Small Business Alternative Lending and CDFI Lending
What makes a lender an “Alternative Lender”? This is certainly a question for Small Business owners seeking to apply for capital whether they are an existing business or a start-up, and have faced challenges through normal retail lending channels.
Alternative Lenders for the most part are for-profit lenders that are not FDIC insured like traditional banks. They are often not regulated for the same borrower protections that banks typically would have. The organizations will usually specialize in a few loan products for small businesses with faster application and decision times.
However, borrowers should be alert to potential downsides to these loans such as higher interest rates, and well as more aggressive repayment schedules, with greater penalties that regulated bank lending.
What makes a CDFI Lender? CDFIs are mission-driven financial institutions that have been certified by the U.S. Department of Treasury’s CDFI Fund. They include Credit Unions, Banks, Non-Profit loan funds and venture capital funds that operated to serve low-income communities.
The “Community” piece of these loans means you’ll first need to meet the CDFI’s definition of the local community they serve. Borrowers will also need to meet other key requirements for a CDFI loan – such as completing the application, providing financial statements and documenting how the funds will be used. CDFIs often offer other benefits like a local office, educational workshops and on-the-ground support – and some CDFIs also participate in SBA guaranteed lending programs. Many borrowers appreciate the benefits of a CDFI’s strong sense of community and networking with other small business professionals through community events.
When seeking capital evaluate the pros and cons for your business as business needs will differ from one another. Understanding your short-term and long-term needs is also crucial when applying for capital. A short-term need might mean that your business can take on a higher interest cost, but a long-term need might mean that your business looks at a lower monthly payment with lower interest rates.
Prestamos CDFI is here to help answer your questions whether it is lending-related or business consulting related. We have been serving our communities for over 50 years!
Written by Mark McKenna