What are CDFIs, and Why Are They Vital to Entrepreneurs and Small Businesses?

What are CDFIs, and Why Are They Vital to Entrepreneurs and Small Businesses?

You might’ve heard the term CDFI tossed around and might wonder exactly what that is. 

The acronym stands for Community Development Financial Institutions, which work to economically empower low-income communities. CDFIs do this by providing loans and related technical assistance to entrepreneurs who, for one reason or another, can’t yet establish a relationship with a traditional lender.

The idea is to create a pathway of accessible, financial products to help make these small business owners bankable so they can have a positive economic ripple throughout a community.

CDFIs are important to our communities and to entrepreneurs. To highlight that, we asked a few CDFI experts right here in Missouri to share how CDFIs serve entrepreneurs and communities.

TL/DR? Watch the CDFI panel, hosted by MOSourceLink.

Featured:

  • Ruben Alonso of AltCap, a Kansas City-based CDFI that recently expanded in Missouri thanks to recent community partnerships

  • Galen Gondolfi from Justine PETERSEN, a HUD-certified counseling agency

  • Sheridan Garman-Neeman from New Growth Capital, a CDFI established to support Missouri’s under-resourced rural markets

  • Charles McElrath from Liberty Bank & Trust Co., a CDFI Bank

What is a CDFI?

A Community Development Financial Institution is a privately owned financial entity that promotes financial inclusion and economic development, especially among low-income communities.

CDFIs are about asset building and increasing access to capital for small businesses. CDFIs also aim to create future credit-worthy customers for banks.

No two CDFIs are the same, and CDFIs across Missouri do things differently. Some might lend to small businesses while others might provide affordable home loans to individuals. The four types of institutions defined as CDFIs are CD banks, CD credit unions, CD loan funds (most of which are nonprofit) and CD venture capital funds.

“I’m still learning about CDFIs after working 20 years in the industry,” says Galen Gandolfi of Justine PETERSEN. “The Paycheck Protection Program was a watershed moment for CDFIs because they were able to get capital to historically underserved groups. Folks became educated about CDFIs during the early days of the pandemic.”

CDFIs tend to have a local focus, which helps them support and serve communities that are underserved by the traditional banking sector. Because of that, CDFIs often have a focus on social responsibility and inclusion over pure profit.

How do CDFIs benefit entrepreneurs?

At their core, CDFIs are anti-poverty, mission-driven alternative loan vehicles that make entrepreneurs more bankable. All CDFIs have to deploy a certain percentage of capital in low-income communities. Banks, like Liberty Bank and Trust Co., work with CDFIs to reach parts of the community that they otherwise couldn’t.

“Liberty Bank has a mission to serve underserved communities,” says Charles McElrath from Liberty Bank & Trust Co. “We’ve taken the government requirement further and help businesses in low- to moderate-income areas.

“Capital is the lifeblood of any business. If entrepreneurs don’t have access, the community they work in will perish. Banks are highly regulated and can’t always lend money where money is needed, so we partner with CDFIs to do that.”

CDFIs are about asset-building and helping entrepreneurs build credit scores and more. If one entrepreneur can build their credit store, this can create a ripple effect throughout the community.

“I managed a CDFI, and our hallmark project was making a loan to a hotel that was an eyesore and a center of illegal activity,” Charles says. “I made a loan to a new buyer, and the hotel became the centerpiece of the community and spurred economic development.”

Galen adds that the benefits of a CDFI spread far and wide.

“Every individual could benefit from some relationship with a CDFI,” he says.

How do CDFIs benefit communities?

CDFI microloans and small business loans can innovate to make capital as accessible as possible to small businesses and may receive support from the federal government’s CDFI Fund. They can also give governments a vehicle to fuel development in target areas.

“AltCap was born out of a public-private agency in Kansas City, Missouri,” says Ruben Alonso of AltCap. “We were an economic development tool the city added to its toolkit.”

Ruben says as the primary CDFI serving Kansas City, AltCap leverages different partnerships to get loan funds and issue capital to small businesses that need it.

“We got money to those who needed it before PPP was released,” Ruben says. “It took a CDFI, banks, municipalities in the region and philanthropy organizations to put together a loan reserve fund, a fund created to allow AltCap to borrow money from banks. We raised $5 million and loaned that to small businesses. Without that, it would have been much more difficult to raise that $5 million.”

Governments have clear investment policies but might not have a clear policy to invest with local entrepreneurs. CDFIs can help be that investment vehicle so more organizations can invest in the community.

“There are countless examples in Missouri and the nation where partners came together to manifest a vital small business in a small town,” Galen says.

And that benefit works in other ways.

“The New Markets Tax Credit Program is a federal tax credit program that supports investments in low-income communities, which allows us to spur private development in underserved areas,” Ruben says of AltCap. “You can leverage that experience to think about how to support entrepreneurs. We partner with banks, entrepreneurial service organizations—anyone working with entrepreneurs.”

On top of that, the support a small business owner receives from a CDFI tends to spread throughout a community.

“When a CDFI makes a loan to underserved communities, money tends to multiply in that community,” says Charles. “There’s a higher than normal employment rate and jobs are created where unemployment is higher. When you support a CDFI, you’re doing more than just helping a single business owner.”

Sheridan Garman-Neeman from New Growth says that the effects of a CDFI are felt throughout small towns, too.

“All businesses in a small town need one another, so when we support one business, you support others, especially in a small town,” she says.

And while other investments might offer a greater return, CDFIs offer something else.

“The rate of return investment with a CDFI is to make a difference,” Galen says. “The return is less than what you can get on more robust investments, but it’s about social good. You have to factor that into the rate of return.”

If you’re not sure if a CDFI is the right fit for you, reach out. If one can’t help you, it can point you in the direction of a CDFI that can.

Here’s more on how CDFIs benefit communities.

How can I partner with a CDFI in my community?

CDFIs can originate from many places, especially when multiple entities see a need for one in their communities.

CDFIs can receive federal funding through the U.S. Department of the Treasury by completing an application. They can also receive funding from private sector sources such as individuals, corporations and religious institutions. A variety of entrepreneur support organizations, like Small Business Development Centers, SCORE and county and regional government entities are partners with CDFIs.

“You can view financial wellness as part of the CDFI curriculum; that’s what we’re seeing at Justine PETERSEN,” Galen says. “Several entities can come together to yield a significant collective investment activity.”

Organizations who want to become a CDFI must meet a set of criteria, according to Strategic Planning:

  • have a primary mission of promoting community development

  • provide both financial and educational services

  • serve and maintain accountability to one or more defined target markets

  • maintain accountability to a defined market

  • be a legal, non-governmental entity at the time of application (with the exception of tribal governmental entities)

Organizations must apply to become certified as a CDFI and submit a CDFI Certification Application to the CDFI Fund for review, according to Strategic Planning. The application documents how the organization meets the certification requirements. Once approved, a CDFI will need to submit a yearly certification report.

“We are starting a CDFI to serve rural markets,” says Sheridan. “We found that entrepreneurs in rural areas are underserved. It’s important to reach out to those communities who don’t have access to mainstream capital.”

 

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