We’re fans of the Community Development Financial Institutions Program (CDFI), which usually has tens (or hundreds) of millions of dollars available annually “to promote economic revitalization and community development” through investment in local startups and businesses. The CDFI Program—notice the capital “P”—is separate from the CDFIs themselves, which are local organizations that offer loans and investments in local companies and are certified as CDFIs by the Department of the Treasury.
I was thinking about CDFIs when I read “How the 22-year-old founders of Brex built a billion-dollar business in less than 2 years,” which is an interesting story in its own right but also says this:
As founders themselves, Dubugras and Franceschi were hyper-aware of a huge problem entrepreneurs face: access to credit. Big banks see small businesses as a risk they aren’t willing to take, so founders are often left at a dead-end. Dubugras and Franceschi not only had a big network of startup entrepreneurs in their Rolodex, but they had the fintech acumen necessary to build a credit card business designed specifically for founders.
Those “Big banks” are exactly who CDFIs are supposed to compete with. Yet the CDFI program has been operating since 1994 and was a much-ballyhooed part of President Clinton’s domestic policy agenda. Over the years, the CDFI Program has largely faded from view, although we still write CDFI proposals every couple years. Still, access to credit remains a massive problem—and one that the Brex founders have tackled, even though CDFIs were (and are) well-placed to do exactly what Brex did.
It’s distressing that, even after decades of CDFI, high-quality entrepreneurs are still struggling to get capital out of existing financial institutions. If I were a CDFI manager in charge of the next program application, I would both cite this article and describe how my CDFI will avoid the traditional Catch-22 of banking and loans: the only entities that can get the loan are the ones that don’t really need it. Venture capital is one way to break that Catch-22. But there ought to be others.
CDFIs have potential. The “weakness” in the title of this post is not meant to be a sign of just another person on the Internet, calling names. It’s meant to be addressed by CDFIs themselves in the next funding round.
I’ve never heard of a startup applying for funding from a CDFI. Doesn’t mean it hasn’t happened, but it is notable. If you know of any that have, please leave a not in the comments.
In addition, it’s notable that most corporate credit cards are still… not very friendly, to speak euphemistically. We know from experience. Maybe we’ll be applying for a Brex card in the near future.