Small businesses are the backbone of a community. The local café offers a common and friendly place to meet and share the conversation. The central market where neighbors go to get their milk, the hairdressing salon that has been passed down from generation to generation, the brasserie where friends meet after work, so many fibers essential to the fabric of a neighborhood.
According to recent statistics from the Small Business Administration, companies with less than 500 employees make up 99.9% of all businesses and are responsible for creating more than 60% of new jobs in America. But starting and maintaining a small business is not easy and certainly expensive. While there are many traditional financial institutions that offer start-up and expansion help, they are not “one size fits all”. It often makes more sense for small businesses to step outside of the traditional lending framework and seek help from a community development financial institution, or CDFI.
By definition, CDFIs “share a common goal of expanding economic opportunities in low-income communities by providing access to financial products and services to residents and local businesses”. But even more than that, CDFIs are mission-driven, helping communities thrive by opening doors for those who may struggle to obtain traditional loans.
Many businesses that could be helped with this type of loan don’t know that a CFDI might be an option or how to go about accessing credit. Here are several reasons why choosing a CDFI might be the smarter choice for the small business itself and contribute to the overall quality of life in Indianapolis neighborhoods.
Open the doors of the “non-bankable”
Many businesses, especially small businesses, are not “bankable” from a lending perspective. If a homeowner is just starting out and doesn’t have the income they need for equipment or construction, it can be difficult to get a bank to give them a loan. This is where a CDFI can fill a void, working with banking partners to provide loans, and then bring the small business to the point where it is seen as a desirable client for traditional lenders.
Mission-oriented support for community growth
CDFIs, such as Renew Indianapolis’ Build Fund (for small business owners) and Edge Fund (for affordable housing, including home ownership), have been launched to continue the mission of improving communities through collaborative partnerships. They have a direct impact in the communities they serve. As the loans are repaid by the borrowers, the funds turn into new loans. The money is reinvested directly into the community to support the next generation of emerging businesses.
The main component of a CDFI loan is job creation, bringing economic growth, opportunity and hope where there may not have been in recent years. On average, a new job is created for each
$ 31,000 loaned by Renew’s Build Fund, providing the stability a community needs, creating generational wealth for neighborhoods and having a direct impact on quality of life.
More than just a question of “money”
Many CDFIs provide additional support for business owners in the form of training and business coaching. These programs can help with the “what’s next?” After the owners have received funding and consider how best to deploy it to grow their business. CDFIs also strive to make the entire loan process easier by working with clients to create the conditions for the business to start or grow.
A valuable resource when needed for XBEs
The world discovered very quickly in 2020 what a tightrope walk many small businesses take just to stay open. While PPP loans provided a lifeline for many during COVID, there were far too many others who were left out of the system, including XBEs (Veterans, Women and Minorities Owned Businesses) in underserved areas. In fact, an analysis from the Center for Responsible Lending estimates that the requirements for receiving a PPP loan effectively excluded 91% of Hispanic-owned small businesses and 95% of Black-owned small businesses. On the other hand, CDFIs have always targeted sensitization of small businesses owned by minorities, women and ex-combatants. This funding has proven crucial to the long-term success of businesses that risk being left behind.
So how does a small business owner know if a CDFI loan is right for them? If your business is struggling to come to terms with a traditional lender, you should consider contacting CDFIs in your area. Make sure to visit their website and see what their specialty is and if it fits your needs or your vision. Contact CDFI directly to find out the best way to apply and to make sure the conditions are what you can afford. It can take some time and research to find the right partner, but the rewards are more often than not worth it.