What is a CDFI?
Community Development Finance Institutions (CDFIs) lend money to businesses, social enterprises and individuals who struggle to get finance from high street banks and loan companies. They help deprived communities by offering loans and support at an affordable rate to people who cannot access credit elsewhere.
Who do CDFIs help?
Most CDFIs are based within the UK’s most disadvantaged communities. They provide loans and support to:
- Microenterprises (businesses with less than 10 employees)
- Small businesses (with 10-49 employees)
- Medium businesses (with 50-249 employees)
- Social enterprises, community organisations or charities
CDFIs can serve one or several of these markets, but often they specialise in just one. Most lending by CDFIs is to microenterprises and social enterprises.
CDFIs traditionally provide loans to people who face barriers to accessing finance. For example, they may lend to individuals with a poor credit history or little collateral, or provide business loans to entrepreneurs with little business experience.
What do CDFIs finance?
CDFIs provide finance for a wide range of purposes, although these will vary according to each individual CDFI. They include:
- Working capital
- Bridging loans
- Property and equipment purchase
- Start up capital
- Business purchase
- Personal loans
- Home improvements*
- Back to work loans
Will a CDFI only lend to me if I’ve been turned down by a bank?
CDFIs will usually only lend to customers who have been unable to get the finance they need from a high street loan provider, such as a bank, building society or loan company (these are sometimes known as ‘mainstream lenders’). Some CDFIs require proof that the customer has been turned down by a mainstream lender.
Some CDFIs will provide an extra loan if a business is waiting for finance to come through from another source, or if a bank is only willing to lend part of the finance they need (these are sometimes known as ‘co-financing’, gap financing’ or ‘bridging loans’).
How is a CDFI different from a normal bank or loan company?
CDFIs are small, independent organisations, not part of multinational companies like the banks. CDFIs’ primary mission is not to make a private profit, but to support communities by providing affordable finance that would otherwise not be available. They recycle this finance again and again into communities. Many CDFIs are run with funding from the Government and charitable trusts, alongside other funding sources.
Most CDFIs do not take savings or deposits like banks do. And because they are much smaller than banks, they can spend more time talking to customers about their needs and finding the right loan for them. Some CDFIs offer business support and financial advice in addition to loans.
Personal-lending CDFIs offer an affordable alternative to high interest doorstep lenders. They keep their fees as low as possible and help customers to manage and repay their debts, unlike doorstep lenders which charge sky-high APR-rates and trap customers in spirals of debt.
How are CDFIs funded?
There are many different sizes and types of CDFI, and they are funded in different ways.
All CDFIs use the income from lending activity for their running costs and to make more loans.
They combine this with funding from a range of additional sources. Many are part-funded by Government departments and agencies. For example, a number of business-lending CDFIs in England have funding from the Regional Development Agencies, while many personal-lending CDFIs have funding from the Department for Work and Pensions Growth Fund.
Other funding sources include European grants, donations from charitable trusts, social investments, and grants and loans from high street banks.
Are CDFIs reputable?
Yes, CDFIs are reputable and some of the larger CDFIs are regulated by the Financial Services Authority (FSA). The sector’s trade association,CDFA, with the FSA, has introduced a Code of Practice to put in place standards of operation. All CDFIs who are members of the cdfa are required to work towards full compliance of this Code of Practice .