When traditional funding routes close, CDFIs are always open to entrepreneurs.
More than a funding alternative for startups and established businesses, CDFIS are mission-oriented, community-driven, small and mid-sized business (SMB) funding powerhouses.
At Hello Alice, we have a lot in common with CDFIs, starting with our founding mission:
to support SMB owners with fast access to capital and ongoing business mentorship.
Although we’re not a CDFI, we’d love for you to know about them.
In this guide, we will reveal the many benefits of CDFIs, answer a few common questions, and provide several helpful resources to help you jumpstart your journey.
What Are CDFIs?
Community Development Financial Institutions (CDFIs) are mission-driven lenders that promote economic growth in underserved communities, by offering loans and mentorship.
There are four types of CDFIs:
- Community development banks.
- Community development credit unions.
- Community development loan funds.
- Community development venture capital funds.
While each CDFI is different, full-service providers offer access to affordable housing, deposit accounts, credit products, auto loans, investment services, and even financial coaching.
While empowering individuals, CDFIs specialize in connecting SMB owners with meaningful funding opportunities.
To that end, CDFIs forgo traditional lending criteria in favor of character-based assessments.
In other words, CDFIs extend SMB funding based on an entrepreneur’s business model, discipline, and passion—rather than their credit score.
Today, there are over 1,300 CDFIs nationwide managing approximately $457 billion in assets. To become a CDFI, financial institutions must be certified by the U.S Treasury Department.
Though certification is granted by one agency, CDFIs receive funding from public and private sources, including the Department of Commerce, Wall Street banks, major corporations, religious groups, and other nonprofit organizations.
Thanks to these diversified relationships, CDFIs can lend significant capital to entrepreneurs.
Why CDFIs Are a Great Option for SMBs
CDFIs are an engine for economic growth.
That’s why the Treasury Department actively invests in them, having provided $9 billion to CDFIs in 2021 and another $5 billion in 2023.
Support is also surging within the private sector, as a cohort of 30 companies recently pledged to raise $3 billion for CDFIs.
As a result of this financial backing, CDFIs provide three major benefits to small business owners.
1. Higher Approval Rates
If you qualify for traditional financing products, that’s great.
SBA loans, microloans, and short-term business loans are terrific options. Plus, they’re all part of Hello Alice’s Small Business Financing Marketplace, where you can connect with over 90 lenders and financial companies.
But what if traditional loans aren’t accessible to you? That’s more than okay, because CDFIs are an equally compelling option.
Here’s why: when you apply to a CDFI, the lending criteria are more nuanced than typical banks and credit unions.
By taking a more equitable and relational view to lending, CDFIs see you, as opposed to just your credit history.
By leading with character-based lending, CDFIs take a personal interest in your entrepreneurial journey, your business acumen, and your long-term goals.
In other words, where traditional banks focus on statistics and scores, CDFIs focus on your (and your SMB’s) story.
CDFIs want to see you succeed, and that’s why they have higher approval rates.
That’s also why, in 2021 alone, the CDFI Fund originated over 111,000 business and microenterprise loans worth over $6.8 billion.
2. Lower Interest Rates
As well as relaxing application criteria, CDFIs help to make SMB funding more affordable than their traditional counterparts.
According to the most recent available data from the CDFI Fund (July 2023), the average CDFI business loan interest rates hover between 5% and 6%.
For comparison, the average SBA loan varies between 11.5% to 16.5%. Keep in mind, that’s the going rate for the average applicant. Entrepreneurs with low credit could face rates well over 25%.
Clearly, CDFI loans deliver incredible value to entrepreneurs.
Plus, their affordability is particularly important as national interest rates increase.
Because CDFIs draw from a wide variety of debt sources, they’re well insulated from the monetary policy of the Federal Reserve.
In other words, while interest rates continue to rise, CDFIs are a stable option for SMB owners.
3. Ongoing Business Mentorship
At Hello Alice, we’re ardent supporters of business mentorship.
Whether it’s 1:1 coaching or interactive workshops, we believe that business success depends on strategic relationships.
We’ve seen it play out countless times: the businesses that receive mentoring and guidance endure, while those that go at it alone often struggle.
Sometimes, mentorship requires intense planning sessions. Other times, it’s just a check-in over a cup of coffee.
Of course, mentorship can also mean avoiding common entrepreneurial pitfalls. Like Eleanor Roosevelt said, “learn from the mistakes of others. You can’t live long enough to make them all yourself.”
When we look at CDFIs, we recognize a cause closely aligned with our own.
Yes, the SMB funding opportunities are fantastic, but CDFIs don’t stop there. While providing fast access to funding, CDFIs invest in their business owners with ongoing advisory services.
They don’t just write a check and wish you well: they stay with you every step of the way.
That’s why CDFI loan charge-off rates are statistically lower than regular banks.
Because CDFIs prioritize coaching and technical assistance, they help entrepreneurs manage risk and address problems as soon as they arise.
What Types of Businesses Do CDFIs Work With?
CDFIs partner with businesses in all stages of growth.
Whether you’re launching a start-up or looking to scale, CDFIs can provide the funding and mentorship you need.
Generally speaking, CDFIs work with SMB owners who live in underserved communities, are concerned about predatory lending, or are unable to access loan products from traditional financial institutions.
People of color, women, veterans, rural business owners, and entrepreneurs in low-income communities are the primary recipients of CDFI financing.
Are There Any Risks Involved in Partnering With a CDFI?
All borrowing introduces a measure of risk. That’s true whether you obtain a loan from a CDFI, a major bank, or even from a family member.
Nevertheless, CDFIs help business owners mitigate risk at every turn.
As we mentioned, CDFIs boast lower charge-off rates than traditional banks. That means CDFI entrepreneurs do an excellent job of managing their obligations and repaying their debts.
Yes, it certainly helps that CDFIs offer very low interest rates. However, the success of CDFI entrepreneurs is also due to the mentorship programs that streamline their business operations.
If you’re worried about the long-term sustainability of CDFIs, you can put those fears to rest. While the federal government actively supports them, so do leading financial institutions like Capital One, JPMorgan Chase, and Bank of America. In fact, these banks (and many others) have collectively invested billions of dollars in CDFIs over the last few years.
Are CDFIs Regulated?
All community development banks are federally regulated and insured through the Federal Reserve, the Federal Depository Insurance Corp. (FDIC), the Office of the Comptroller of the Currency, and various state banking agencies.
Likewise, all community development credit unions are regulated by the National Credit Union Administration (NCUA).
While all CDFIs are certified by the U.S. Department of the Treasury, some CDFIs are non-regulated, including community development loan funds and venture capital funds.
CDFIs are very secure. After all, each organization must satisfy specific application requirements in order to get certified.
CDFI Resources
Want to learn more about CDFIs? Check out these links:
- View a complete list of CDFIs in your local state.
- Find CDFIs according to organization or lending type.
- Access the CDFI Fund’s Searchable Award Database.
- View CDFI programs, training, and technical assistance.
- Join the CDFI Connect Community.
As CDFIs continue to expand, we will refresh our available resources.
Earn, Redeem, and Grow With Hello Alice
As an entrepreneur, getting SMB funding can be frustrating (to say the least).
That’s why we built our Small Business Financing Marketplace: so you can see your best financing options all in one place.
In fact, Hello Alice connects you with over 90 lenders and financing companies, unlocking fast access to a number of products.
Best of all, you can access these inclusive loan products with one simple form.
Say goodbye to complicated applications, say hello to your funding future.
Apply now for the SMB funding you need and deserve.