Small-Business CDFI Loans: What They Are and How to Find One
CDFI loans are issued by community development financial institutions that are mission-driven to provide capital and assistance to traditionally underserved communities.
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If you’re having trouble qualifying for a small-business loan, a loan from a community development financial institution (CDFI) might be a good option for you. CDFIs are bank or nonbank lending institutions that are committed to providing resources — including capital — to underserved communities.
How much do you need?
We'll start with a brief questionnaire to better understand the unique
needs of your business.
Once we uncover your personalized matches, our team will consult you
on the process moving forward.
What is a CDFI loan?
A CDFI loan is a type of financing provided by a CDFI lender, which is bank or nonbank lender that has a mission to provides loans, training and business assistance to underserved communities. These communities can include minority- or women-owned businesses as well as those located in or serving low-income areas. Business loans issued by CDFIs can be term loans, lines of credit, SBA loans or commercial real estate loans.
Because they are mission-oriented and are funded by a combination of government and private sector money, CDFIs can offer unique loan products that fit their target markets. They can also eliminate many traditional barriers to accessing capital, such as personal credit score, time in business or collateral requirements.
Did you know...
Although many CDFIs fall under the category of alternative lenders, in terms of interest rates, they should not be confused with online lenders, which are another type of alternative lender that often offer higher rates than traditional institutions.
Nerdy Perspective
Make sure you leverage all the benefits of working with a CDFI
I previously worked in small-business lending at a couple CDFIs. A lot of small-business owners didn't know how to take full advantage of working with a CDFI. I saw small-business owners become frustrated or discouraged trying to manage the loan application process alongside their everyday business operations. In response, I would often offer to fill out an application with a client in person or over the phone. Many business owners were not even aware this was something that CDFIs are willing to do.
If you need support finishing your loan application or are confused about a part of the process, don’t be afraid to ask your loan officer for help. And remember that CDFIs can offer a more personalized approach to working with small businesses than a big bank or online lender does.
Olivia Chen
Lead Writer, Small Business
Pros and cons of CDFI loans
Pros
✅ Low interest rates ✅ Low interest rates
Rates on CDFI loans are competitive with bank loan rates. For example, TruFund Financial Services, a CDFI that funds loans in New York, Texas and Georgia offers fixed rates as low as 9%. In comparison, average bank business loan rates most recently ranged between 6.42% and 12.41%. Because they raise money from a variety of sources, CDFIs are better able to maintain stable rates even amidst recent rate hikes.
✅ Higher likelihood of approval ✅ Higher likelihood of approval
CDFIs have a mission to lend to underserved communities, including rural and urban low-income areas. That means their qualifying criteria are often more relaxed than traditional lenders. For example, Accion Opportunity Fund has a minimum credit score requirement of 600 and only requires $50000 in annual revenue.
✅ Business development help ✅ Business development help
CDFIs offer technical assistance and training programs to small businesses to help them get started and grow sustainably. Some offer mentoring and advisory services, and may even offer workspaces for you to use as an office or to meet with clients.
To be certified by the federal government as a CDFI and be eligible to extend CDFI loans, organizations must have a primary mission to promote economic development and must serve an underserved area or population. If your business isn’t lacking resources, opportunity or access to financial services, chances are that a CDFI is not the right path for you.
❌ Longer funding time ❌ Longer funding time
The application process and time to funding can take longer with CDFIs than other types of institutions. Because of their business model, CDFIs generally have fewer assets than banks, which can result in lack of updated technology and staffing shortages. If you are in need of fast funding, you likely won’t find it with a CDFI loan.
CDFI loans vs. traditional bank loans
CDFI loans
Traditional bank loans
Required minimum credit score
Some CDFIs do not have a minimum credit score requirement, while others may require a 600 or above.
Typically 680.
Type of lender
Can be depository – meaning they hold deposits from customers – or nondepository institutions.
Depository institutions.
Business advisory services
Often offer technical assistance and business advisory services.
Do not offer technical assistance with applications or additional business advisory services for loan customers.
Regulating entity
Depending on the type of CDFI, the regulating entity may be the FDIC, NCUA, OCC, IRS, the respective state or the institution may be self-regulated.
FDIC, Federal Reserve or OCC.
Funding source
Mixture of government and private-sector money that they have to raise to cover salaries, operations and any money loaned out.
Make the majority of their money from the deposits of their customers.
Where to find a small-business CDFI loan
To find a CDFI in your area, visit the Treasury Department’s searchable award database or the Opportunity Finance Network’s CDFI locator. If you use a larger bank, you may also check its website to see if it partners with any CDFIs. Bank of America, for example, provides a searchable list of its CDFI partners.
What you need to apply for a CDFI business loan
To apply for financing, small-business owners likely will need to provide the same kind of information they would at a bank, including:
Personal and business tax returns.
Personal financial statements for all business owners.
Online lenders, like OnDeck and iBusiness Funding, provide a variety of small-business financing options. The entire loan process can be conducted online, which can make it more streamlined and faster than a traditional loan. They are usually easier to qualify for than traditional loans, which make them a good alternative to CDFIs if you are having trouble qualifying. However, make sure you look for lenders that are transparent about their terms. Annual percentage rates, or the total cost of funding, for online lenders can fall anywhere between 14% to 99%.
SBA loans are partially guaranteed by the Small Business Administration and administered through a variety of different lenders, including many CDFIs. SBA products are designed to incentivize lending to underserved borrowers and offer favorable terms, rates and fees. However, they can be difficult to qualify for, and the process can be lengthy. Still, if your bank offers SBA loans, it’s worth checking with them first to see if you qualify for one.
Small-business grants are another great way to finance your small business without having to take on any debt, though they can be difficult to find and qualify for. There are many government and private-sector grant programs that are dedicated to funding small businesses in underserved communities, and resource centers like your local Minority Business Development Agency center can help you find and apply for them.
Merchant cash advances can be an alternative to small-business CDFI loans. They are a type of financing wherein an MCA company advances capital to a business in exchange for future sales revenue, plus a fee. While they can be a short-term solution to gaps in cash flow and qualifying is typically easy, they are also one of the most expensive types of business financing. Try to exhaust all other financing options before turning to an MCA.
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