Though ingenuity and passion are essential, funding is what fuels immigrant small businesses (SMBs).
And while financing can be hard to acquire, immigrant entrepreneurs have many options to pursue.
Over the last few months, uLink Business has shined a spotlight on small business funding in the United States.
We’ve explored funding options like SBA loans, which are partially guaranteed by the government and offer low interest rates.
We’ve also seen how small business credit cards provide cash flow, while small business grants allow entrepreneurs to obtain free money.
As much as we encourage you to investigate each of these options, we’d like to introduce another powerful alternative: Community Development Financial Institutions (CDFIs).
As we’ll discuss below, CDFIs not only unlock access to capital—they provide mentorship and guidance to accelerate small businesses.
Understanding CDFIs
Traditional banks have barriers, especially for first-time business owners.
To get funding from a mainstream lender, entrepreneurs need a high credit score, reliable business cash flow, and the ability to provide a hefty downpayment.
That’s asking a lot, especially in an economy roiled by inflation and geopolitical uncertainty.
CDFIs flip the page on old-school business financing.
But what are CDFIs, exactly?
They are mission-based lending institutions dedicated to underserved communities. To that end, they replace the stringent requirements of traditional banks with more nuanced criteria.
CDFIs come in many forms and include community development banks, credit unions, loan funds, microenterprise development loan funds, and venture capital funds. As of 2023, there are over 1,300 certified CDFIs managing roughly $457 billion in capital.
Though each CDFI has their own protocols, they all generally offer financial services including:
- Deposit accounts.
- Personal loans.
- Auto loans.
- Business loans.
- Credit cards
- Investment services.
While their product offerings are similar to traditional financial institutions, CDFIs have one core difference: they promote financial inclusion by lending to communities that need it most.
Certified through the U.S. Department of the Treasury (and funded by the public and private sector), CDFIs have a distinctly local focus—rather than national. Therefore, they can freely pursue social responsibility and community development over profit and bottom line.
Instead of relying on FICO® scores, many CDFIs prefer “character-based” lending.
This innovative process emphasizes an entrepreneur’s business acumen and strategy over their credit history, income statement, and time in business.
According to Russ Seigal, director of a CDFI in North Carolina, this approach truly works: “that is the beauty of a CDFI—we make decisions based on real people.”
As you’ll see, CDFIs are ideal for entrepreneurs.
CDFIs Are a Great Option for Immigrant Entrepreneurs
Why do CDFIs love to invest in visionary business owners? Because entrepreneurs enrich communities.
In fact, at the end of 2021, CDFIs had over $25 billion in SMB and community-driven loans.
As you embark on your entrepreneurial journey, there are three essential benefits of CDFIS:
1. Low Interest Rates
Though interest rates spiked in 2023, CDFI loans are far more affordable than their traditional counterparts.
According to a 2023 report, CDFI business loans range between 5% to 6%.
Though these rates are ideal for entrepreneurs, traditional loans are comparatively costly.
In fact, as of late 2023, SBA loans vary between 11.5% to 16.5%, online business loans can reach 60% or higher, and “poor” credit business loans can vary between 25% to 99%.
CDFIs clearly have the most compelling interest rates on the market.
2. High Approval Rates
Where regular banks see risk, CDFIs see opportunity.
By broadening their qualifying criteria, CDFIs make it easier for underserved communities to get the capital they need.
As Siegal says, “a bank by default begins with a ‘no,’ we start with, ‘how can we make this work?’”
That’s exactly why CDFIs have higher approval rates than their traditional counterparts. They actually want to provide business loans to clients, and they’ll do whatever it takes to make it happen.
To that end, most CDFIs do not require a minimum credit score.
Instead, they focus on your short and long-term business goals, growth potential, and other character-based qualifications to help determine eligibility.
3. Business Mentorship and Development
In addition to relaxing loan qualifying criteria, CDFIs go a step further.
In fact, once you have secured financing, most CDFIs provide complimentary advisory services to help guide your business.
Through hands-on workshops and mentorship meetings, CDFIs seek to become strategic partners in your entrepreneurial journey.
After all, the median charge-off rate for CDFIs was just 0.48% from 2017 to 2021, below commercial banks during the same period.
CDFIs want to see your business succeed. That’s why they make funding available, and that’s why they provide mentorship services to you and your team.
Though not related to business loans, it’s important to mention how helpful CDFIs have been for immigrants faced with legal fees, medical exams, travel costs, and other miscellaneous expenses.
To combat the exorbitant cost of immigration, a Rhode Island-based CDFI created immigration loans of up to $20,000 for over 400 families.
This is just one of the many ways CDFIs are strengthening communities and helping the people who need it most.
CDFI Resources
CDFIs serve entrepreneurs nationwide—in all 50 states, including the District of Columbia, Puerto Rico, and the U.S. Virgin Islands.
As you consider your options, there are two resources worth bookmarking:
- A complete list of CDFIs in your state.
- Use this CDFI locator to find CDFIs according to organization type (i.e., credit union or venture capital fund) or lending type (i.e., business or microenterprise).
One more thing.
Throughout the year, the CDFI Fund—under the auspices of the U.S. Treasury Department—awards significant financial gifts to CDFIs around the country.
Recipient businesses often convert CDFI Fund investments into generous business loans.
CDFI FAQs
Have CDFI questions? You came to the right place.
CDFIs aren’t a broadly-discussed subject, so it’s important to research them before submitting an application.
While each CDFI has unique attributes and requirements, the following Q&A can help you gain a clearer understanding about how they work.
1. Which types of business do CDFIs help?
Whether you’re a start-up or an expanding business, CDFIs serve entrepreneurs in all stages of growth.
Nevertheless, there are a few qualifications to consider.
Generally speaking, CDFIs want to partner with SMB owners from underserved communities. If you’re a minority, veteran, rural, or Native American entrepreneur, CDFIs will be very interested in meeting you.
It’s also important to note that CDFIs are primarily available to entrepreneurs who have struggled to receive adequate financing or are concerned about predatory lending.
Conversely, companies with considerable revenue and cash flow resources may have a difficult time securing CDFI backing.
While CDFIs welcome a diverse pool of applicants, they don’t partner with SMB owners in every industry.
For example, companies engaged in the sale of firearms, in the promotion of gambling activities, or in the proselytizing of a religious cause may not be eligible for funding.
While each institution has their own protocols, most CDFI websites clearly state which businesses they serve (and those they avoid).
2. What documents do I need to apply?
While CDFI applications aren’t as rigorous as traditional banks, it’s wise to have your business documents on hand.
For example, be sure to bring your profit and loss statement and tax returns.
You should also be prepared to explain the purpose of the loan, the amount requested, and a detailed explanation of how the loans will be used.
Remember that while traditional banks are interested in profit, CDFIs are interested in you.
Though your financial documents will help tell your story, give yourself permission to confidently articulate your business vision and the challenges you’ve overcome.
3. Are there risks associated with borrowing from a CDFI?
Borrowing is a part of life—especially if you’re a SMB owner. In fact, 34% of U.S. business owners recently applied for a loan.
Whether you get funding through a traditional bank or a CDFI, debt always introduces risk. However, it also provides the financial fuel you need to grow your business.
So long as you can make payments on time (and in full), the risk will give way to reward.
As we discussed above, CDFIs have lower charge-off rates than consumer banks. That’s strong evidence that CDFIs work and that participating entrepreneurs are disciplined with their borrowing.
Plus, many CDFIs are also backed by major financial institutions like Bank of America and JP Morgan, so their long-term solvency should never be in question.
4. Who regulates CDFIs?
On a high level, the U.S. Department of the Treasury oversees all CDFIs.
However, each CDFI type has their own regulatory bodies. For example:
- Community development banks are federally regulated and insured through the Federal Depository Insurance Corp. (FDIC) and the Federal Reserve.
- Community development credit unions are regulated and insured by the National Credit Union Administration (NCUA).
- Community development corporations and microenterprise development funds are both regulated by the Internal Revenue Service (IRS).
To successfully apply for CDFI certification, financial institutions must meet each of the following requirements:
- Be a legal entity at the time of certification application.
- Have a primary mission of promoting community development.
- Be a financing entity.
- Primarily serve one or more target markets.
- Provide development services in conjunction with its financing activities.
- Maintain accountability to its defined target market.
- Be a non-government entity and not under the control of any government entity (Tribal governments excluded).
CDFIs are unique organizations with a heart for local communities. After all, there are only 1,300 certified CDFIs nationwide.
Welcome to uLink Business
It’s a great time to be an immigrant entrepreneur.
Though traditional funding routes are available, CDFIs deliver a powerful alternative to help grow your business.
More importantly, CDFIs provide access to a network of people who want to see you succeed.
The financing is vital, but the relationships and mentorship are especially meaningful.
We hope that this article has been helpful, and we’re excited to continue our series on SMB funding.
Regardless of the funding you find for your SMB, at uLink Business, we’re dedicated to making international payments as seamless as possible, to help you grow and expand your business.
