What is a CDFI?
A Community Development Finance Institution, or CDFI, is a class of financial institution that caters to underserved and often low-income communities. CDFIs are certified by the Treasury Department and can be banks, credit unions, venture capital funds or loan funds – like Pathway Lending. Ignore the ungainly name, because institutions like ours can provide a lifeline for entrepreneurs.
CDFIs are laser-focused on community, and typically target their funding on small businesses, micro-enterprises, commercial real estate, and affordable housing within a particular geographic region. Pathway Lending serves communities across all of Tennessee and Alabama.
Pathway Lending operates a revolving loan fund that makes affordable loans to small business owners and micro-entrepreneurs that might not otherwise qualify for a bank loan. Like old-fashioned bankers, we provide a high-touch model, and funding often comes with mentoring and other support (that’s one reason why our loan portfolio has held up relatively well throughout the financial crisis and recovery).
We typically raise the money we lend through grants or EQ2s from banks looking to satisfy their CRA requirements. Since 1999, we have originated more than $175 million in loans to small businesses.
Need more reasons to refer your clients to a CDFI like Pathway Lending? Our services are:
- Great for entrepreneurs and organizations that cannot access bank loans or other capital
- Long-term with the goal to make small businesses and micro-entrepreneurs to be bankable
- Socially responsible with a high-touch model with mentoring support and technical training
- Fiscally responsible – under no circumstance do we support predatory lending practices
How can Pathway Lending help my bank with CRA requirements?
CDFI loan funds like Pathway Lending fill a niche in the nation’s financial services system by specializing in providing credit to borrowers and communities that may be difficult for traditional banks to serve.
In many instances, the most effective and efficient way for a traditional bank to meet the market needs of low-income borrowers in their assessment areas may be through investing in or collaborating with a CDFI like Pathway Lending. In addition to helping traditional banks reach underserved, low-income communities in their assessment areas, loans to and investments in qualifying CDFIs may be useful in helping banks meet their CRA obligations.
Under the CRA, community development activities can be delivered directly through, or in cooperation with, a CDFI partner that serves an area that includes the bank’s assessment area. Banks of all sizes that invest in and collaborate with CDFIs may receive CRA consideration in the lending, investment, and service components of their performance evaluation.
CRA evaluation of a bank is composed of three tests: lending, investment, and service.
- The lending test considers a bank’s record of helping to meet the credit needs of its assessment area(s) through its lending activities by considering its home mortgage, small business, small farm, and other lending activities requested by the institution. Community development loans, such as those with a primary purpose of community development and that do not qualify as mortgage, small business, small farm, or consumer loans, are also considered. Community development loans include, but are not limited to, loans to financial intermediaries, such as CDFIs, that lend to promote community development.
- The investment test evaluates a bank’s record of helping to meet the credit needs of its assessment area(s) through qualified investments that benefit its assessment area(s) or a broader statewide or regional area that includes the bank’s assessment area(s). The investment test considers “qualified investments,” which are lawful investments, deposits, membership shares, or grants with a primary purpose of community development. CRA-qualified investments include equity investments, deposits, membership shares, grants, and in-kind contributions in or to financial intermediaries such as CDFIs. CDFIs are among the organizations in which banks may invest and for which they may receive CRA consideration.
The service test evaluates a bank’s record of helping to meet the credit needs of its assessment area(s) by analyzing both the availability and effectiveness of a bank’s systems for delivering retail banking services, and the extent and innovation of its community development services. Community development services include the provision of technical assistance to CDFIs engaged in community development and lending bank executives as volunteers for a specified time to these organizations. Community development services should be related to the provision of financial services. Pathway Lending often calls upon our banking partners to serve as class facilitators at the Pathway Women’s Business Center.
How can Pathway Lending help bank borrowers?
Research shows that minority-owned, lower-income, and rural businesses have difficulty accessing capital. In particular, individuals with limited equity, collateral, credit, and/or business experience often struggle to obtain affordable loans. These borrowers typically cannot satisfy the underwriting criteria of man mainstream lenders, and as a result, these entrepreneurs frequently rely on credit card financing, predatory loans, and capital infusions from families and friends. These sources not only limit their prospects for growth, but also threaten their long-term financial health.
Community development financial institutions (CDFIs) like Pathway Lending are uniquely positioned to address this challenge by offering both affordable loan capital and the technical assistance that is crucial to successful small and emerging businesses.
CDFIs are a great partner to banks, and together, we make more possible for borrowers.
Pathway Lending can provide a way to help a client that does not meet your bank’s underwriting requirements. It’s a great way to help your customers by referring them to a lender that could meet their financial and educational needs, while you retain the depository relationship. These referral relationships can be a win-win for both parties, and we aren’t the only ones who think so.
In 2015, the CDFI Fund issued two independent reports that provide the first-ever comparative analysis and evaluation of the effectiveness of CDFIs. The findings confirm that CDFIs, like Pathway Lending, are resilient and a reliable resource for capital in areas that need it the most. Since 1999 we have originated over $175 million and provided more than 36,000 hours of advisory services to strengthen Tennessee’s small business community.
Will Pathway Lending offer small dollar loans to my borrowers?
Why would a consumer go to high-interest online lender to get small dollar loans— and in the process rack up hundreds or thousands of dollars in debt—rather than to banks? The answer is that most banks simply don’t or can’t offer small dollar (under $100,000) loans to many of their business borrowers, especially startups. For many banks, it doesn’t make good business sense given the considerable staff time, systems, and oversight needed to issue and document loans for such a small amount.
Small dollar loans can provide much needed capital to low-income, low-wealth consumers and small businesses and startups.
At Pathway Lending, we have made it a priority to fill financial gaps in the market. As such, small dollar loans, those under $100,000, make up a majority of loans in our portfolio. Whether it’s for equipment, working capital needs, or just a line of credit, Pathway Lending can help entrepreneurs with their small dollar needs, and help them grow their business.
How does Pathway Lending help improve financial fluency for bank clients?
CDFIs like Pathway Lending serve a diverse group of businesses operated by women, minorities, low-income and rural demographics, comprising largely of businesses that would not otherwise qualify for traditional bank loans, those needing small dollar loans, or those in need of business education. This combination of in-depth business education and flexible capital creates value for our customers and allows for funding opportunities and solutions that would otherwise be unsupported by traditional, risk-adverse financial institutions. This educational framework creates the foundation for success, leading many of these small businesses to become ideal future borrowers at traditional institutions.
By providing opportunities for financial fluency, rather than just funding, Pathway Lending moves small businesses forward toward their goals.
We achieve this by providing a wide range of services, including in-depth business counseling, classroom training, and peer-to-peer learning to help entrepreneurs start, expand, and successfully manage their businesses.
Most of our classes, events and counseling are offering through Pathway Women’s Business Center and are available to anyone. Visit our calendar of events to connect your clients to the right events, mentorships and resources essential for them to reach their goals.
How does Pathway Lending strengthen the community?
As a mission-driven lender, Pathway Lending provides credit and financial services to people and communities traditionally underserved by mainstream commercial banks and lenders. We offer a range of financial products and educational services to support small businesses and help them capitalize on new growth opportunities.
Community Development Financial Institutions (CDFIs) like Pathway Lending add value by bringing innovative financing and educational tools to the marketplace. Our unique position in the credit market allows us to support projects that mainstream financial institutions may consider too risky or need gap financing, in combination with investments from government, philanthropic, or bank partners.
CDFIs play a critical role in building community wealth in several key ways:
- We provide much needed capital and financial services to people and communities that typically are not served by traditional financial institutions. Reflecting this, CDFIs are credited with investing billions of dollars in low-income areas.
- Our loans often enable community members to purchase, start, or grow a locally-based business, and assist in the development of affordable housing, community facilities, and other critical community programs.
We play a significant role in community wealth building. We are non-predatory and our services help businesses improve their core competencies, capture new opportunities, and become more bankable over time.