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A Guide to Community Development Financial Institutions

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What it is: Community Development Financial Institutions (CDFIs) certified by the U.S. Treasury Department to provide special financial products to businesses located in distressed or underserved areas. They may be community banks, credit unions or other types of economic development organizations. The Federal Financial Institutions Examination Council maintains an online list of distressed areas.

Basically, business owners don't need to give up on securing financing just because they live in an economically depressed area and have a history of money troubles as a result. Local financial institutions might be empowered by the federal government to help.

How to get it: The idea behind a CDFI is simple and powerful. A community makes viable loans to businesses that can help the area grow and prosper. Good loan candidates involve money to acquire a business location, purchase equipment, or construct business additions, as well as any kind of funding that actually creates jobs.

The U.S. Treasury Department's Community Development Financial Institutions Fund has more than 1,000 CDFIs certified across the country.

Go to the Community Development Financial Institutions Fund's website to find a local CDFI.

The CDFI website has an overview of the various financial products offered. Think a particular program is a good fit for your business? You can search for a CDFI based on whether it has received funding under a particular program. It is also possible to find CDFIs through the Opportunity Finance Network website.

Upside: The CDFI certification provides the financial institutions with access to federal funds, and they also receive support from private entities such as the Starbucks Create Jobs for USA Fund.

Related: Starbucks Is Into Them. But What Exactly Are CDFIs?

Thanks to the extra money, CDFIs are able to make loans that are generally "unbankable" by traditional industry standards. The problem might be past credit problems, the size of the loan request, limited equity from founders or limited collateral.

CDFIs can look beyond these issues because they are so deeply rooted in the communities they serve, allowing them to pay more attention to business owners. They can truly evaluate funding requests on a case-by-case basis.

Downside: A CDFI still runs like a financial institution. 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.

More Tips:

1. Contact the CDFI and schedule an appointment. Not only are they willing to discuss your loan proposal, but many CDFIs also assist companies in getting loan financing from other institutions.

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?

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.

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