May 14, 2010

CDFIs--An Alternative Loan Source for Small Businesses

Unable to secure a traditional bank loan for your small business? You might want to check out your local Community Development Financial Institution ("CDFI"). CDFIs are government-designated lenders--usually small banks, credit unions, nonprofits, and others--whose mission is to promote community development. In return for access to funding sources like grants and Treasury and SBA financing, they agree to make at least 60% of their loans to low income borrowers.

As reported in a Wall Street Journal article by Emily Maltby, most of their loans have gone to start-ups and struggling businesses that wouldn't qualify for a traditional bank loan because they are considered too risky. In fact many CDFIs only work with businesses and individuals that cannot get a traditional loan. In making loans, CDFIs don't focus on a borrower's credit history. "We look at character, willingness to do the work of the business and willingness to repay the loan," says Mary Mathews, president and chief executive of a nonprofit CDFI.

You'll need to find the CDFI in your area that is the right fit for your business. Each CDFI serves a certain region and they all have their own loan criteria. You can find a complete list of CDFIs on the Treasury's website.

For a comprehensive guide to all aspects of running a small business, see Legal Guide for Starting & Running a Small Business, by Fred Steingold (Nolo).