Challenging assumptions: How a distinct operations model sets CDFIs apart in a vast financial ecosystem
By Victoria Brown
Veteran coffee roaster Yan Yanez gained a fast following when he and his business partner, Leo Nunez, opened Flor and Seed Coffee Roasters in late 2020 by popping-up at a busy farmers market in San Diego’s Little Italy. Two years later, they were ready to make their pop-up permanent with a brick-and-mortar location, serving their signature Mexican-style coffee made with beans ethically sourced directly from farmers in prominent growing states, like Oaxaca and Chiapas.
They found a space, invested in an espresso machine and other equipment and bought beans in bulk, but lacked the financing they needed to get them over the finish line to true entrepreneurship. Traditional banks turned their loan application down due to a lack of a business track record, despite their small-scale success as a farmer’s market vendor. One bank, however, referred them to Accessity, a 30-year-old Southern California nonprofit Community Development Financial Institution (CDFI) whose mission is to open up financing options for business owners just like Yanez. Accessity, which is a grantee of the Mastercard Strive USA program, provides access to capital, resources and education primarily to low-to-moderate-income entrepreneurs of color, women and immigrants to help them prosper and their communities thrive.
Yanez ultimately borrowed $63,000 from Accessity and opened his 700-square-foot café in spring 2022, pouring single-origin drip and espresso drinks and offering locally made Mexican pastries and molletes — a dream realized thanks to a financial institution that didn’t count him out because of his first-timer status.
Stories like Yanez’s are common in the CDFI sector, a fast-rising category of mission-first financial institutions with that has seen exponential growth in assets in the past five years, partly because CDFI investors are challenging a set of assumptions about how CDFIs operate that could have otherwise held back their success.
While CDFIs have roots dating back to the late 19th century, the sector’s current form began taking shape in the late 1960s and early 1970s. In 1994, CDFIs were designated by the U.S. government under the Riegle Act, which also created the CDFI Fund as a sub-agency of the U.S. Treasury Department. CDFIs served as a crucial stabilizing force for communities during the pandemic as they stepped up to fund the Paycheck Protection Program loans that kept many small businesses afloat in the early days of the pandemic era.
CDFIs can be banks, credit unions, development loan funds or venture capital funds, but unlike traditional lenders, they operate with a distinctly mission-first mindset, prioritizing impact over profit, and are more open to issuing loans to clients that commercial banks deny (due to narrow credit boxes that often don’t accurately assess risk). CDFIs aim to provide fair, responsible lending to individuals, organizations and businesses from low-income communities with the ultimate goal of improving economic health and greater financial inclusion — a thriving economy translates into higher home ownership rates, more living wage jobs, and the development of schools, grocery stores and other local businesses.
Over the past 30 years, CDFIs have also become a conduit for public-private partnerships, as the private sector aims to drive capital and create impact in low-income communities. It doesn’t hurt that CDFIs have proven to be a sound steward of public resources: they leverage $8 in private sector investment for every $1 in public funding.
Recent statistics illustrate the pivotal role CDFIs play in the small-business ecosystem: Since 2018, the number of certified CDFIs in the U.S. have increased by 40 percent, from just over 1,000 to nearly 1,500, while the assets they hold tripled to $452 billion, according to an August 2023 study released by the Federal Reserve Bank of New York.
And while that growth is poised to continue — for example, the Treasury department’s $10 billion State Small Business Credit Initiative (SSBCI) funds are largely being deployed via CDFIs — it requires a perspective that looks past a number of assumptions about how CDFIs operate. Namely, that high performing CDFIs must issue loans with high interest rates, qualify loan applicants using only traditional credit scores, and scale up rapidly in a short period of time.
In reality, many CDFIs are able to offer competitive rates by tapping into impact investment capital. CNote, for example, channels investment funds from corporate impact investors, like Mastercard, PayPal and Netflix, to mission-driven lenders to facilitate affordable loans to women and people of color. As such, CNote has invested 50 percent of capital into BIPOC-led small businesses and 40 percent into women-led businesses (eight times the national average) and created 4,000 jobs.
Platforms like LoanWell allow CDFIs to build customized lending technology platforms so they don’t have to rely solely on credit scores from the three largest credit-reporting bureaus to assess risk — a system that often prevents potential entrepreneurs from lower-income communities from obtaining financing to accelerate their business plans.
Although sustainable growth is certainly important in the CDFI sector, as with any financial institution, scale isn’t their only or often even their most important measuring stick of success. Small CDFIs in low-income neighborhoods tend to be high-impact, even if they grow at a slower rate, and still represent a critical cog in the economic machine — as borrowers repay their loans, CDFIs recycle those dollars back into the community through new borrowers. Also, the businesses enabled by CDFI support, such as Flor and Seed, help their communities prosper, often in areas of persistent poverty.
This is precisely what has happened in the Old Town neighborhood where Flor and Seed opened its café. In the two-and-a-half years since it opened, it has evolved from simply a place to get a cup of small-batch Mexican coffee into a vital community space, spotlighting Hispanic heritage by curating and hosting art shows featuring Mexican artists, hiring and paying fair wages to local baristas, while also redistributing wealth by paying above-market rates to farmers working the land where they source beans. All because a CDFI took a chance.
Victoria Brown is a Senior Director of Programs and Implementation at DAI where she leads implementation of the Mastercard Strive USA small business program.
