What is a CDFI?
Community Development Finance Institutions (CDFIs) are mission-based lenders that share a common goal of providing access to financial products and services to the underserved. Beyond the money, they can also provide technical assistance, coaching, and connections to help potential borrowers succeed.
CDFIs provide opportunity for all.
CDFIs can serve those who may not qualify for a traditional loan from a bank. The CDFI industry manages more than $450 billion and consists of more than 1400 CDFIs across the country.
Since the CDFI industry was created to help fill financing gaps, each CDFI customizes lending and services for its areas of focus. However, one common thread exists: CDFIs are mission-based lenders that focus on community development where it counts.
If you are looking to connect with a CDFI:
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Types of CDFIs
There are 4 different kinds of CDFIs:
➡ Community Development Banks: Primarily for-profit institutions and are held to the same regulation standards as conventional banks. They raise capital through insured deposits from individuals, businesses, and organizations who bank with them, through subordinated debts, and from equity. Primarily, these CDFIs fund housing projects, provide loans to businesses for expenses such as commercial real estate or small business loans, and provide loans to individuals.
➡ Credit Unions are typically nonprofit, cooperative CDFIs regulated by NCUA, state banking agencies, and COSSEC. They focus their services primarily within the communities they are situated in and their capital comes from individuals and small businesses that deposit money and take out loans. They provide affordable credit lines and financial services for individuals and businesses.
➡ Loan Funds are predominantly nonprofits (however some are for-profit) that are unregulated. These CDFIs raise capital through unsecured and secured debt, EQ2 loans, and equity. Loan funds are good for individuals or groups looking for funding for microenterprises and small businesses, consumer or community loans, and both private and commercial real estate loans.
➡ Venture Capital Funds are unregulated CDFIs that are typically for-profit. They look to provide funding for businesses with high growth potential who are doing good within their communities or funding projects that will help the community build strength and resilience. Their capital mostly comes from equity, but also they sometimes take on debt. These funds organize loans for businesses.
What Makes CDFIs Different from Traditional Banks?
Community Development Financial Institutions (CDFIs) may look like banks from the outside — they lend money, support businesses, and finance projects. But their mission and approach set them apart.
Here’s how:
✅ Mission-driven: Banks operate under regulations that emphasize “safety and soundness” that sometimes make it difficult for the banks to provide financing for the types of mission-driven projects that CDFI Friendly Bloomington has been created to advance.
✅ Serving the underserved: CDFIs exist to fill financing gaps, especially for small businesses, affordable housing, and community projects that banks may not be able to finance.
✅ More than money: Alongside loans, CDFIs often provide technical assistance and connections to help borrowers succeed.
The bottom line: CDFIs are financial institutions built to create impact by lending to borrowers who may face barriers with traditional banks. We are proud to have banks as partners so that organizations like ours can help make the financing process for borrowers more seamless.
Who Do CDFIs Help?
Community Development Financial Institutions (CDFIs) exist to make financing accessible for borrowers who cannot get lending from a traditional bank. Here’s who they serve:
➡️ Small Businesses – Entrepreneurs who need start-up or expansion capital (loans) for their business, building, etc.
➡️ Child Care Providers – Providers who need start-up, renovation or acquisition capital, or a bridge loan.
➡️ Affordable Housing Developers – Developers and managers who need capital for their housing project to acquire land or a building, or build new units.
And more!
CDFIs believe everyone should have access to affordable, flexible financing, which is why they are on a mission to serve the underserved in our communities.
Why do CDFIs matter?
In simple terms, CDFIs can step in where traditional lenders can’t to provide the necessary financing to develop housing and community buildings, support small business owners and child care providers, help create jobs, and more.
They matter because they’re a vital piece of the community development puzzle and help advance economic development growth in places that are often overlooked or underinvested in.
Here are a few examples of how CDFIs make a difference:
🏡 Homeownership – A low-income couple with two kids dreams of buying their first home after years of renting. After not qualifying for traditional bank financing, they turn to a CDFI that is able to tailor a loan to their situation and they finally become homeowners.
🏢 Affordable Housing – A developer in a rural community is looking for one more financing piece to complete their capital stack for an affordable apartment complex. They’ve secured a bank loan, grants, and a government subsidy, but they still face a gap. When they approach a CDFI, someone helps them refine their pro forma, and provides them the loan to complete their project.
☕ Small Business – A coffee shop owner wants to expand her kitchen to serve breakfast and lunch. She has received a grant, but the funds won’t be dispersed for another 6 months. She already bought the equipment and her contractor is ready to start. She can’t get a short-term loan from the bank, so she turns to a CDFI. They are able to provide a bridge loan, giving her the capital she needs to pay her contractor and move forward without delay.
While these stories are simplified, they reflect real and common scenarios across the CDFI industry. Banks can’t help everyone – and CDFIs everywhere are filling gaps, building opportunity, and creating ripple effects that can be felt throughout communities.
That’s why CDFIs matter – because when opportunity reaches everyone, communities thrive.
How did CDFIs start?
ShoreBank, which is considered the nation’s first CDFI, was founded in 1973. Ronald Grzywinski, Milton Davis, Jim Fletcher, and Mary Houghton purchased South Shore National Bank – a struggling bank in Chicago’s South Shore neighborhood.
Before they purchased it, a group of investors wanted to buy the bank and move its location to downtown Chicago. Their argument, as described by Opportunity Finance Network (OFN), was that “the neighborhood’s racial transformation (from a predominantly white neighborhood to predominantly black) had caused the bank to deteriorate economically and that it could not viably continue operations in South Shore.”
The community pushed back against the investors and stopped the relocation.
ShoreBank then took over and sought to invest in the community and its economic development. At the time, the community of South Shore had been redlined by every bank in Chicago, and many doubted ShoreBank would be able to revive the bank or its community. But the founders persisted and developed a new kind of business model – one that combined profitability and strong social change.
They were able to prove that “investing in disinvested, formerly redlined communities was [not] bad business, too high-risk, or a recipe for failure.” Their success paved the way for more social impact and investment in underserved areas, as well as equitable lending and community development.
What is the CDFI Fund?
The Community Development Financial Institutions Fund (CDFI Fund) was created in 1993 under the Clinton administration with a mission to increase the number and capacity of Community Development Financial Institutions (CDFIs) operating in distressed communities across the nation. Rather than having the government decide where to invest, this model of U.S. Treasury programming allowed local lenders who know their communities best to invest where it would have the most impact.
Since its creation, the CDFI Fund has played a crucial role in strengthening #CDFIs by providing funding that helps them grow their lending and leverage other capital to vastly impact underserved areas.
Today, the CDFI Fund:
➡️ Certifies CDFIs through an application process.
➡️ Awards grants, such as the Technical Assistance (TA) award and the Financial Assistance (FA) award, that support operating expenses, lending capital, and technical assistance for borrowers.
➡️ Offers training and technical assistance for CDFIs to strengthen their organizations and improve operations.
➡️ Allocates New Market Tax Credits, a program that enables Community Development Entities (CDEs) to “attract investment from the private sector and reinvest those amounts in low-income communities.”
The CDFI Fund fuels the work of thousands of mission-driven lenders so that the underserved can be served.
What community development projects does CDFI Friendly Bloomington focus on?
The mission of CDFI Friendly Bloomington is to “strengthen the communities in and around Bloomington and the Indiana Uplands, and to improve the economic conditions of lower income residents by assisting community development financial institutions (CDFIs) and other organizations in providing accessible, flexible financing for affordable housing, job growth and other community development projects.”
Our organization is driven to support those in our region looking to increase the amount of affordable housing, start or expand their small business, and build or expand a child care center. As a “friendly,” we are uniquely positioned to be “boots on the ground.” We connect with potential borrowers, provide technical assistance, and connect them with a CDFI that might be able to help them with financing.
Some of our recent project features include:
Oak Street Village – an affordable housing project and child care center in Loogootee, Indiana that is using CDFI loans as part of their capital stack to construct the buildings and units.
Mobile Mulligans – a mobile golf experience small business that used a CDFI loan to aquire their truck and kick-start their business.
Avalon Garden – an additional Bloomington Cooperative Living house that was built with the help of a CDFI loan, creating 7 new units of affordable housing.
Are there areas of the country where CDFIs don’t work in?
There are areas of the country that are considered CDFI deserts where CDFI financing is less prevalent, but that doesn’t mean a CDFI won’t invest there.
CDFI Deserts are defined as areas that receive less than $571 in CDFI financing per person on average and are located in a CDFI Fund Investment Area. A CDFI Fund Investment Area is calculated by looking at the area’s “economic distress indicated by high poverty, low income, and/or high unemployment,” according to @CDFI Friendly America’s website. These deserts do not always indicate the full need for CDFI funding in places that may or may not be deserts, but they give an idea of where to focus.
Our organization, along with the other CDFI Friendlies, is working to connect potential borrowers with CDFIs to increase financing in areas that may not have received substantial CDFI investment, including CDFI deserts.
To learn more about where CDFI deserts are, check out CDFI Friendly America’s interactive map at https://www.cdfifriendlyamerica.com/cdfi-deserts.
What is OFN?
Opportunity Finance Network (OFN) is a network of more than 490 CDFIs nationwide and is a great source for CDFI-related resources.