How access to flexible, affordable capital can grow small businesses and transform communities
Across our nation, small businesses thread the fabric of our communities together. From our favorite restaurants to the daycare provider who loves our child like their own, small businesses keep our economy vibrant while providing essential goods and services. According to the Small Business Administration, small businesses employ half of America’s private workforce. Despite their considerable impact and enormous buying power, small businesses still struggle to access capital from the financial mainstream.
In a report on 2019 activity, the Federal Reserve Bank highlighted a significant shortfall in conventional financing for small businesses: 9% of entrepreneurs applied for funding and were declined, 12% applied and received a partial amount, and 9% felt discouraged from applying entirely. Economic uncertainty around the pandemic only exaggerated these conditions, leaving small business owners with unmet financing needs. Community Development Financial Institutions (CDFIs) step in to fill this gap, providing alternative financing to small business owners in need.
What is a CDFI?
Most CDFI lenders are non-profit, mission-focused organizations; their sole purpose is to provide capital to individuals and small business owners who cannot obtain traditional financing. Because they aren’t profit-driven, CDFIs recycle funds so that as loans are repaid, the funds are distributed to more business owners. CDFIs also carry a commitment to serve communities with limited access to financial products. In addition to a unifying mission statement, many CDFIs adopt core values and target financial products to specific populations in need.
CDFIs are partners to small business owners throughout their entrepreneurial journey. DreamSpring's small business loans are flexible and easy-to-access regardless of business stage or size.
What are the benefits of a CDFI small business loan?
CDFIs often provide support to businesses without the need of a prior banking relationship. With customized underwriting, they are more able than mainstream banks to offer flexible terms to help business owners with a broader range of credit and financial profiles. Many CDFIs, like DreamSpring, also lend to new businesses, filling an opportunity gap for startups. Loan products are generally simpler, with rates and terms designed to limit the borrower’s risk. CDFIs also have unique business education offerings and resources to help entrepreneurs expand their expertise.
How do I apply for a CDFI small business loan?
Long-certified as a CDFI, DreamSpring offers a seamless online application process that can be started from a computer or mobile device. The applicant shares information about themselves and their business to request funding. The online process provides a quick decision, and from there, the applicant can close the loan online by signing documents digitally. For applicants who prefer to work with a dedicated loan officer or those who have questions along the way, DreamSpring has a welcoming lending and client success team to make the process easy and secure.
Fernando Jimenez, owner of Tortilleria Doña Esperanza in Tucson, Arizona.
Is a CDFI the same as an online financial services company or cash advance business?
No. CDFIs are certified by the U.S. Department of Treasury and have a commitment to responsible lending. Many have been around for two decades or more and carry strong reputation centered around social impact and job creation. The mission focus and federal designation require CDFIs to be transparent about pricing, terms, rates, and fees.
Many online financial service companies operate on a for-profit basis and the cost of capital is much higher. Payday loans and cash advances are designed to provide short-term funds in an emergency and can be incredibly pricey. For example, the interest rate on payday loans and cash advances in Texas isn’t capped. According to the Center for Responsible Lending, the current average interest rate for a payday loan in the state was 664%. With such unfavorable terms, it isn’t likely that a payday loan or cash advance would help a small business thrive. By comparison, CDFIs are a source of significantly lower-cost capital for small businesses to thrive.
Do CDFIs compete with banks?
According to the CDFI Coalition, there are more than 950 CDFIs working across the nation, each with a specialized expertise in the geographies where they operate. Because CDFIs work closely with entrepreneurs and community leaders, they have a deep understanding of community needs and opportunities. Many CDFIs leverage this knowledge to create loan products responsive to gaps in the financial system, allowing them to complement bank loans rather than compete. CDFIs and banks both embrace access to capital as a tool to serve communities and support entrepreneurship. CDFI small business loans are an excellent way for entrepreneurs to build credit worthiness and graduate into bank products.
How can a CDFI small business loan help someone like me?
CDFIs have a mission to provide financing for underserved small business owners and many focus, for example, on businesses owned by people of color and women. Some lenders have tailored loan programs for populations such as entrepreneurs who have a disability or who speak a language other than English. While entrepreneurs still need to show an ability for loan repayment, CDFIs are able to work with small business owners whom banks may turn away. CDFIs are an exciting entry point to financial products and services, opening doors for small business owners and startup entrepreneurs just launching.
CDFIs are partners to small business owners throughout their entrepreneurial journey. Capital needs can vary depending upon the stage of business, industry, and structure. A government supplier, a solopreneur, and a high-growth startup each have unique financing needs, and CDFI small business loans are flexible and easy-to-access regardless of business stage or size.
If you are an entrepreneur seeking capital to start or grow your business, a CDFI small business loan can transform how you do business.