Looking for flexible financing as a nonprofit or community-based organization? Working with a Community Development Financial Institution (CDFI) might be the right path for you.
Find out:
- What CDFIs are
- What the different types of CDFIs are
- What products and services CDFIs offer
- How CDFIs and traditional banks are different
What are CDFIs?
Community Development Financial Institutions (CDFIs) are financial lenders that focus on expanding economic opportunity in low-income communities. A CDFI can be a credit union, bank, loan fund, microloan fund, or venture capital provider that is certified by the US Department of the Treasury. They have a goal to support mission-driven individuals and groups traditionally underserved by mainstream financial institutions. In order to be certified, CDFIs must define a Target Market that guides their operations. These investment areas can be either place-based (census-based) or people-based (to certain populations of people). CDFIs are required to deploy at least 60% of their capital by volume and count of their products within their defined Target Markets annually.
What are the different types of CDFIs?
The first CDFIs were minority-owned banks focused on serving low-income areas. Now with more than 1,400 certified CDFIs nationwide managing over $222 billion, CDFIs have come a long way from their humble beginnings in the 1880s.
Today, there are 6 main types of CDFIs, all with slightly different features.
- Community Development Bank: For-profit corporation providing capital to rebuild low-income communities. Borrowers include nonprofit community organizations, entrepreneurs, small businesses, and housing developers. Capital sources include deposits from individuals, institutions, and the government.
- Community Development Credit Union (CDCU): Nonprofit financial cooperative promoting community ownership of assets and providing affordable banking, loan, and credit card services to lower-income members. Borrowers are mostly individual members of the credit union. Capital sources include member deposits and limited deposits from social investors and the government.
- Community Development Loan Fund: Mostly nonprofit lenders supporting nonprofit housing and business developers in urban and rural lower-income areas through startup and expansion loans. Borrowers consist of nonprofit community organizations, social service providers, and small businesses. Capital sources include foundations, banks, religious institutions, corporations, insurance companies, individuals, and the government.
- Community Development Venture Capital Fund: For-profit or nonprofit investor providing commercial equity investments and loans with equity features to small to medium-sized businesses to generate jobs, entrepreneurship, and wealth that benefit low-income communities. Investees include small to medium-sized businesses in underserved areas that have the potential for rapid growth. Capital sources include foundations, corporations, individuals, and the government.
- Microenterprise Development Loan Fund: Nonprofit lender fostering social and business development in low-income communities through loans and technical assistance. Borrowers include very small businesses, self-employed individuals, and entrepreneurs who are unable to access conventional credit. Capital sources consist of foundations and the government.
- Community Development Corporations: Nonprofit lender supporting the revitalization of low-income neighborhoods through the creation of affordable housing, jobs, and social services. Borrowers include entrepreneurs, homeowners, business owners, and other community residents. Capital sources consist of banks, foundations, corporations, and the government.
What products and services do CDFIs offer?
Different types of CDFIs offer different products and services. A Community Development Credit Union, for example, offers consumer banking services, like checking and savings accounts, personal loans, and credit card services.
As a Community Development Loan Fund, FCI offers nonprofit, real estate, and small business lending to mission-driven development projects in Wisconsin. We also utilize the New Markets Tax Credit (NMTC) Program to provide low-interest financing to critical service providers in Wisconsin. Impactful projects like community health centers, charter schools, childcare facilities, YMCA recreational facilities, and youth arts and performance centers have benefited from our NMTC allocation.
CDFIs vs. Mainstream Banks: How are they different?
In 1994, over 100 years after the first prototype CDFIs started popping up, Congress created community development banking. Community Development Financial Institutions were meant to offer services to those that the mainstream banking system did not reach.
Unlike traditional banks, CDFIs are founded in a mission to fund projects that bring critical services, jobs, affordable housing, and sustainable growth to underbanked communities and are required to deploy a certain percentage of their capital in their defined Target Markets. CDFIs also offer clients the technical assistance, financial education, and business coaching services that they need to achieve success, increasing economic potential and helping build wealth.
Additionally, CDFI loans may have a higher likelihood of approval than traditional bank loans due to their more flexible underwriting standards. There are, however, some qualifications your business or nonprofit must meet to be eligible for a CDFI lending program through FCI.
Should my organization work with a CDFI?
Wondering if your Wisconsin-based nonprofit, real estate project, or small business should seek out financing from FCI? Contact our team at FCI today to see if you qualify.
Not from Wisconsin? Check out the CDFI Fund’s list of certified CDFIs to find the right fit.