This week, we’ll explore another potential source of non-diluting startup funds—the Community Development Financial Institutions (CDFI) Fund.
Founders everywhere seek non-diluting startup funds to launch their business ventures. But depending on where you live, this can be more difficult for some than others. The United States is a nation of communities. At the heart of every community lies the potential to contribute to the success of our nation. It is an unfortunate reality though, that not all communities are created equal. Due to geographical constraints and strategic placements, among other factors, some communities are economically well-off and performing well. As for others, they become low-income generating communities, but it is everyone’s responsibility to bring out the best in such communities.
Through the Riegle Community Development and Regulatory Improvement Act of 1994, the Community Development Financial Institutions (CDFI) Fund was established, with a goal of revitalizing and developing the economies of select communities with underserved markets. The main goals of the CDFI Fund are to create more jobs, finance businesses until they are stable, assist in building homes, improve healthcare, and improve the quality of education across all communities within the nation. For startups that are creating jobs and economic opportunity in high-poverty communities, the CDFI Fund can possibly be an attractive source of non-diluting startup funds.
In fiscal year 2016 alone, CDFIs:
- Financed more than 11,300 businesses (some of which was provided in the form of non-diluting startup funds)
- Provided funding for more than 33,500 affordable housing units
- Provided more than 427,000 individuals with financial literacy or other training
What does a CDFI look like?: The faces of CDFI are varied. They can be banks, credit unions, or loan-providing financial institutions. These institutions help the communities they serve through housing loans, helping startup businesses, and even looking after the welfare of the people through local healthcare initiatives, and educational centers.
What services does the CDFI Fund provide? The CDFI program makes use of programs, trainings, and initiatives for the benefit of the community. Listed below are their current offerings. Depending on the type of startup and where it is located, one or more of these could be a potential source of non-diluting startup funds.
- Bank Enterprise Award (BEA) Program: The program provides monetary awards to FDIC-insured depository institutions who have invested substantially in the most distressed communities throughout the country.
- Healthy Food Financing Initiative: This initiative provides funding for activities in healthy food businesses centered in underserved areas such as grocery stores, markets, and cooperatives in low-income communities.
- CDFI Program: This program provides training and funding for CDFIs to build their capacity in handling financing initiatives, and help in achieving a sustainable community development program.
- Capital Magnet Fund: This initiative provides grants for to support affordable housing options and loans.
- Native Initiatives: This initiative is focused on creating jobs, building businesses, and shaping communities to become self-sufficient.
- New Markets Tax Credit (NMTC) Program: The program helps private institutions to invest in businesses centered on low-income communities, in the form of tax credits. Refer to my previous post discussing the NMTC Program as a possible source of non-diluting startup funds.
- CDFI Bond Guarantee Program: This program, authorized by Secretary of Treasury, provides CDFIs with access to debt from the Federal Financing Bank. These include loans which are unavailable to CDFIs under normal circumstances.
To be clear, the CDFI program is not going to be a source of non-diluting startup funds in all cases. In fact, the types of businesses that can access these funds is limited to startups that are creating jobs and economic opportunity in high-poverty communities where access to growth resources is limited. The CDFI program was created because many small businesses and critical community development projects lack access to the capital investment necessary to spark economic growth in their communities. The CDFI Program actively works to address these issues by investing federal resources—which are matched with private funding—in CDFIs working to serve low-income and underserved people and communities.
It is also important to note that not everything CDFIs offer is in the form of non-diluting startup funds. Financial Assistance awards are made in the form of loans, grants, equity investments, deposits, and credit union shares, which CDFIs are required to match dollar-for-dollar with non-federal funds. This requirement enables CDFIs to multiply the impact of federal investment to meet the demand for affordable financial products in economically distressed communities.