What are Community Development Financial Institutions?

If you’ve been in a Starbucks in recent years, you may have seen red, white and blue bracelets offered for a donation of $5 or more to the Jobs for USA campaign. Starbucks joined forces with Opportunity Finance Network, a network of Community Development Financial Institutions (CDFIs), to help raise money for loans to small businesses and seeded this campaign with a $5 million donation.

If you donated to the campaign, as the authors of this book did, you may not have entirely understood what you were supporting. In fact, it’s possible that this campaign could become a source of funding for your business, or that of someone in your community.

CDFIs include non-profit loan funds, credit unions, banks and venture funds that focus on making loans to underserved communities. In addition to making personal loans, they are often a crucial source of funding for small businesses that have been turned down for loans from traditional sources. CDFIs may provide funding for small businesses, microenterprises, nonprofit organizations, commercial real estate, and affordable housing.

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The group that Starbucks partnered with, Opportunity Finance Network, has originated more than $30 billion in funding in urban, rural and Native communities. In particular, CDFIs often focus on low-income and/or minority communities, though applicants shouldn’t be discouraged from reaching out to one if they are having trouble getting funding and don’t meet any of those criteria.

If you apply for a loan through a CDFI, you should expect that the lender will run a personal credit check on you, the owner.

It’s likely that your credit score will be considered in the application process; but it’s usually only one part of the decision and most CDFIs will tell you that even with past credit problems you may still be eligible for loans. In addition, CDFIs may be able to
consider non-traditional credit references, such as rent or utility payments, for example.

Typically, these loans require collateral and/or personal guarantees as well.

CDFI’s offer loans of varying sizes including microloans as well as some that go as high as $250,000. Many CDFIs provide small-business coaching and other professional resources, such as legal, accounting, and marketing assistance, to grow their borrowers’ small businesses.

CDFIs usually:

  • have more flexibility with their collateral and credit requirements (they accept good, but not perfect credit)
  • are willing to consider explanations for lower credit score (such as loss of home equity, late pays, illness)
  • consider the character of the borrower
  • offer reasonable loan terms and try to make sure the borrower thoroughly understands them

However, businesses still need to show the ability to pay back the loan through positive cash flows and have a marketing plan to guide growth. The loan criteria is often listed on the lender’s website and vary in terms of a business location, loan size, interest rates, risk, or borrower income.

CDFI’s want to “make loans that change lives,” says Mark Pinskey, President and CEO of Opportunity Finance Network.

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