By: Emily Maltby
May 6, 2010
A growing number of the nation's lenders are pursuing a speciality that could make them a promising source of funding for small-business owners and entrepreneurs who don't qualify for traditional bank loans.
To qualify for that status, they must have a mission to promote community development and direct at least 60% of their loans to low-income communities or individuals, leaving them room to pursue other types of business.
In return, they gain access to funding sources--like grants, private investment and Treasury and Small Business Administration financing--that allow them to provide housing loans at favorable rates or market-rate business loans to borrowers that many banks deem too risky.
That can make them just the ticket for struggling start-ups or would-be business owners willing to tolerate the extra supervision, financial or technical training requirements and red tape that typically come with community-development loans.
Randy Broin, who started Amity Creek Homes LLC, in Duluth, Minn., in August by tapping his personal savings, got a lifeline last year from Northeast Entrepreneur Fund, a CDFI based in Virginia, Minn.
Mr. Broin had a background in selling modular homes, but had never run a business on his own. With the slow winter season approaching, he knew he needed working capital to sustain his operations.
"I visited every bank in town, but being new, no one wanted to talk to us," he says.
Like most CDFIs, the Northeast Entrepreneur Fund, doesn't base its loans on a borrower's credit history.
"We look at character, willingness to do the work of the business and willingness to repay the loan," says Mary Mathews, president and chief executive of the nonprofit organization. "We're able to do that by providing training and technical assistance which helps strengthen their request for financing."
Mr. Broin says he had to work with advisers to "mold a business plan into what they considered acceptable." But the effort paid off for him. He got a $35,000 loan, and he says his business's growth has exceeded expectations this spring.
Fifty-five institutions were newly designated as CDFIs last year, up from 41 in 2008. While the primary mission for such institutions is to lend to low-income borrowers, CDFIs have been increasingly active in lending to start-ups, struggling businesses and individuals turned down for traditional loans since the credit crunch. Indeed, they don't usually work with businesses that could get a traditional loan.
"We don't want to compete with the banks, and we don't want to replace their funding," says Roberto Barragan, president of the Valley Economic Development Center in Van Nuys, Calif.
Mr. Barragan's nonprofit organization works primarily with businesses in Los Angeles county. "We don't end up with business from Beverly Hills," he says.
To meet the surging demand for business loans, CDFIs have sought additional assistance from their own funding sources.
The Treasury's CDFI Fund, for example, received 408 applications seeking a total of $467 million for fiscal 2010, which ends Sept. 30, up 97% from fiscal 2009.
Scott Berman, operating chief of the fund, says its funding has increased under the Obama administration, and that Congress is examining several proposals to expand support. The fund's operating budget more than doubled to $243.6 million for fiscal 2010.
Still, some CDFIs have struggled to secure funding. "It's been a major challenge, the demand," says Ron Phillips, president of Coastal Enterprises Inc. in Wiscasset, Maine.
Sources that used to support nonprofit Coastal Enterprises, including banks and private investors, have pulled back on their contributions, he says.
Mr. Barragan, of Valley Economic Development Center, says his group's funding actually picked up during the recession because of its focus on small businesses, rather than the low-income home borrowers that account for the bulk of some of his counterparts' lending business.
"The majority of resources we've gotten has been from big banks," he says. "They weren't doing the [small business] lending, but they can do it through us."
A complete list of CDFIs is available on the Treasury's website. But finding the right one requires some research. Each CDFI has its own mission, geographic reach and loan criteria.
Coastal Enterprises, for instance, makes direct loans ranging from $1,000 to $500,000, and its borrowers, like at most CDFIs, must show how they plan to benefit their local communities.
That requirement is among the various types of strings typically attached to CDFI loans. "Some people don't mind hand-holding and paperwork to get to the other side. Others do," says Deborah C. Wright, chairman and chief executive of Carver Bancorp Inc., a small New York bank that makes loans of up to $12 million. "For those who want to walk in and get the check and no interest, it's not the right place."
Ms. Mathews of the Northeast Entrepreneur Fund agrees. "We need to validate and verify the business opportunity in a different way, which takes more time," she says.
But for business owners with the stomach for the process, Ms. Mathews adds, CDFIs are a good bet. "If someone has difficulty accessing financing through traditional markets, we encourage them to check out local CDFI because it's highly likely they may qualify."