When businesses need an injection of capital they will typically turn first to banks and building societies.
But while this is the obvious place to start for any business needing a loan, many will find themselves seeking alternative sources of finance.
That’s because high street lenders are unlikely to offer funding if they believe a business or an individual represents a certain level of risk.
Research suggests that more than half of small business credit applications are either rejected or abandoned because they are too difficult.
There are several alternatives to the traditional outlets, however. Among them are Community Development Finance Institutions (CDFIs).
What is a CDFI?
A CDFI is an independent social enterprise that has been set up specifically to serve individuals, communities and businesses that are unable to secure credit through mainstream lenders.
There are currently around 60 CDFIs in the UK, most of which serve particular geographic regions.
CDFIs tend to get their own funding from government grants, local authorities, charitable foundations and corporate social responsibility (CSR) programmes.
How could a CDFI help my business?
There are a number of reasons why businesses can struggle to obtain finance from mainstream sources, ranging from a poor credit history and an insufficient track record to a lack of assets to use as collateral.
More than 90% of businesses that received funding from CDFIs in 2019 had previously been turned down by other lenders.
CDFIs offer products including secured and unsecured loans and commercial account facilities. They lend mainly to organisations that struggle to get finance elsewhere, typically by assessing applications on a case-by-case basis rather than relying on algorithms.
Loans can range from as little as £100 up to as much as £100,000.
Most CDFIs also provide support services such as business mentoring and advice, typically from advisers who understand the region you operate in.
Can a CDFI also support individuals?
While the bulk of CDFI lending goes to businesses and small enterprises, most also serve individuals.
As with businesses, they are designed to provide an option for individuals that are excluded from mainstream sources of finance.
They provide small loans of around £500, with lending decisions made on a caseby-case basis. They can also signpost customers to other advice and savings services.
Am I eligible for CDFI support?
Eligibility for CDFIs is usually based on geography. Your chances of a loan being approved are likely to be higher if you can show that your business provides benefits to the local community, such as job creation or positive social impacts.
If you can’t demonstrate any positive economic or social impact on your local area, your prospects will be slim.
It’s important to note that while CDFIs are usually regulated by the Financial Conduct Authority (FCA), some are not, which means you will have less protection if things go wrong.
Where can I find a local CDFI?
The simplest step is to search online for a CDFI that serves the region you’re based in.
You can also find CDFIs among the responsible finance providers listed at www.findingfinance.org.uk.
What other business support may I be eligible for?
There are a range of options open to businesses finding it hard to secure affordable finance from mainstream lenders.
These include government and local authority grants, including start-up loans available to individuals seeking to start or grow a business in the UK.
Government support schemes are sometimes temporary by nature, such as the Recovery Loan Scheme that replaced the previous support for businesses affected by the pandemic.
Some loans are available for specific purposes, such as mitigating the effects of climate change.
For example, the Carbon Trust offers government-funded 0% business loans to help businesses with the cost of upgrading equipment and putting energy efficiency measures in place.
A full list of the finance and support currently available around the UK can be found at www.gov.uk/business-finance-support.
» MORE: Top small business grants in the UK
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