Catalyzing Impact with Community Development Financial Institutions

Limited Capital for High-Impact Companies
High-impact businesses need capital that matches their structure, timeline, and reality.

Consider this: A woman- and Native-owned farming company in the Pacific Northwest, we’ll call it Project Seed Bank, aims to feed tribal neighbors, steward the land, and promote economic development. Project Seed Bank employs regenerative, biodynamic Native farming practices to grow Native crops – such as tribal peppers, tomatoes, herbs, and flowers – for Native communities, while also offering a line of packaged tribal sauces, teas, and snacks. The founder-owner, like any business leader, needs financing to make strategic purchases for business stability and growth.

However, conventional finance doesn’t meet the needs of this type of business. Because of historical discrimination and ongoing disinvestment, many traditional lenders don’t operate in rural and Native communities.1 Even if Project Seed Bank were to qualify for a traditional loan, the lender would charge a high interest rate and require collateralization of personal assets, on account of higher perceived risks. Moreover, repayment of the loan would likely begin immediately, despite the seasonality and prolonged harvesting and sales cycle of a food production business. Traditional capital, therefore, can lead to a relentless cycle of debt that can destroy the business and deepen mistrust of the financial industry, all to the detriment of the community.

Catalytic Capital to Fill Gaps in Capital Markets

Fortunately, catalytic capital is a type of impact investment that intentionally aims to fill these financing gaps. Acknowledging the limitations of conventional finance, catalytic investors accept lower risk-adjusted financial returns in exchange for greater social or environmental impact.

In the case of Project Seed Bank, a Native-led Community Development Financial Institution (CDFI) provides low-interest, patient, and culturally responsive loans that meet the distinctive needs of Native-led food businesses. One of the loan products offered, for example, charges a significantly lower interest rate and allows borrowers to make interest-only payments for up to five years before beginning principal repayment. The CDFI also provides technical assistance to help borrowers enhance their business operations. In this financing model, producers are given a fair chance to employ indigenous, ecologically sound production methods, provide food for their communities, and grow a prosperous enterprise.

More broadly, this approach to catalytic investing can propel transformative societal outcomes. Without the pressure to quickly deliver profit-maximizing returns to investors, capital providers like CDFIs are empowered to offer financial tools that better address the nuanced needs of the intended beneficiaries. Moreover, when investors accept lower financial returns, catalytic providers can, in turn, charge lower rates to end borrowers. This helps to keep capital circulating in target communities, which can accelerate economic development and enhance overall impact. In fact, recent research from the Miller Center for Global Impact estimates that intentional catalytic investment can multiply impact by 6x – 40x.2

CDFIs as a Key Feature of Catalytic Investing

CDFIs are catalytic by design. For context, CDFIs are certified organizations offering financial products tailored to the specific needs of low-wealth, communities that are underserved by traditional finance.

Nationwide, in rural and urban areas and Red and Blue states, there are over 1,400 designated CDFI entities listed as community development banks, credit unions, loan funds, and venture capital funds. Some have a national footprint, while others are regional or local. CDFIs provide a wide range of products, including FDIC-covered personal checking accounts and Certificates of Deposits, individual and small business loans, and larger loans supporting community organizations.

And they operate in high-impact themes and sectors, including affordable housing, education, healthcare, small business lending, energy efficiency, and, as noted above, Native food production. In addition to providing financial capital, many have robust technical assistance programs, financial education training, and policy and research arms.

How community investing works

As catalytic intermediaries, CDFIs source capital from external investors and redeploy that capital to community borrowers. Notes programs provide a critical source of capital for community investing. An investor makes a loan to a CDFI, typically at a rate of return lower than an investor could get from comparable investment opportunities. The CDFI then offers high-impact, affordable loans, along with hands-on support, to the end borrower. The revenue from those community loans covers note repayment and some CDFI operations.