- Community development financial institutions (CDFIs) help small-business owners in underserved or low-income communities access financing and other resources.
- CDFI loans typically have competitive interest rates and flexible qualification requirements. They can be a good option if you can’t get conventional business financing.
- You can find CDFI lenders by using the Treasury Department’s searchable award database or the Opportunity Finance Network’s CDFI locator.
How much do you need?
What is a CDFI loan?
A CDFI loan is financing provided by a CDFI lender. CDFIs are banks, loan funds and venture capital funds, whose primary mission is to provide loans, training and assistance to underserved communities.
CDFIs offer several types of business loans, including term loans, lines of credit, SBA loans or commercial real estate loans.
Because they focus on underserved borrowers, CDFIs offer flexible loan terms and are often easier to get than traditional small-business loans.
Expert on the ground
Who do CDFI lenders serve?
CDFIs typically focus on serving minority, women or veteran-owned businesses, as well as those located in or serving low-income areas.
They can be a strong option for borrowers who can’t qualify for traditional small-business financing due to limited credit, little collateral or a short time in business.
Pros and cons of CDFI loans
Pros
✅ Low interest rates
Rates on CDFI loans are competitive with bank loan rates. For example, TruFund Financial Services offers fixed rates as low as 7%. In comparison, average bank business loan rates range between 6.37% to 10.98%.
✅ 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 620 and only requires $300000 in annual revenue and 24 months in business.
✅ Business development help
CDFIs offer technical assistance and training programs to small businesses to help them get started and grow. Some offer mentoring and advisory services, and may even offer workspaces to use as an office or to meet with clients.
Cons
❌ Not for every business
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
The application process and time to funding can take longer with CDFIs than other types of lenders. Because of their business model, CDFIs generally have fewer resources than banks, which can result in lack of updated technology and staffing shortages.
Make sure you leverage all the benefits of working with a CDFI
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.
CDFI loans vs. traditional bank business loans
CDFI loans | Traditional bank loans | |
|---|---|---|
Minimum credit score | May have no minimum credit score requirement. | Typically 680. |
Minimum time in business | May offer funding to startups. | Typically two years. |
Interest rates | May be slightly higher than bank loans. | Typically offer the most competitive rates. |
Collateral requirements | Tend to be more flexible than banks. | Depends on the bank and type of loan. |
Support offered | Often offer training, business coaching and financial education. | Do not offer technical assistance with applications or business advisory services. |
Where to find a small-business CDFI loan
To find a CDFI lender in your area, visit the Treasury Department’s searchable 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 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.
Lease agreements.
Bank statements.
Income statements.
Balance sheets.
CDFI loan alternatives
Online lenders
Online lenders, like OnDeck and iBusiness Funding, provide a variety of small-business financing options. You can apply entirely online, which can make it 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.
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
SBA loans are backed by the Small Business Administration and issued through approved lenders, including many CDFIs. SBA loans are designed to encourage lending to underserved borrowers and offer long terms and low rates and fees.
However, they can be difficult to qualify for, and the application process can be long. Still, if your bank offers SBA loans, it’s worth checking with them first to see if you qualify for one.
» MORE: Pros and cons of SBA loans
Small-business grants
Small-business grants are a good way to finance your small business without having to take on debt, but 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
Merchant cash advances can be an alternative to small-business CDFI loans. They are a type of financing where an MCA company gives your business a lump sum of cash upfront in exchange for a portion of future sales, plus a fee.
MCAs can be easy to qualify for and are a short-term solution to gaps in cash flow. However, they are also one of the most expensive types of business financing. Consider all other financing options before turning to an MCA.
