Here’s a great opportunity for banks looking to better serve their small business customers: According to a survey by the Federal Reserve Banks, 61% of small businesses faced financial challenges within the last year—access to credit was named as the number one challenge for these businesses, and only 45% of small businesses were successful in securing traditional financing for their needs. While these small businesses did not qualify for conventional financing, an alternative lender may have been able to fulfill their financing needs. Small business owners are faced with many alternative lending options, but Community Development Financial Institutions (CDFIs) provide responsible and affordable solutions that are beneficial to their business bank as well.
When banks partner with CDFIs to help their small business customers, everyone wins. CDFIs are mostly nonprofit financial organizations that offer affordable financing options to small businesses in hard-to-serve markets, often in partnership with traditional banks. What differentiates CDFIs from other alternative lenders is their mission to serve one or more low- or moderate-income or underserved communities.
CDFIs can be banks, credit unions, loan funds and venture capital funds—and are found in communities throughout the country. Most also have a specific geographic focus that can be as specific as a single community or city (like New York City) or broader to include an entire state or multiple states, such as Pursuit. Together, banks and CDFIs can work together to strengthen businesses, improve neighborhoods, create jobs and increase wealth.
CDFIs that focus on small business lending benefit from bank partnerships because they help reach more business owners and fulfill the CDFI’s mission. Banks reap tremendous benefits, too, and we’ve outlined five of the most impactful here:
1. You’ll build broader and deeper customer relationships.
When small business customers are unable to meet the eligibility criteria for a bank loan, they can be referred to partner CDFIs for a “second look.” CDFIs often have more flexible credit requirements, consider broader criteria and offer payment terms that may be easier for borrowers to meet, all of which can help improve the chances of approval. This creates a win/win situation: Customers get the funds they need to open or expand their businesses and banks maintain their relationships with satisfied customers.
2. You’ll put your customers in the hands of a responsible alternative.
If a small business customer is unable to qualify for traditional financing, they may end up turning to predatory online lenders that are much more expensive but offer easy applications, quick decisions and fast funding. Often, these borrowers soon find themselves caught in a vicious debt cycle. When banks refer clients to CDFIs as the next option, they and their clients have the assurance of working with reputable and responsible lenders, and some CDFIs even offer the same speed and efficiency. Pursuit, for example, provides approvals in as little as one day. Pursuit is certified by the U.S. Department of Treasury and is endorsed by the New York Bankers Association and the Independent Bankers Association of New York State.
3. Your institution can earn Community Reinvestment Act (CRA) credit.
Partnering with CDFIs can help banks earn valuable CRA credit, all while providing direct benefits to entrepreneurs and the target communities in which they operate. Through CRA, banks are required to document their efforts to meet the credit needs of the community it serves, including low and moderate income (LMI) neighborhoods. These efforts are evaluated by the federal bank regulatory agencies.
Some CDFI partnerships can be innovative and multifaceted, and provide great benefits in improving LMI entrepreneur access to financial services. Talk to a CDFI like Pursuit to find out more about how these types of partnerships could earn your institution CRA credit.
4. You’ll help customers become loan ready.
When you refer your customer to a CDFI, you’re keeping the door open with them for future financing. Ultimately, CDFIs want to turn their clients into bank customers by helping them become ready for conventional financing. CDFIs frequently work closely with their clients to improve their business and financial situations and creditworthiness. The next time the client needs funds, they’ll be in a better position to secure a loan with their bank.
5. You’ll help build a successful business in the long run.
In addition to partnering with banks to provide affordable loans and helping customers become more bankable, many CDFIs teach clients the skills needed for long-term business success. For example, Pursuit’s Business Advisory Services team works with clients to create and understand sound financial reports and improve marketing, networking and outreach skills to build customers and resources. These services are frequently offered at no cost to business owners as part of the CDFI’s mission.
Partnering with CDFIs provides benefits to banks and their clients while strengthening communities. Pursuit has helped many clients graduate to bank financing while building the skills and tools needed to increase their chances of small business success. If you’re interested in partnering with Pursuit and learning more about these benefits, contact Steven Cohen at (646) 465-8186.