Community Development Financial Institutions

By Duane Adams –

Are you looking for money to start or maintain your business?

If so, you may already know that leveraging debt is one way that you can acquire funds. Of course, every business owner would like to receive “free money” through a grant, but grant funds are few and far between and typically come in relatively small increments. Most for-profit businesses that receive grants are still forced to take on debt at some point.

Once you have done the proper due diligence and feel that you are able to evaluate lending options, you should speak with a commercial and/or traditional lender about financing. These institutions typically offer lower interest rates upon approval.

The drawback with these lenders is the lack of flexibility in working with early-stage businesses. Lenders typically evaluate a business’s historical financial data, credit score, how much money the business is currently generating, the business’ assets, industry growth and stagnation, and the team, as well as any existing debt. These banks can also be finicky when it comes to investing in industries that they are not familiar with.

If you discover that you are not able to take on a loan through a commercial bank or traditional lender, a Community Development Financial Institution (CDFI) may be able to provide the perfect funding solution for your business.

Community Development Financial Institutions (CDFIs)

CDFIs are specialized organizations that provide financial services in low-income communities and to people who lack access to funding. They work to empower low-income and underserved people and communities to enter the financial mainstream. CDFI is a designation given by the CDFI Fund.

What Types of Activities Do CDFIs Finance?

CDFIs finance a wide range of activities, including mortgage lending for first-time homebuyers, flexible underwriting to community facilities, and commercial loans for businesses in low-income areas.

What Qualifies a Lender to Be a CFDI?

To qualify as a CDFI, an organization must submit an application to the CDFI Fund for review. The CDFI Certification Application must demonstrate that the applicant meets a number of requirements including that it:

• Is a legal entity at the time of certification
• Has a primary mission of promoting community development
• Is a financing entity
• Primarily serves one or more target markets
• Provide development services in conjunction with its financing activities
• Maintains accountability to its defined target market
• Is a non-government entity and not under the control of any government entity (tribal governments excluded)

What is the Difference Between a CDFI and a Traditional Bank?

The traditional banking industry has historically underserved low-income and minority communities. This often forces these groups to turn to high-risk alternatives for funding such as check-cashing services, pawnshop loans, auto title loans, payday loans, and paycheck or tax refund advances. They are also more objective with the underwriting process and are often credit-score driven.

CDFIs are more likely to have funding available to support startups, nonprofits, micro, and small businesses, affordable housing, consumers, and commercial real estate. They usually offer loans that are more predictable, allowing the customer to have more certainty with payments; seek to make lending more inclusive; and place more weight on credit history and character.

Most CDFIs offer technical assistance services and training programs such as business coaching, mentoring, and advisory services. They also have more flexibility with their lending terms if a borrower faces financial difficulties.

Local CDFIs

Among CDFI’s that can be found locally are:

• Mountain BizWorks, mountainbizworks.org
• The Carolina Small Business Development Fund, carolinasmallbusiness.org
• National Community Investment Fund, ncif.org
• Self-Help Credit Union, self-help.org
• ICAP Institute Capital, theinstitutenc.org/icap

If you have further questions about CDFIs and other financing options…

I would encourage you to reach out to your local Small Business Center to discuss the various types of financing available as well as when to apply. There is a Small Business Center at every community college in North Carolina. This expansive network of business experts covers all 100 counties. Be sure to check out the A-B Tech Small Business Center’s webpage at www.abtech.edu/sbc.

Duane Adams is Associate Director of the A-B Tech Small Business Center. He may be reached at (828) 398-7951 or [email protected].