The Entrepreneur and the Community Lender
Author: Jeff Maglin
As a second follow-up to my original piece two weeks back on “Funding for the Rest of Us Entrepreneurs”, I would like to discuss a second area of alternative funding, that being the Community Development Financial Institution (CDFI). CDFIs provide financial products and services to people and communities underserved by traditional financial institutions. They normally work in low wealth areas and can take many forms (ex. banks, credit unions, micro-lenders, etc.).
CDFIs receive funding from the government, conventional finance institutions, other public and private businesses and individuals. They act as incubators for many small businesses, providing counseling, training and funding. Currently, there are more than 800 CDFIs throughout the US. A list of CDFIs certified by the Department of Treasury can be found at the CDFI Coalition web site.
I recently visited with Michelle Bhattacharyya of the NYC Small Business Solutions, who has helped many small businesses obtain funding from CDFIs at different stages of their ventures. I specifically was interested in funding available to pre-startups and startups.
Pre-startup
No CDFI will fund an undeveloped idea. Micro-lenders such as Grameen and Project Enterprise offer entrepreneurs counseling and training to develop their business plans to qualify for lending. These entities often employ a peer lending format. Entrepreneurs form peer groups that participate in business training together. The group reviews and approves all loans to members. Using Project Enterprise as an example, loans start at $1,500 and can reach $12,000. Each level of lending is dependent upon prompt payment of the previous level. Interest rates range from 9-18% and term lengths range from 6 months to 3 years.
Startup
The number of lending options and amounts increase at the startup stage. For example, according to a presentation Michelle provided me, CDFIs in NYC will lend anywhere from $500 -$100K to startups on a case by case basis. CDFIs minimum credit score requirements (575-600) are much lower than traditional financial institutions and interest rates are similar (6-12%). Startup loan term lengths go up to 5 years. CDFIs still require startups to provide personal (i.e. bank statements, tax returns, etc.) and business (i.e. business plan, financial projections, etc.) information as part of the loan application. Loans most often are given for physical assets such as capital equipment and inventory. CDFIs rarely give startups loans for working capital.
Although all CDFIs have community development based missions, each CDFI institution’s specific mission differs. Many of these institutions can be quite flexible regarding the population and the geography that they serve. For those individuals that have been unsuccessful in their attempts to obtain financing through traditional institutions, it is worthwhile to investigate CDFI lending options either directly through one of its certified members or an organization such as NYC Small Business Solutions.
Tags: business plans cdfi community development business community financial institutions entrepreneur funding jeff maglin lending pre-startups small business startups www.entrepreneurweek.com
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