace for businesses to use as offices or meet with customers.

It's not for everyone: To be federally certified as a CDFI and eligible to lend CDFI loans, an organization must have a primary mission of promoting economic development and serve underserved communities and populations. If your business does not lack resources, opportunities, or access to financial services, a CDFI may not be the right path for you.

Longer funding period: The application process and funding can be longer for CDFIs than for other types of financial institutions. Because of their business model, CDFIs typically have fewer assets than banks, which means they may lack the latest technology and be understaffed. If you need funding quickly, you probably won't get it through a CDFI loan.

To find a CDFI in your area, visit the Treasury Department’s Searchable Awards Database or Opportunity Finance Network CDFI LocatorIf you use a large bank, you can also check their website to see if they work with CDFIs. For example, Bank of America provides a searchable list of CDFI partners.

To apply for loans, small business owners will likely need to provide similar things. Information obtained from banksPersonal and business tax returns, personal financial statements for all business owners, lease agreements, bank statements, profit and loss statements, and balance sheets.

Online Lenderslike On Deck and Funding Circleoffers a variety of financing options for small businesses. The loan process can be done entirely online, making it more streamlined and quicker than traditional loans. They also typically have easier qualifications than traditional loans, making them a good alternative to CDFIs if you're having trouble qualifying. But be sure to look for lenders that are transparent about their terms. Online lenders' annual percentage rates, or total cost of financing, can range from 8.99% to 99%.

SBA Loans Partially guaranteed by the Small Business Administration and administered through a variety of lenders, including many CDFIs, SBA products are designed to encourage lending to underserved borrowers and offer favorable terms. Fee There are fees. But it can be hard to qualify, and the process can be lengthy. Still, it's worth checking with your bank first if they offer SBA loans. See if you qualify.

Small and medium-sized business subsidies is another great way to fund your small business without going into debt, but they can be hard to find and difficult to qualify for. There are many government and private sector grant programs dedicated to providing funding to small businesses in underserved communities, and resource centers, such as your local Minority Business Development Agency center, can help you find and apply for them.

Merchant Cash Advance It can be an alternative to CDFI loans for small businesses. MCA They advance capital to a company in exchange for future sales revenue and fees. They can provide a short-term solution to a cash flow gap and are usually easy to qualify for, but they are also one of the most expensive types of business financing. Make sure you exhaust all other financing options before turning to an MCA.

If your company doesn't qualify for a CDFI loan, online lenders may offer an alternative. Online lenders specialize in streamlining the loan application process and providing loans to a wide range of businesses more quickly than banks, at competitive rates for creditworthy borrowers.