If you come from a region like ours that’s experiencing financial hardship, you know it can be difficult to get access to capital to start your business. 

But accessing funding isn’t a unique problem in Eastern Kentucky. It’s a common barrier for most entrepreneurs across the country. 

The great news is that the tides are shifting. As more entrepreneurs launch businesses in Eastern Kentucky, they’re legitimizing the hard work and innovation we’re all capable of. In turn, it’s creating new pathways to access funding for great business ideas. 

SOAR Innovation is helping our region’s entrepreneurs identify the types of funding available to them — equity and loans — and exploring the ins and outs of each in a 3 part series. (You can read Business Funding Part 1: Applying for Bank Loans as a Small Business Entrepreneur here.)

Today, we’re unpacking Part 2 of our small business funding series: CDFIs. The US Department of the Treasury created the CDFI Program to help qualified financial institutions expand their capacity and serve regions like Eastern Kentucky. 

What are CDFIs, and why are they relevant to small businesses? This post will answer all that and more for you. 

Find out what the CDFI program can do for small business owners in Eastern Kentucky, what you need to qualify, and where to locate CDFI-provided funding. 

What are the benefits of small business loans? 

There are two types of funding available to small businesses: loans and equity. 

The primary advantage of a small business loan is retaining ownership and decision-making power after the bank issues you the cash. This feature isn’t available through equity investments, which provide cash in exchange for part-ownership and varying degrees of influence over leadership decisions. 

On the flip side, you’ll need to pay your loan back with interest. Though, it’s worth noting that you can write interest payments off against what you owe for year-end business taxes.

A small business loan can be an accessible way to get the cash you need, if: 

• You can get your hands on a reasonable interest rate.
• Your cash flow can accommodate repayment.

What are CDFIs?

CDFIs help small business owners access competitive interest rates and favorable loan terms. 

The Community Development Financial Institutions Program (CDFI Program) sparks economic growth in communities like Eastern Kentucky. It invests federal resources, matched with private funding, in certified institutions that serve target communities, including ours. 

The US Department of the Treasury administers this program by investing loans, grants, equity investments, and other resources into Certified CDFIs.

In 2019, CDFI Program awardees provided financing to more than 19,000 businesses and delivered over $21.5 million in loans and investments. 

How do small businesses interact with the CDFI Program? 

The CDFI Program doesn’t issue loans to entrepreneurs directly. It provides funding to Certified CDFIs across the US, including local banks, credit unions, qualified lenders, and more. 

From here, small business owners can apply for loans with low and competitive interest rates from Certified CDFIs. 

CDFIs also sometimes provide financial education. If you’re considering entrepreneurship, consider reaching out to a financial institution enrolled in a CDFI program to access important financial literacy resources. 

It’s worth noting that CDFIs still need to review your application and determine whether you’ll be capable of repaying the loan. CDFIs won’t issue blank checks to everyone that applies. Try not to get your hopes up until you have a conversation with a CDFI to discuss their eligibility requirements. 

CDFI loans vs. traditional bank loans

A high-interest loan can be a deathtrap for small businesses, even if you have reliable cash flow. 

Traditional bank loans have specific requirements for applicants, such as your income, projected cash flow, credit score, industry experience, and other personal factors. 

Many traditional banks and predatory lenders are willing to offer a wide range of interest rates that aren’t favorable to entrepreneurs. Those with less-than-perfect credit histories are especially vulnerable. 

This is why CDFIs are so essential. They support innovation in regions like ours by providing sustainable interest rates to businesses that aim to rebuild the economy. 

CDFI programs consider other factors compared to traditional banks. They’ll prioritize working with businesses that show great promise for economic development impact. 

CDFIs will also be more likely to consider your application more holistically. For example, they’ll check if you have a well-thought-out plan that considers how your business will support the region.

Checklist: Is a CDFI loan right for you? 

• Do you need cash to keep growing your business — but can’t locate a reasonable interest rate or a lender willing to work with you?
• Have you located a CDFI in your area that aligns with your business type/purpose? 
• Can you afford to pay back a loan principal plus interest? Have you checked your financial statements to validate this?
• Are you willing to participate in the due diligence process? 

Locating a CDFI 

SOAR is partnered with a few CDFIs that serve Eastern Kentucky. Consider adding these 3 CDFI lenders to your list of potential funders for a small business loan: 

• Kentucky Highlands Investment Corporation
• Mountain Association 
• Southeast Kentucky Economic Development

Another accessible way to look for CDFIs in our region is to search for Kentucky in the CDFI Program database. 

This approach will help you locate nearby financial institutions that have received awards from federal CDFI programs. 

You’ll notice that some programs aim to work with particular industries. Be sure to do your research into each CDFI’s areas of focus before spending your time developing an application. 

Conclusion: Apply for a loan with a Certified CDFI 

Want to learn how to strengthen your CDFI loan application? Check out Business Funding Part 1: Traditional Bank Loans for advice that’s easy to follow.

And if you want to learn more about launching, growing, and optimizing your business, download the Complete Guide to Entrepreneurship in Eastern Kentucky. It contains all the information you need to feel confident in your decision to start your own business. 

Don’t hesitate to contact SOAR to get help with your funding applications, receive an introduction to a local CDFI, or ask questions about entrepreneurship.