If you’ve been discouraged by the fact that you weren’t approved for a bank loan, pay attention: There is a category of lenders who are eager to be of assistance. They are sometimes referred to as community development financial institutions (CDFIs), and their primary purpose is to provide loans to small firms that have been rejected for financing by conventional banks.
The United States Department of the Treasury certifies community development financial institutions (CDFIs), which include banks, credit unions, loan funds, and venture capitalists. This is done to ensure that CDFIs are mission-driven, with the intention of assisting communities that are currently being underserved. CDFIs provide funding not only to charitable organizations, housing initiatives, and commercial real estate enterprises but also to small businesses. The CDFI program run by the Treasury Department makes it possible for CDFIs to get cash for investment purposes.
We polled CDFIs to find out what small businesses need to know about the loan products and business services that CDFIs offer in order to make informed decisions. It is important to keep in mind that CDFIs have different lending rules; consult with lenders in your area for more particular information. A list of CDFIs located all around the country can be found on the website of the Opportunity Finance Network, which is a national network of CDFIs.
1. They do take into account startup companies.
It is extremely uncommon for financial institutions to make loans to new businesses, and this is something that may be partially understood: According to the statistics provided by the United States Small Business Administration, during the first five years of operation, fifty percent of all small enterprises are unsuccessful. But it requires money to make
Entrepreneur Works Fund, situated in Philadelphia, is led by Leslie Benoliel, who is the executive director. “Unlike banks, we will finance beginning firms,” she explains. “We will also fund enterprises such as daycare facilities and restaurants, which are often excluded from financing options by banks.” money, and community leaders are aware of this fact.
Borrowers from startups are required to demonstrate their creditworthiness through alternative methods because they do not yet have a track record. Community Reinvestment Fund, which is based in Minneapolis, will consider providing three hundred dollar loan to newly established companies “provided that the borrower is investing at least 25 percent cash and has a very well-thought-out business plan, complete with cash flow projections and meaningful assumptions,” according to Brian Burke, vice president of business lending at Community Reinvestment Fund.
2. The value of one’s relationships
A borrower’s credit score, tax returns, balance sheets, income statements, and the amount of money that the borrower already has invested in the firm are some of the quantitative factors that banks are known to consider when making lending decisions. Community lenders take into account a number of the same parameters as conventional lenders, but in addition, they assess the borrower in their entirety.
According to Marc Nemanic, the executive director of 3CORE, which has its headquarters in Chico, California, “Our approach is old-school, relational lending.” Regarding the recipients of our financial support, we do not adhere to any strict guidelines.
3. They provide preference to borrowers from minority groups and low-income households.
Community lenders concentrate their efforts on providing assistance to companies located in underprivileged communities. For instance, over sixty percent of Accion’s loans are given to customers with modest income. According to the website for the organization, more than half of the customers served by the Accion branch that is located in New Mexico and serves the states of Arizona, Colorado, Nevada, and Texas are people of color, and should they have any questions or concerns, they can communicate with staff members who are bilingual.
According to Metta Smith, the vice president of financing and client relations for the organization, “We also regularly deal with entrepreneurs who have suffered past credit issues and are devoted to recovering and rebuilding, or who may have restricted cash flow or collateral.”
4. They do not demand any form of collateral.
The majority of financial institutions demand that business borrowers provide collateral in the form of real estate, personal property, or commercial space in order to be eligible for a loan. CDFIs are more pliable; many of them claim that they would like collateral, but they can make loans even without it as long as the borrower can demonstrate other strengths in the firm, such as a good cash flow and strong financial statements from the past and the future.
“Collateral is valuable to us, but it is not a necessity to be authorized for a loan,” says Scott Lewis, a senior vice president at OBDC Small Business Finance in Oakland, California. “As it is typically the case with a bank, collateral is a prerequisite to be granted for a loan.”
5. They are more than just financial institutions
In addition to financial assistance, CDFIs provide chances for the growth of businesses. Counseling and training in financial literacy are two of the services provided by the Black Business Investment Fund, which is situated in Orlando, Florida. According to Jasmine Houston, who is in charge of marketing and development, the company is looking for potential borrowers who “have a coachable attitude” and “want to better their individual management capacity.”
According to Houston, “We endeavor to understand the particular challenges and strengths of our loan clients in order to better serve them through our in-depth, monthly financial technical assistance roundtable program.”