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If you’ve been jaded by bank loan rejection, listen up: There’s a class of lenders that wants to help. Known as community development financial institutions, they’re designed to loan to small businesses that have been turned down by traditional banks.
The U.S. Treasury Department certifies CDFIs, which include banks, credit unions, loan funds and venture capitalists, to ensure they are mission-driven, with the goal of helping underserved communities. CDFIs finance small businesses as well as nonprofit organizations, housing programs and commercial real estate. CDFIs can get capital to invest in these efforts from the Treasury Department’s CDFI program.
We surveyed CDFIs to find out what small businesses need to know about the loan products and business services they provide. Keep in mind that CDFIs have varying lending standards; check with lenders in your area for more specific information. The Opportunity Finance Network, a national CDFI network, has a list of CDFIs around the country.
1. They do consider startups
It’s rare for lenders to loan money to startups, and that’s somewhat understandable: Half of small businesses fail in the first five years, according to the U.S. Small Business Administration. But it takes money to make money, and community lenders understand that.
“Unlike banks, we will finance startup businesses,” says Leslie Benoliel, executive director of Philadelphia-based Entrepreneur Works Fund. “We will also finance businesses such as day care centers and restaurants that banks often exclude.”
Without a track record, startup borrowers have to prove they’re creditworthy in other ways. Minneapolis-based Community Reinvestment Fund considers lending to new businesses “provided the borrower is investing at least 25% cash and has a very well-thought-out business plan, complete with cash flow projections and meaningful assumptions,” says Brian Burke, vice president of business lending.
2. Relationships count
In making lending decisions, banks are known for sticking to the numbers: credit score, tax returns, balance sheets, income statements and the amount of capital the borrower already has invested in the business. Community lenders consider some of the same metrics, but they also look at the borrower as a whole.
“Our approach is old-school, relational lending,” says Marc Nemanic, executive director of 3CORE, based in Chico, California. “We have no hard-and-fast rules regarding whom we finance.”
3. They prioritize minority and low-income borrowers
Community lenders focus on supporting businesses in underserved areas. For example, around 60% of Accion loans go to low-income borrowers. More than half of the clients of the Accion branch that serves New Mexico, Arizona, Colorado, Nevada and Texas are minorities, and if necessary, they can speak to staff members who are bilingual, according to the group’s website.
“We also frequently work with entrepreneurs who have experienced past credit challenges and are committed to recovering and rebuilding, or who may have limited cash flow or collateral,” says Metta Smith, the organization’s vice president of lending and client relations.
4. They don’t require collateral
Most banks require business borrowers to have collateral – a home, equipment or commercial space – to secure a loan. CDFIs are more flexible; many say they would like collateral but can underwrite loans without it as long as the borrower can demonstrate other strengths in the business such as positive cash flow and strong past and projected financial statements.
“Collateral is valuable to us but not a prerequisite to be approved for a loan, as it often is in a bank,” says Scott Lewis, a senior vice president at OBDC Small Business Finance in Oakland, California.
5. They’re more than just lenders
CDFIs offer business development opportunities in addition to financing. The Orlando, Florida-based Black Business Investment Fund offers one-on-one counseling and financial literacy training. It seeks borrowers who “have a coachable attitude” and a “desire to enhance their individual management capacity,” says Jasmine Houston, marketing and development officer.
“We work to understand the unique challenges and strengths of our loan clients through our in-depth, monthly financial technical assistance roundtable program,” Houston says.
Top image via iStock.