Creating Pathways for Entrepreneurs

It's no secret that entrepreneurs from marginalized groups can have a harder time starting or growing their businesses. Underrepresented founders receive?less than 2 percent ?of venture capital, and Black-owned firms are approved for business financing at?nearly a third of the rate ?of their white peers. What shouldn't be a secret but tends to be less known is a resource created to help underserved entrepreneurs: Community Development Financial Institutions, or CDFIs.

The name might sound intimidating, but local CDFIs are in communities across the country — they just go by different names, like?Working Solutions ?in San Francisco or?Allies for Community Business ?in Chicago. They've also grown rapidly over the last five years,?tripling in terms of assets ?and increasing in number by nearly 40 percent, bringing the total number of CDFIs to 1,487 CDFIs in the United States now.

As Director of BMO's?Zero Barriers to Business ?program, I look for ways to help Black, Native, Latinx, and women-owned businesses, and one of those ways is through community partnerships. BMO's U.S. Zero Barriers to Business team partners?with 40?non-profits, loan funds, and CDFIs across its footprint, which helps entrepreneurs realize their dreams of business ownership.

Here are some of the most common questions I get about CDFIs:

What is a CDFI?

CDFI stands for?Community Development Financial Institution , a mission-driven financial organization that serves those with lower incomes or in under-resourced areas. They support entrepreneurs with solid ideas but low or no capital to optimize them, especially if they don't qualify for traditional lending or investment opportunities.

Most CDFIs serve?distressed areas? and may offer affordable, below market interest rates and concessionary origination fees.

Do?CDFIs work with new businesses?

CDFIs are designed to be a steppingstone to traditional business financing. You may be able to land a CDFI loan even if your business is brand new, or you think you're too small to qualify.

CDFIs don't always expect you to meet all the typical business financing requirements, but they do like to see a track record of your industry experience, a realistic business plan and that you've done all the due diligence of a serious entrepreneur.? CDFIs aren't looking at your assets as much as they are seeking signs that you're prepared to run a business and can pay back the loan on time. They may review your credit history, but the story behind your credit score and your plans for your credit future are just as important.

How much money will a CDFI loan??

CDFI loan amounts depend on many factors, including the lending organization, the borrower's history and how much capital they've raised so far. Working Solutions in San Francisco, for example, offers loans between $5,000 and $100,000, with an average loan size of about $25,000. Some CDFIs may offer even smaller loans, and a small boost can be exactly what an early-stage business needs.

CDFI loans are not one-and-done, though. As Titi Ikhile, Chief Program Officer for Working Solutions, has put it: "Somebody can get $10,000 today. In six months, they can come back for another $20,000. CDFI financing provides the opportunity to scale slowly in a way that's healthy for the business."

What other resources?does a CDFI provide?

Based on each applicant's needs, CDFI?support might?include?pre-loan application assistance, business development services, and business consulting throughout the term of the loan — usually up to five years.

CDFIs can also connect clients with a critical financial team that includes a banker, accountant, insurance rep and a lawyer. Small business advocate, Flossie Hall, CEO of?Stella ?Foundation, a non-profit serving female founders and female funders, has explained it this way: "They help you to get the money, and then afterward they help to make sure you're on the right track with that money."

How does a CDFI help me transition to?a bank?loan?

A small business typically needs two years under its belt to qualify for a bank loan. For many entrepreneurs, making it that long without funding is a real barrier. Some of the start-up funding we like to talk about, like bootstrapping, friends and family support or crowdfunding, just isn't available to everyone.

A CDFI loan can be the bridge that helps your business get through those first years. With its business support services, a CDFI can also help your company build the financial knowledge and foundations needed to qualify when the time comes.

Is it hard to get a CDFI loan?

CDFIs loaned more than $15 billion to businesses in 2020.

However, if your books aren't in order or you haven't shown enough initiative, a CDFI may not immediately approve your application. But you don't just get a yes or a no with a CDFI. You might get a full yes, approving the full amount you asked for. You can get a partial yes, and the CDFI will work with you on a smaller loan until you qualify for more. And even if the answer is "no," a CDFI will let you know how to improve your business plan to get to yes.

How do I apply for a CDFI loan?

To apply with a CDFI, you will need basic financial reports and?information about you and your industry experience. A business plan also helps. You should prepare by thinking through exactly how much financing you need and how you plan to spend it.

When you're ready to find a CDFI, our?Zero Barriers to Business team ?can point you in the right direction. You can also search for lenders and learn more at the Department of the Treasury's?CDFI Fund website . Working in tandem with your banker and a local CDFI?can make a difference?in the success of your?early-stage business.