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Community Development Financial Institutions (CDFI)

Funding 1A Community Development Financial Institution (CDFI) is a class of financial institution that caters to and provides assistance to underserved and low-income communities. CDFIs, which are certified by the U.S. Treasury Department, can be community banks, credit unions, nonprofit organizations, venture capital funds or loan funds. They typically raise the money they lend through grants, low-interest loans, foundations, the government or banks looking to satisfy Community Reinvestment Act requirements. CDFIs are very focused on community, targeting their funding to small businesses, microenterprises, nonprofit organizations, commercial real estate and affordable housing.

Many CDFIs have revolving loan funds that target a specific state or geographic region, making low interest loans to small business owners and micro-entrepreneurs that might not qualify for a bank loan. Like old-fashioned bankers, this is a high-touch model, and funding often comes with mentoring and other support (that’s one reason why CDFI loan portfolios held up relatively well throughout the financial crisis compared to bank portfolios).

Many CDFIs also participate in 7(a) loans through SBA’s Community Advantage Program for loans up to $250,000 and other SBA loan programs.

Some CDFIs also maintain venture capital funds that provide equity or royalty (revenue-sharing funding).

To locate a CDFI near you, visit Opportunity Finance Network’s CDFI locator tool.

Pros

  • Competitive rates
  • Good option for entrepreneurs unable to secure traditional bank loans
  • High-touch model: funding is paired with mentoring support and training
  • No predatory practices
  • Wide coverage across the U.S.

Cons

  • Small value loans may not be sufficient
  • Personal guarantee and/or collateral often required