Why CDFIs Might Be the Right Choice for Many Small Businesses Seeking Loans

Why CDFIs Might Be the Right Choice for Many Small Businesses Seeking Loans
Written by Publishing Team

Small business is the backbone of society. Corner Café provides a communal and friendly place to gather and share conversations. The centrally located market where neighbors go for their milk, the hairdressing salon that has been passed down for generations, the brewery where friends meet after work – all the essential fibers of the neighborhood’s fabric.

According to recent statistics from the Small Business Administration, companies with fewer than 500 employees make up 99.9% of all businesses and are responsible for creating more than 60% of new jobs in America. But starting and maintaining a small business is not easy, and it is certainly costly. While there are many traditional financial institutions that provide assistance to start-ups and expansion, it is not a “one size fits all”. It is often smart for small businesses to look outside a traditional lending fund and seek assistance from 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 more than that, CDFIs are mission-driven, helping communities thrive by opening doors for those who might struggle to secure traditional lending.

Many companies that can be assisted with this type of lending are not aware that CFDI may be an option or how to proceed to obtaining credit. Here are several reasons why choosing CDFI is the smartest choice for small businesses themselves as well as contributing to the overall quality of life in neighborhoods across Indianapolis.

Opening doors for the “unbanked”

Many businesses, especially small businesses, are not “bankable” from a lending perspective. If the owner is just getting started and doesn’t have the revenue he needs from equipment or construction, it can be difficult to convince the bank to offer a loan. This is where CDFI can fill the 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-led support for community growth

CDFI, such as Renew Indianapolis’ Build Fund (for small business owners) and Edge Fund (for affordable housing including home ownership), was launched to advance the mission of improving communities through collaborative partnerships. They have a direct impact on the communities they serve. When the loans are repaid by the borrowers, the money turns into new loans. Funds are reinvested back into the community directly to support the next generation of startups.

The main component of the CDFI loan is job creation, economic growth, opportunity and hope where it may not have existed in recent years. On average, a new job is created for each person

$31,000 has been lent from Renew’s Build Fund, providing needed stability to the community, building generational wealth to neighborhoods, and directly impacting quality of life.

More than just “money”

Many CDFIs offer additional support to business owners in the form of business education and training. These programs can help with “what next?” After the owners receive the funding and think about the best way to spread it to grow their business. CDFIs also make the entire loan process easier by working with clients to create terms that allow the company to start or expand.

A valuable resource in times of need for XBEs

The world quickly discovered in 2020 what many small businesses do just to stay open. While PPP loans have provided a lifeline to many during COVID, there have been plenty of other people left out of the system, including XBEs (veteran companies, women, and minorities) in underserved areas. In fact, an analysis by the Center for Responsible Lending estimates that PPP loan requirements effectively excluded 91% of Hispanic-owned small businesses and 95% of small black-owned businesses. On the other hand, CDFIs have historically targeted access to small businesses owned by minorities, women, and veterans. This financing has proven critical to the long-term success of businesses that are at risk of being left behind.

So how does a small business owner know if a CDFI loan is appropriate? If your business is finding it difficult to come to terms with a traditional lender, you should consider reaching out to CDFIs in your area. Be sure to visit their website and see what their specialty is and if it fits your needs or vision. Contact 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 most of the time the rewards are worth it.

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