Editor's Note: Learn from a panel of experts and entrepreneurs who have successfully financed their own ventures and are helping others do it at the Thought Leaders Live 2013 event May 29, in Long Beach, Calif. Event and ticket information can be found here.
What It Is: CDFIs primarily provide loan financing to businesses in areas that need economic development. CDFIs make loans that are generally "unbankable" by traditional industry standards.
Appropriate for: Startup to established companies that can demonstrate the ability to repay a loan but whose loan proposal is unbankable because of past credit problems, the size of the loan request, limited equity from founders or limited collateral.
Supply: Good. There are nearly 1,000 CDFIs in urban, rural and reservation-based communities with billions of dollars to lend. Unfortunately, despite their numbers, CDFIs can be difficult to track down because they aren't as well publicized as mainstream financing sources. The best way to find them is by networking with other entrepreneurs and local businesses.
Best Use: For starting a new business or expanding an established one. Also, when the application of the proceeds can create a second bottom line in the form of community job creation through the introduction or preservation of a service that is vital to a community or stabilizing a community in decline.
Cost: Most CDFI loans are priced according to risk as opposed to the cost of funds. Since CDFI loans tend to be riskier than bank loans, they may cost more as well. Typical pricing may be from 0.5 to 3 percentage points higher than conventional loan rates, but, in some instances, CDFI loans may be less expensive than mainstream financing. For example, a CDFI loan for a child-care facility is generally less costly than conventional credit.
Ease of Acquisition: Easier than commercial lenders, but challenging, since for loans, a company must still undergo the scrutiny of traditional credit analysis. The difficulty of securing CDFI financing is sometimes compounded by the relatively narrow focus and agenda these institutions may maintain.
Range of Funds Typically Available: $2,000 and much higher. In fact, the National Community Capital Association reports an average member loan of $11.4 million.
The idea behind a CDFI is simple and powerful. In a nutshell, a community makes viable loans to businesses that can help the area grow and prosper. Here are five steps to get started.
2. Be ready to demonstrate your "second bottom line." Specifically, how will the loan result in job creation or the introduction of an important service in the community, or how will it help stabilize the local economy or community? For instance, Mark Pinsky, president of the National Community Capital Association, recalls an urban neighborhood that did not have a Laundromat. It was a Latino community and many of the families did laundry every day. With the closest Laundromat 20 blocks away, it took all day. But then a couple of the residents got together to open a new neighborhood Laundromat, which was funded by a CDFI. The new facility, Pinsky says, spawned a small grocery, an eating establishment and a newsstand. "In essence," he says, "this one small business helped stabilize the economy of the entire neighborhood."
3. Show that you are committed to the community, and that your long-range plans are to stay there, not grow up and move on.
4. Set aside ample time. CDFI loan officers tend to spend more time with you than a traditional commercial lender. Give them their due because it might result in the creative solution that delivers your financing.
5. Be ready to commit some of your own funds. If possible, set aside some of your personal capital to put into the business as an incentive for the CDFI to make a commitment. Nothing gives a lender more comfort than a founder who puts in everything he can.
To find a CDFI in your area, use the National Community Capital Association's CDFI locator. Click here for more information.
Excerpted from Financing Your Small Business.