Community Development Financial Institutions

Definition Or Explanation: Community Development Financial Institutions (CDFIs) provide primarily loan financing to businesses in areas that need economic development. CDFIs make loans that are generally unbankable by traditional industry standards.

Appropriate For: Start-up 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 hundreds of 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.

Best Use: To start a new business or to expand an established one. Also, when the application of the proceeds can create a second bottom line in the form of community job creation--the introduction or preservation of a service that is vital to a community or stabilizing a community in decline.

Cost: Relatively inexpensive. 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 cost more as well. Typical pricing may be from 0.5 to 3 percentage points higher than conventional loan rates.

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: $25,000 to $500,000.

From Where's the Money? Sure-Fire Financing Solutions for Your Small Business, by Art Beroff and Dwayne Moyers. (c) Entrepreneur Press, 1999.