The main purpose of Community Development Financial Institutions (CDFIs) is to expand access to capital in low-wealth and underserved communities in order to foster economic development and revitalization. Many of these communities have been left out of the financial mainstream, unable to access financial services and capital from traditional banks. In recent years, particularly after the Great Recession, the credit market tightened even further. Large banks pulled back from small business lending and enacted tighter lending criteria. As a result, many entrepreneurs—even those that were previously able to secure small business loans—were left struggling to access the credit they needed to startup or expand their businesses. That is where CDFIs come into play.
CDFIs are typically smaller institutions that are able to evaluate businesses on a broad range of criteria—not just credit scores— and benefit from a close relationship with their borrowers. Accordingly, CDFIs are able to take on additional risk and make loans that large banks will not. A report released by The Support Center in November showed that CDFIs in the state are playing a growing role in filling the lending gap. In 2010, the 17 CDFIs in North Carolina helped to finance 33,000 businesses and developments that have created 3,100 jobs across the state. In addition, The Support Center found that:
- In Fiscal Year 2011 alone, the 999 CDFIs nation-wide made 16,000 loans and investments, worth $1.2 billion, that supported 5,000 small businesses, 17,000 affordable housing units, and 25,000 jobs.
- As of 2010, North Carolina’s CDFIs hold $1.17 billion in assets, and nearly 33,000 outstanding business, microenterprise, home purchase, consumer, and residential and commercial construction loans. The projects that CDFIs supported created over 3,100 jobs.
- CDFIs are healthy and financially sound institutions. The CDFI Fund issues Minimum Prudent Standards, which are a range benchmarks for assessing the health of CDFIs. When measured against these standards, as well as in comparison to other lending programs such as the Small Business Administration’s 7(a) and 504 programs, CDFIS in North Carolina perform better in terms of risk management, charge offs, net assets, and capital deployment.
- CDFI credit unions and loan funds in the state are more than just lenders. They also provide financial education and technical assistance services to help their members and borrowers, as well as to members of their broader community, increase their financial management skills.
As the nation continues to seek a broadly-shared economic recovery, CDFIs can be a strategic partner to the State of North Carolina, local governments, non-profits, and private institutions in revitalizing the state’s economy.
Sadaf Knight is the Policy and Research Director of The Support Center, which is a statewide nonprofit and Community Development Financial Institution (CDFI) that provides small business loans, financial training to start-ups and existing businesses, and lending services to community-based organizations.