Community Development Financial Institutions (CDFIs) strengthen economically distressed communities that are under served by traditional financial institutions to provide the funds to offer low or no-interest loans for housing, micro-businesses, human development, community development, and basic consumer needs. For business owners, a CDFI revolving loan fund helps by offering commercial loans and investments to small start-up or expanding businesses. A unique aspect of this funding that isn’t available with most other forms of revolving loans is they also provide technical assistance to help their borrowers succeed adding additional value to the loan.
CDFI revolving loan funds are certified by the US Department of Treasury and get their capital from banks, socially-motivated individuals, religious institutions, foundations and corporations. These organizations and individuals lend money to CDFIs at a below-market rate of interest.
Why would banks in particular do this? It’s because the banks don’t want to serve this market which is low to moderate income and thus higher risk. The bank also receives Community Reinvestment (CRA) consideration which helps during bank audits.
Qualifications for a CDFI revolving loan fund include:
Many CDFI revolving loan funds for small businesses can go up to $250,000 but this amount will vary by location. The typical CDFI loan is between $5,000 and $50,000.
Interest rates vary but a general average is between 3% – 10%.
The loan proceeds are primarily for:
How it works
Since the CDFI expects and accepts that these loans will be higher risk, they typically have strong collection and liquidation procedures, which means before a loan is made there will be sufficient collateral to secure the loan in the case of default.
Like the other revolving loan fund examples, the application is typically evaluated by an administrator and/or loan review committee. The loan committees for CDFI’s are typically sophisticated lenders so be sure your business plan and application are solid.
The administrator/committee makes an overall recommendation and the funding is either approved or denied.
Expect six weeks to six months from application submission to approval.
Case Study
We had the opportunity to work with a client in a small, rural community who worked as the director of a day care facility, the owner became ill and no longer to able to work. She had her daughter come in to run the facility and the daughter was not suited to run a business and eventually drove it to bankruptcy.
This day care facility was the only center for the community and the effects of it’s closing meant that many people had to drive 15+ miles to find child care. The client who had been a driving force for the success for the facility desperately wanted to reopen the center but her credit was not the greatest.
We worked with the bank to donate the building to a local faith based group who in turn gave it to the client. An area CDFI revolving loan fund provided funding for the equipment, renovations and some working capital. While this is an extreme example that could probably only work in a small, rural community such as this, there are creative options available in certain circumstances.
Where to Find
The best place to find CDFI revolving loan fund is U.S. Treasury’s CDFI website –http://www.cdfifund.gov/what_we_do/need_a_loan.asp