Why CDFIs Might Be the Right Choice for Many Small Businesses Seeking Loans
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Small businesses are the backbone of a community. The corner coffee shop provides a common, friendly spot to gather and share conversation. The centrally-located market where neighbors go to get their milk, the hair salon that’s been passed down through generations, the brewery where friends meet after work — all essential fibers of the fabric of a neighborhood.
According to recent statistics from the Small Business Administration, businesses with fewer than 500 employees make up 99.9% of all businesses and are responsible for creating over 60% of new jobs in America. But starting and sustaining a small business is not easy, and definitely costly. While there are many traditional financial institutions that offer help for start-ups and expansion, they are not “one-size-fits-all.” It’s often smarter for small businesses to look outside of the traditional lending box and seek the assistance of a Community Development Financial Institution, or CDFI.
By definition, CDFIs “share a common goal of expanding economic opportunity in low-income communities by providing access to financial products and services for local residents and businesses.” But even more than that, CDFIs are mission-driven, helping communities thrive by opening doors to those who may struggle to secure traditional lending.
Many of the businesses that could be helped with this type of lending are not aware that a CFDI might be an option or how to go about getting access to credit. The following are several reasons why choosing a CDFI could be the smartest choice for the small business itself as well as contribute to the overall quality of life in neighborhoods across Indianapolis.
Opening doors for the “unbankable”
Many businesses, especially small businesses, aren’t “bankable” from a lending perspective. If an owner is just starting out and doesn’t have the revenue they need for equipment or a build-out, it can be hard to convince a bank to provide a loan. This is where a CDFI can fill a void, working with banking partners to provide loans and then get the small business to the point where they are considered desirable clients for traditional lenders.
Mission-driven support for community growth
CDFIs, like Renew Indianapolis’ Build Fund (for small business owners) and Edge Fund (for affordable housing including homeownership), were launched to further the mission of improving communities through collaborative partnerships. They have a direct impact in the communities they serve. As loans are repaid by borrowers, funds revolve into new loans. The money is reinvested right back into the community to support the next generation of emerging businesses.
The main component for a CDFI loan is job creation, bringing economic growth, opportunity, and hope where it may not have existed in recent years. On average, a new job is created for every
$31,000 loaned by Renew’s Build Fund, providing needed stability for a community, building generational wealth for neighborhoods, and directly impacting quality of life.
More than just about “the money”
Many CDFIs offer business owners extra support in the form of education and business coaching. These programs can help with the “what next?” after owners receive funding and are considering the best way to deploy it to grow their business. CDFIs also work to make the entire process of securing a loan easier by working with clients to create terms allowing the business to startup or expand.
Valuable resource in times of need for XBEs
The world found out very quickly in 2020 what a tight rope walk many small businesses perform just to stay open. While PPP loans provided a lifeline for many during COVID, there were far too many others who were locked out of the system, including XBEs (veteran-, women-, and minority-owned businesses) in underserved areas. In fact, an analysis by the Center for Responsible Lending estimates the requirements for receiving a PPP loan effectively excluded 91% of Hispanic-owned small businesses and 95% of Black-owned small businesses. On the other hand, CDFIs have historically targeted outreach to small businesses owned by minorities, women, and veterans. This funding has proven to be crucial for the long-term success of businesses at risk of being left behind.
So how does a small business owner know if a CDFI loan is the right fit? If your business is finding it difficult to come to terms with a traditional lender, you should consider reaching out to the CDFIs in your area. Make sure to visit their website and see what their specialty is and if it fits within your need or vision. Contact the CDFI directly for the best way to apply and to make sure the terms are what you can afford. It may take some time and research to find the right partner, but the rewards are most often well worth it.