Following on from our recent article on the new Business Bank, this is the fifth in a series explaining the various government schemes providing alternative finance solutions.
Community Development Finance Institutions (CDFIs)
Community Development Finance Institutions (CDFIs) are social enterprises that support communities by providing affordable finance that would otherwise not be available. By making loans, they are able to recycle this finance again and again into neighbourhoods where it is most needed.
CDFIs lend money to those unable to get finance from high street banks. They fill the gaps in mainstream lending, addressing market failures and offering an affordable alternative to high interest doorstep lenders.
There are currently around 60 active CDFIs operating across the UK.
CDFIs provide business finance to:
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
- Individuals
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.
CDFIs provide availability of funding to:
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
Will a CDFI only lend to me if I have funding problems and have been refused finance?
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 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 a reputable source of business finance?
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.
Finding alternative funding
If the continuing lack of availability of funding is affecting your business, please contact us. We are specialists in this field and can hopefully point you in the right direction.
As always, if you have any comments or any of your own experience you would like to share on this subject, please contact me at john.thompson@transcapital.co.uk or on 0845 689 8750.
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