Applications for PPP round 2 loans are now open.
On December 27, 2020, a new bill was signed into law called the Consolidated Appropriations Act, 2021. The bill includes an extension of the Paycheck Protection Program (PPP) and dedicated set-asides for CDFI and MDIs.
On January 7, 2021, the SBA released Guidance on Accessing Capital for Minority, Underserved, Veteran and Women-Owned Businesses.
We’ll talk you through how this legislation may help your small business access a loan—even if you missed out on PPP the first time around.
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What is a CDFI?
A Community Development Financial Institution (CDFI) is a financial institution that is dedicated to serving low-income and disadvantaged communities by committing to responsible lending practices. In order to become a CDFI, an institution must be certified by the U.S. Department of Treasury and backed by the CDFI Fund, a government program that has been around since 1994 and provided billions of dollars towards community development. All CDFIs must support the CDFI fund mission to provide affordable financial services—including credit and capital—in low-income communities.
What is an MDI?
MDI stands for Minority Depository Institution, a bank or credit union that is owned or managed by a person of color. MDIs play a critical role in helping to resource underserved communities and in creating economic opportunity where it is needed most. Studies reveal that the social impact of MDIs is significant, because they distribute more loans among POC individuals and businesses compared to other financial institutions.
Some MDIs are federally insured, but not all are. To be considered an MDI by the Federal Deposit Insurance Corporation (FDIC), the institution must meet one of two criteria:
- At least 51 percent of the voting stock is owned by minority individuals who are also U.S. citizens or residents; or
- The majority of the board of directors is minority and the community that the institution serves is predominantly a minority population.
The law requires the FDIC to support MDIs and help establish new ones.
An MDI can also be CDFI certified.
Can CDFIs and MDIs help my business access a PPP loan?
Minority business owners and those in low-income communities have historically faced bigger challenges in accessing loans and capital than their white or affluent counterparts. This was clearly demonstrated in the distribution of the first PPP round, which left out many BIPOC-owned small businesses. In an effort to remedy this, part of the PPP Round 2 funds will be allocated directly to CDFI and MDI lenders.
By supporting a mission to provide more equitable access to capital, CDFI and MDIs are highly effective lenders and have already provided billions of dollars in PPP loans to small business owners this past year. In the last PPP round CDFIs and MDIs made 232,110 loans, the median value of each loan being approximately $21,000. Data also showed that CDFIs and MDIs were significantly more effective in lending to Black-owned businesses than traditional banks.
For the next round of PPP, $2 billion is allocated for the CDFI Fund, and $800 million of that amount is earmarked for minority lending institutions.
What challenges should I be aware of?
A common drawback of using a CDFI to MDI is time. Because these institutions are often resource-constricted, getting funding may take longer than it would with a large bank. The funding provided by the Consolidated Appropriations Act, 2021 is meant to help solve these resourcing issues among CDFIs and MDIs.
Something else to be aware of: CDFIs often focus on very specialized groups; if you don’t fit the needs of that specialized group, the CDFI may not be right for your business.
Where can I find a CDFI or MDI that supports my area and my needs?
There are CDFIs in every state, as well as the District of Columbia, Guam, and Puerto Rico. We put together a comprehensive spreadsheet of CDFIs so that you can find one in your area. Keep in mind that not all CDFIs will be participating in the second round of PPP; there is a column in the spreadsheet that indicates if a lender participated in the first round. While there are no guarantees, an institution that participated the first time is more likely to participate this time.
Update on January 13: This CDFI list is being continually maintained as we learn more about which CDFIs are participating in PPP. Check back for updates:
You can also use the CDFI locator to search for a certified organization that serves your area, and filter based on the type of service (e.g. small business or venture fund) you’re looking for.
While there are fewer MDIs (there are currently 150 across the country), you may find one in your area.
If there are no CDFIs or MDIs near you, check out Benefits.gov to see what disaster, financial, medical, and other benefits you may qualify for.
Last, make sure to check out SBA’s Lender Match tool, which connects small businesses with SBA-approved lenders. The Lender Match tool aims to connect small business owners with the appropriate lenders (based on their needs) within two days.
OK, I found CDFIs and MDIs that might be a fit. What now?
Contact the CDFIs and MDIs that look like the best fit for your needs to find out more about exactly what they offer, eligibility requirements, and the application process. We recommend contacting a few institutions so that you can compare their loan process and offerings.
What if the CDFIs or MDIs in my area are not participating in PPP?
You have other options.
The Consolidated Appropriations Act, 2021 included funds outside of PPP that were dedicated to serving BIPOC businesses and those in underserved communities.
Outside of PPP:
- $12 billion was allocated to to CDFIs and the creation of a new Neighborhood Capital Investment program that will support CDFIs and MDIs
- $20 billion in EIDL funding was dedicated to grants for low-income communities
- $2.5 billion was allocated to the SBA 7(a) microfinance loan program
This means that even if a CDFI or MDI is not participating in PPP, they may offer other lending programs that suit your needs.
If your local CDFI/MDI can’t help you, try for an EIDL or contact the SBA.
What are best practices for evaluating a lender?
While PPP loan terms and interest rates are fixed and highly specific, it’s always a good idea to discuss these. Generally, before moving forward with a loan, you’ll want to consider the following:
- What is the loan rate?
- When can you expect to receive the loan?
- What are the repayment terms?
- How long will you have to repay?
- Is there a “penalty” for repaying the loan early?
- What can you expect if you default on the loan?
- Is a personal guarantee required?
We’ll continue to keep you updated as we learn more about which lenders are participating in PPP. Check the COVID-19 Small Business Resource Hub for updates.