Establishing Partnerships with Community Development Financial Institutions
Poverty is a social determinant of health. Community Development Financial Institutions (CDFIs) are private-sector organizations with a primary mission to serve individuals with low incomes and economically distressed communities. They provide access to financial services, investment capital, and affordable credit. They have the potential to create important changes in communities by fostering economic growth, creating opportunities, and alleviating poverty in disadvantaged communities. There are six types of CDFIs:
- Community development banks
- Community development loan funds
- Community development credit unions
- Microenterprise funds
- Community development corporation-based lenders and investors
- Community development venture funds
CDFIs began in the 1970s, though the history of this concept — credit solutions for distressed communities — dates back even further. Historically, many of CDFIs' functions were performed by mutual aid societies that brought together local resources to meet local needs, from a down payment on a mortgage to a loan to open or expand a family business.
CDFIs serve all 50 states and U.S. territories and work to leverage funding from a variety of sources, including federal grants, private financing, corporations, and other sources of capital. These funds are made available to local organizations that can use these loans or grants to make investments that will generate community wealth.
CDFIs can also provide resources such as financial planning or technical assistance to organizations (for example, developing a business plan), which can help a new or inexperienced business owner achieve success.
CDFIs in Rural Communities
About 40% of rural counties currently do not have a bank branch. CDFIs can serve an important purpose for small and underserved communities that are increasingly losing access to local banks offering credit for economic development. CDFIs can help small government grant-seekers like rural economic districts, housing authorities, or water districts and other rural non-governmental organizations, such as small businesses. In addition to a lack of access to local banks, business owners in rural or underserved communities may not be able to meet the documentation requirements (like long credit histories) to secure a loan.
Access to capital, credit, and banking services can improve the social capital of a community and make it a more appealing location for investment and grantmaking by philanthropies and state and federal government grants. CDFIs play an important role because their mission is to invest in underserved communities. The 2016 Federal Reserve Small Business Credit Survey reported that there were higher approvals for small-revenue firms at CDFIs, small banks, and online lenders, as compared to large banks.
CDFIs and cdfis: Certification and Differences
CDFIs may apply for certification by the U.S. Department of the Treasury to be able to apply for financial and technical assistance awards and training provided by the CDFI Fund. Established by the Riegle Community Development and Regulatory Improvement Act of 1994, the CDFI Fund invests in and supports CDFIs and has awarded more than $1.7 billion to community development organizations and financial institutions. The CDFI Fund reports that there are 1,000 CDFIs in operation across the U.S. Two key focus areas of CDFIs include housing and small businesses. CDFIs typically focus on investing in a particular geographic area (a few counties or a state) and may expand that area over time.
Certification through the U.S. Treasury is not required. In addition to CDFIs certified by the U.S. Treasury, many other community development financial institutions are present in rural communities. For the purposes of this section, “cdfis” is used to distinguish these organizations from “CDFIs,” which are certified by the U.S. Treasury. Cdfis are mission-driven lenders that lend money but do not accept deposits. Some cdfis choose to be Small Business Administration (SBA) Preferred Lenders to add products and resources to their work. For example, the U.S. Department of Agriculture's Intermediary Relending Program (IRP) provides low-interest loans to local intermediaries like cdfis that relend to businesses in rural communities. Since cdfis do not have the same reporting criteria as CDFIs certified by the U.S. Treasury, it is difficult to ascertain how many exist across the U.S.
Applying for a Loan
Programs interested in working with a CDFI can begin by identifying a CDFI that serves their geographic region. The CDFI Fund and the Opportunity Finance Network, a national trade association of CDFIs, offer locator services of CDFIs.
Individuals can call the CDFI to explain their intention of starting a business (or that they are seeking a loan for another purpose). The CDFI may have a website that provides information about the loan products they offer, loan limits, and their contact information. The CDFI loan officer or program administrator can provide information about available programs, eligibility, and application processes. In rural communities, people may learn of cdfis through word of mouth. Cdfis generally do not widely market their services because they have limited resources; rural residents may be unaware that a cdfi is located in their community.
Cdfis in rural communities are capable, flexible, and agile institutions. Unlike other financial institutions that have stringent requirements that determine the success of the application, cdfis are willing to work with individuals to understand the unique circumstances of the borrower. For example, rather than denying an application, cdfis may ask an individual or organization why they do not have a bank account even though they have good cash flow or how they will raise equity up front. Cdfis are also flexible in ways that other lenders are not. For collateral — the repayment source in the event of default on the loan — cdfis in rural communities have accepted non-traditional forms of collateral, such as old trucks, and other personal possessions that are valuable to the borrower though they are of a low monetary value.
Examples of Models to Increase the Capacity of Community Development Financial Institutions
- Self-Help Credit Union in Durham, North Carolina, is a credit union and community development organization that serves 145,000 members online and through 45 different locations in North Carolina, California, Florida, the greater Chicago area, and Milwaukee. Self-Help Credit Union began by helping employees of farmworker-owned cooperatives in rural areas of North Carolina. It focuses on food systems, community revitalization, and stronger neighborhoods. For example, as part of its Healthy and Equitable Food Systems Capital Initiative, in partnership with the W.K. Kellogg Foundation, Self-Help Credit Union aims to increase access to capital for food entrepreneurs.
- Coastal Enterprises, Inc. (CEI), located in Maine, is committed to empowering people with low incomes and helping them to achieve financial security. CEI and its subsidiaries have donated over $77 million to projects in Maine and in rural communities throughout the U.S. Started in 1977, its key focus areas include loans or investments for entrepreneurs or business owners with low incomes, affordable housing, and child care and healthcare in disadvantaged communities.
- Rural LISC works with approximately 80 organizations across the country, primarily in rural areas. As an intermediary, Rural LISC offers financial and technical assistance to those organizations, representing communities in 42 states. Its health portfolio supports Federally Qualified Health Centers (FQHCs), clinics, and multi-housing facilities to improve access to medical services. In general, Rural LISC prefers to work with local partners or clients who can most accurately describe and represent the needs of the community being served.
- Northern Initiatives is a CDFI that operates in Michigan's rural Upper Peninsula. Working with the W.K. Kellogg Foundation and other supporters, it offers loans to community businesses that might not be eligible for traditional bank services for a variety of reasons. In the past 25 years, Northern Initiatives has provided over 1,000 loans to small business owners, including start-ups and women-owned businesses. These investments have created over 4,600 jobs in the region.
- The Natural Capital Investment Fund (NCIF) is a CDFI that provides funding and assistance to small and mid-sized businesses in the Appalachian region. Its investments focus on job creation and building community wealth through responsible use of natural resources. Its current areas of interest include farmers of color, energy efficiency, local food systems, and tourism infrastructure development in West Virginia. NCIF has provided advisory services for over 1,500 clients and provided $47 million in loans.
- The Kentucky Highlands Investment Corporation (KHIC) was the first community development venture capital fund in the United States. Since 1968, KHIC has provided financing to 220 businesses totaling $356 million, creating an estimated 22,000 jobs. Headquartered in southeastern Kentucky, KHIC prefers to invest in companies that provide all employees a minimum benefits package and a living wage. KHIC requires all companies that receive an investment to provide stock option plans (equity compensation plans) to employees with low incomes.
- CDFI Fund's Native Initiatives program provides technical assistance, financial assistance, trainings, and other resources to organizations that primarily serve Native communities. The program was developed to increase the ability of Native communities to access credit, capital, and financial services. Since 2001, Native and Native-serving CDFIs have received $150 million in awards.
- Capital Impact Partners is a national, mission-driven Community Development Financial Institution that partners directly with local communities to support social impact programs, invest in strategic financing initiatives, improve local capacity, and advocate for policy reform. Areas of focus include community health centers, affordable mixed income housing, healthy foods, educational alternatives, cooperative development, and aging in community. Capital Impact Partners is the manager of the Michigan Good Food Fund.
Considerations for Implementation
When applying for a loan from a CDFI, as with a traditional loan, there are requirements such as a business plan, personal financial statement, collateral, a track record, and good personal and business credit. CDFIs may require other information; the requirements are not standardized. CDFIs may also consider the economic conditions in the local community and other factors that could affect their investment. Rural organizations should be prepared to provide this information to help the CDFI loan officers make their decision and should also be prepared to discuss any questions the loan officer may have.
Unlike many commercial banks, CDFIs provide technical assistance, helping the organization to set up a business plan and answering other questions, which can prepare a business or organization to succeed over the life of the loan.
CDFIs are mission-driven and may be willing to assume more risk than other types of financial institutions. For example, if their mission is to start more businesses in a community or build diversity, they may have fewer requirements for a loan. Also, if a CDFI is not able to provide the full loan amount to an organization, it may work with other CDFIs in the area.
Program Clearinghouse Examples
Resources to Learn More
Banking in Rural America:
Insight from a Community Development Financial Institution (CDFI)
This paper presents research on the decline of access to banking and financial services in rural communities and its impacts on the economic and social health of the whole region. In particular, community banks have historically played an important role in rural lending and investment and they are closing at a high rate. It concludes with some case studies describing how the author institution (Southern Bancorp) has worked with at-risk rural community banks to help them maintain their services.
Author(s): Covington, M. & Courtney, J.
Organization(s): Southern Bancorp
Rural and Underserved Markets
Provides links to three reports funded by the CDFI Fund. CDFIs and the Segmentation of Underserved Markets analyzes whether and how CDFIs are effective at serving racial and/or ethnic minority clients. Community Development Venture Capital in Rural Communities identifies different organizational models and approaches used by venture capitalists working in rural areas and provides policy recommendations to increase access to these funds. Investing in Native Community Change: Understanding the Role of Community Development Financial Institutions describes some of the unique characteristics of Native communities and the CDFIs that serve them, including case studies and data on effectiveness.
Organization(s): Community Development Financial Institutions Fund; U.S. Department of the Treasury
Hosts a variety of resources describing the history, best practices, and publications about CDFIs. Also includes a toolbox with a number of community investment resources and a policy guide about community development strategies for practitioners.
Organization(s): Democracy Collaborative
CDFIs Give Voice to a Brighter Future in Rural Regions
Describes some of the experiences of Coastal Enterprises, Inc. (CEI), a rural CDFI working to support economic development within the context of the heterogeneous small towns in rural Maine. Describes challenges, successes, and lessons learned, including ideas about the future of rural lending.
Author(s): Biemann, B. & Bisson, K.
Citation: Community Development Investment Review, 12(1), 63-72
Organization(s): Federal Reserve Bank of San Francisco
CDFIs: Creating Connections to Marketplaces: A Conversation with Mary Mathews of the Entrepreneur
This article describes some of the unique challenges facing rural CDFIs, including declining populations and investors lacking familiarity with rural communities. Mary Mathews, the founder of a rural CDFI located in northern Minnesota, describes some recent trends in rural-focused lending and economic development, including the impact of the 2008 recession and ways that CDFIs are developing partnerships with traditional and non-traditional financial organizations.
Author(s): Kokodoko, M.
Organization(s): Federal Reserve Bank of Minneapolis
the Role of Community Development Finance in Improving Access to Healthy Food: A Guide for Public Health
Discusses how rural public health practitioners can use CDFIs to finance food retail establishments including grocery stores, wholesale food distribution networks, and other options. It outlines some of the particular challenges facing rural areas, as well as ways that CDFIs can be used as an alternative to traditional financing options.
Organizations(s): The Food Trust, ChangeLab Solutions, National Policy & Legal Analysis Network to Prevent Childhood Obesity