Capital investment: What you should know about CDFIs
A Community Development Financial Institution may be the answer for low- to moderate-income entrepreneurs seeking capital investment.
As a small business owner, you might bootstrap your way to a positive cash flow by conserving the funds generated through sales and stretching your resources in order to grow your business. There are several ways to accomplish this. Perhaps you've tried some, such as seeking trade credits with suppliers, sharing office space, deferring legal fees, or eschewing other professional services to do it yourself.
But as you may well know, this approach may only get you so far. Especially if your business is in the early stages, you may need outside capital investment to ensure survival and meet your long-term goals.
For businesses in financially distressed areas, Community Development Financial Institutions (CDFIs) can be a valuable source of external funding, especially when traditional bank financing — which often requires a business to have a profitable track record — is not available. Here's what you should know about CDFIs.
What are CDFIs?
CDFIs are designed to expand economic opportunities and improve the quality of life in underserved communities. The current CDFI industry dates back to the late 1960s and early 1970s, when government efforts to address poverty and racial discrimination created the first organizations. Today, there are over 900 CDFIs certified by the CDFI Fund located across the country.
For example, one CDFI, Main Street Launch, has lent more than $41 million in the past 10 years. Its focus is low- to moderate-income entrepreneurs in Oakland and San Francisco, and veteran-owned businesses throughout California. Main Street Launch is one of over 125 CDFIs in the U.S. that Wells Fargo assists with grants and lending capital to help promote diverse small business entrepreneurs.
In addition to lending at competitive rates with low fees, Main Street Launch advises small businesses in the community and provides post-loan education through workshops, roundtables, and networking opportunities.
How can a business receive funding through a CDFI?
If you determine that internal bootstrapping can free up enough cash to finance an expansion, there may be no need to look for external investment. But if you're seeking financing through a CDFI, there are many considerations in order to qualify.
CDFIs may or may not require a form of collateral investment. Main Street Launch, for example, requires business assets as collateral.
Scott Lewis, Main Street Launch's executive vice president and chief financial officer, says before he discusses a loan with a business owner, he typically performs a thorough market analysis. "Existing businesses must have a strong sense of their customers, and whether there are missed opportunities being left on the table," says Lewis.
In order to receive funding, he recommends constructing a business plan with an executive summary that details the investments needed to sustain and grow their business. Your business plan should also include a projection of the costs and revenue of your business over the course of the next 12 months.
Above all, your business expansion must have the strong likelihood that it will succeed and that the loan will be repaid. While the financing costs to support an expansion can initially strain your operating budget, generally your business should normalize within about one year.
"Operating profitability at the end of the year has to be sufficient to cover the capital you're getting from the lender," Lewis says. "Try to get a sense of what you'll experience in those 12 months. Even the most successful businesses have peaks and valleys. You have to make adjustments as you go."
Is a CDFI right for you?
A bootstrapping mentality is valuable for any business at any stage. But when that's not enough, businesses in economically distressed communities may have the option of turning to a CDFI for support and financing.
For more information about CDFIs that may be in your area, explore Venturize, a free online resource that includes a directory of mission-driven lenders for small business owners. This resource was developed by Opportunity Finance Network, a national network of mission-driven financial institutions investing in low-income communities.
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