CDFIs (part 1 of 2): Borrowing with Greater Flexibility
Community investing involves institutions and investment products that support economically disadvantaged communities. This is made possible through community development banks, credit unions, loan funds and microfinance institutions. Closely tied to socially responsible investing, they focus on economically improving disadvantaged communities by offering banking services and small loans to fund businesses, non-profit groups, and affordable housing initiatives. A key player, Community Development Financial Institutions (CDFIs) are a major force in serving the needs of the poor and working class within urban and rural communities. In this two part series, we’ll take a look at the role of CDFIs for both lenders and borrowers.
What is a CDFI?
Community development financial institutions (CDFIs) are private financial institutions that are 100% dedicated to delivering responsible, affordable lending to help low-income, low-wealth, and other disadvantaged people and communities join the economic mainstream. The goal is to help this group of people become more financially self-sufficient and contribute more to overall economic growth through community redevelopment. CDFIs were created in 1977 as a result of the Community Reinvestment Act which was drafted because of banking and economic development inequalities throughout communities in the United States.
CDFIs can receive federal funding from the United States Department of the Treasury but may also receive funding from private sector sources such as individuals, corporations, and religious organizations. CDFIs have a focus on social responsibility and inclusion, rather than a pure profit motive and may receive support from the federal government’s CDFI Fund.
The Opportunity Finance Network (OFN) is the national association for community development financial institutions (CDFIs). It provides capital, advocacy, and capacity building to help OFN members and non-member CDFIs create impact in rural, urban, and Native communities nationwide. It provides fair, transparent financing and financial education to small businesses, community-based projects, and consumers that mainstream finance considers too risky or not profitable enough. CDFIs invest in potential and promise and support future successes; they lend where it counts.
Recently, The Treasury Department launched a $9 billion Emergency Capital Investment Program (ECIP). The ECIP is an initiative meant to funnel pandemic relief to nonwhite-owned businesses and low-income consumers through loans, grants, and forbearance from community development financial institutions (CDFIs) and minority depository institutions (MDIs). About $2 billion of the program’s funding is set aside for institutions with less than $500 million in assets, and another $2 billion is earmarked for CDFIs or MDIs with less than $2 billion.
The coronavirus pandemic has had a disparate impact on businesses along racial lines. This $9B ECIP is intended to reach these business owners of color, who have historically weak relationships with banks serving BIPOC entrepreneurs.
Today, the CDFI industry has become a significant part of the financial landscape. Currently, there are over 1000 certified CDFIs helping communities in need across the country.
LENDonate and CDFIs
At LENDonate we partnered with a CDFI called Capital Good Fund in raising loan capital for their COVID response fund. Capital Good Fund is a social change organization, with the mission to “put poverty out of business” in America. They provide small loans to families and individuals looking to break the cycle of poverty. In addition, Capital Good Fund also teaches participants financial awareness and management, as well as help them build their credit. Many of the borrowers that Capital Good Fund lends to would be deemed non-credit worthy by banks. Through their efforts, their current portfolio of at risk (120+ days past due or doubtful accounts) loans is 4.7% based on a 12/31/2019 audit. It is expected that 32.5% of loan receivables will be collected within a year and the remaining balance over the next 6 years. Capital Good Fund’s success highlights the positive impact that CDFIs can play in turning around the prospects of individuals and small businesses who may otherwise be left out of financial prosperity.
Why Borrow from a CDFI?
Favorable Terms
Perhaps the biggest benefit of borrowing from a CDFI is the comparably favorable terms offered, relative to a traditional bank. Particularly for borrowers from low-income communities, qualifying for a traditional bank loan can be exceedingly difficult. Poor credit, low income and other deciding factors can disqualify a borrower from a commercial bank loan before they have even applied. CDFIs on the other hand, may specifically tailor their loan terms and interest rates to those that would otherwise not qualify for loans from a commercial bank.
Additional Financial Services
Typically, the loan process is simplified and easier to understand when borrowing from a CDFI, especially for those who may not have an in-depth financial understanding. As community focused institutions, many CDFIs go beyond simply lending money to small businesses and individual borrowers. In addition, financial education, business coaching services, and technical assistance are often available to those who may be first time business owners. These services can go a long way in helping businesses stay on track and become successful.
Greater Flexibility
Another benefit to borrowing from a CDFI is that they may be able to provide a greater level of flexibility with regard to repayment of the loan than a traditional bank. Since CDFIs have a mission statement of community improvement, they often work closely with the borrower and may be able to adjust repayment terms, such as temporarily accepting interest-only payments, in order to help the business or borrower survive seasonal lulls or other hard times. In particular, during the COVID-19 pandemic, CDFIs have been a much faster and more reliable source of additional funding than commercial banks and even PPP loans. Relying on government grants or loans can mean months of sitting and waiting without access to funding. The flexibility of CDFI loans means getting funds into waiting hands quicker than traditionally possible.
Conclusion
CDFIs have become a significant part of the finance industry. Their commitment to increasing accessibility to capital for not only small businesses and nonprofits, but historically disadvantaged communities, helps make the world a better place. At LENDonate we are dedicated to bridging the gap between nonprofits and their financing needs. We partner with CDFIs and other lenders as a way to be a source of loan capital. Whether you are a nonprofit looking for financing, or a CDFI looking for a partner, we invite you to visit our website and explore working together for our communities.
