CDFIs (part 2 of 2): Investing in Communities
In this previous Insight (link), we introduced CDFIs (Community Development Financial Institutions) and their primary mission, which is to help communities that are traditionally under supported by bank loans.
Since CDFIs cultivate specialized knowledge about the communities in which they do business, they forge deep relationships with their customers and community leaders.
This translates into a willingness and commitment to spending time on individualized service and specialized programs that are often too time-consuming and costly for mainstream financial institutions to implement. For example, some CDFIs offer non-conforming mortgages or loans while others make accounts available to customers with limited or poor credit history.
Despite their differences CDFIs and conventional financial institutions complement each other because they both share a market-based approach to serving communities. CDFIs often work in partnership with banks to develop innovative ways to deliver loans, investments, and financial services to distressed communities. They often jointly fund community projects, with the CDFI assuming the riskier subordinated debt.
Mainstream financial institutions also invest their own capital directly in CDFIs, receiving Community Reinvestment Act (CRA) credit and potential cash rewards under the CDFI Fund’s Bank Enterprise Award Program. CDFIs, on the other hand, create a future market for mainstream financial institutions products and services. They incubate businesses and people, helping them to grow and prosper. Once these customers achieve some success, establish good credit history, and reach a substantial size, they can move forward to borrowing larger amounts of financing from conventional lending institutions. CDFIs are trailblazers in their communities, leading the way in investing in distressed urban and rural neighborhoods and bringing people into the economic mainstream as contributors to the economy.
Types of CDFIs
There are 6 basic types of CDFIs. Below is a brief description of the purpose of each and how they work. Many of these are depository CDFIs which means they can be used as a banking alternative to a traditional bank or credit union.
Community Development Banks
Community development banks are for profit institutions, with a focus on providing lending opportunities for low income and rural communities that have been historically underserved. Community members are typically part of their board of directors to help ensure the community’s needs are being met and their concerns represented to the board. Their deposits are FDIC insured.
Community Development Credit Unions
Community development credit unions (CDCUs) encourage savings accounts for members, along with ownership of assets. CDCUs, like traditional credit unions, are nonprofit financial cooperatives that are owned by members. Their difference is based on the CDFI mission, to promote savings and asset building, and provide affordable credit to low-income members and underserved communities. Their deposits are generally NCUA insured.
Community Development Loan Funds
Community development loan funds (CDLFs) are created with the intent of providing lending and finance opportunities to businesses, nonprofit organizations and even individuals residing in low-income communities. Capital is aggregated from individuals and institutional social investors at below market rates. These funds are re-lent into the community primarily to nonprofit housing and business developers in urban and rural lower-income communities. CDLFs are typically nonprofit.
Community Development Venture Capital
Community development venture capital (CDVC) funds provide financial returns to investors, but with a focus on helping small to midsize businesses in underserved communities with equity capital. They use a combination of equity and debt with equity features to help businesses create jobs, enable entrepreneurial capacity and wealth that benefit low-income people and communities.
Microenterprise Development Loan Fund
Microenterprise Development Loan Funds foster social and business development through loans and technical assistance to low-income people involved in very small businesses or those who are self-employed and are unable to access conventional credit. It is regulated by the IRS and grant makers as any other 501(c)(3) nonprofit.
Community Development Corporations
Community Development Corporations are also regulated by the IRS and grant makers, as any other 501(c )(3) nonprofit. Their focus is to revitalize neighborhoods by producing affordable housing, creating jobs, and providing social services to low-income communities.
Today, the CDFI industry has become a significant part of the financial landscape. Currently in the United States, there are over 1000 certified CDFI’s helping communities in need across the country. At LENDonate, we bridge the gap and create financial collaborations that allows capital to flow more freely in the non-profit sector. Through an extensive network of investors and non-profit organizations, including CDFIs, LENDonate seeks to develop a dynamic, expressive marketplace that connects affordable capital with impactful projects in the non-profit sector.
How To Support CDFIs?
Bank with CDFIs
By keeping some of your monies in a savings account at a bank or credit union that is officially certified by the United States Treasury as a CDFI, your money will make a direct impact on your community. Deposits at CDFIs are used to provide financial services including small business loans and mortgages to members of the community. Most CDFI deposits are insured by the FDIC or the NCUA, making it a safe place to keep your money as well as benefit communities in need.
Directly Invest in CDFIs
While most CDFIs receive funds from the government, a large portion of the money made available to borrowers comes from other banks, individual investors, corporations, and even religious organizations. As an individual, investing in a CDFI can help produce solid returns on your investment, while also directly benefiting underserved communities in need. Community development loan funds are the most common way for individuals to invest in CDFIs, at a relatively low risk.
Donating to CDFIs
As most CDFIs are nonprofit organizations, they rely on funding from as many different sources as possible to help them provide their services. For example, Housing Trust Silicon Valley says, “A donation to Housing Trust helps us continue to operate our homeless assistance grant programs, provide education and loans to first-time homebuyers and finance affordable rental homes.”
Conclusion
CDFIs have become an extremely effective and popular way for investors to support historically disadvantaged communities. By supporting CDFIs, investors and donors leverage their expertise and due diligence process while receiving a return on investment. At LENDonate we are dedicated to bridging the gap between nonprofits and their financing needs. We invest with CDFIs as a source of their loan capital. So 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.
