Considering the Cost of Inaction: Communities Bear the Risk of Diminished CDFI Capacity

The question isn’t whether investing in Community Development Financial Institutions (CDFIs) carries risk. It’s whether we can afford the risk of letting them fail.

As foundations and asset allocators navigate an increasingly volatile economic landscape, I find myself fielding the same question repeatedly: “Should we double down on CDFIs right now, or is this the moment to pull back and protect our boards’ appetite for future impact investing?”

I understand the concern. Many of you have spent years building board confidence in impact investing strategies. The fear that industry turbulence might lead to failed investments — which may shake board and leadership commitments to CDFIs or alienate them from the entire concept of impact investing — is not unreasonable. However, I want to offer a different lens through which to view this moment. The question many of you are asking — “What’s the risk if I put capital into a CDFI?” — is important. But I believe it overlooks the more critical question: “What’s the risk if these CDFIs fail?”

Acknowledging What We Stand to Lose

Compared to the landscape just a decade ago, Georgia’s CDFI industry has undergone a remarkable transformation – from a handful of institutions to a robust network of 35 that collectively move hundreds of millions of dollars into communities across the state. This growth wasn’t accidental but rather the result of years of intentional collaboration among foundations, public agencies, and private investors who understood that building financial infrastructure takes patience and coordination. The strategy of attracting national CDFIs to establish headquarters in Atlanta while simultaneously supporting locally-rooted CDFIs has created a complementary ecosystem, where national players bring large balance sheets and connections to different capital markets, and local CDFIs bring deep place-based expertise and relationship capital that create trusted footholds in communities across the state.

The emergence of CDFIs in markets like Thomasville and Athens tells an equally important story about adaptation and possibility. These institutions are proving that mission-driven lending works across Georgia’s diverse geography—from urban cores to small towns—each CDFI tailoring its products to what their specific market needs, whether that’s equipment financing for rural manufacturers or startup capital for Main Street businesses. The patient capital that foundations provided gave these CDFIs time to learn their markets, build trust, and develop sustainable operations without having to choose between mission and financial stability.

From 2005 to 2022, CDFIs deployed $3.6 billion in lending across Georgia communities. Using industry-established methodologies, including the 8:1 leverage ratio, we can reasonably estimate that this investment generated between $6.2 billion and $28.8 billion in total economic impact and created 30,000 to 60,000 jobs. These aren’t abstract numbers. They represent families buying homes, small businesses hiring employees, and communities building essential facilities like health centers and schools.

As tremendous as these figures are, data alone doesn’t illustrate the vital roles CDFIs are playing across Georgia. What makes CDFIs irreplaceable isn’t just their lending capacity, it’s their willingness to work with borrowers who don’t fit traditional banking models.

Loss of Important Financing Infrastructure
While it is true that the CDFI industry is relatively small when compared to the conventional banking sector, the 2023 Federal Reserve CDFI Industry Survey reveals that these institutions provide essential financing infrastructure that allows more capital to reach communities that have historically lacked access to retail or commercial financial services. In fact, the same Federal Reserve survey shows that a majority of CDFIs report that they are unable to fully meet local lending demand, with 45% citing lending capital as a significant limiting factor. These constraints mean that when a CDFI fails, there isn’t excess capacity elsewhere in the system to absorb their loan portfolio or continue supporting existing borrowers. When institutions operating at capacity fail, their borrowers don’t simply transition to traditional banks. Often, they lose access to the patient capital and relationship-based underwriting that made their success possible.

These CDFIs work with borrowers having minimum credit scores of 600 and businesses generating as little as $50,000 in annual revenue, populations that traditional banks typically cannot serve profitably, and importantly, CDFIs manage to reach these populations without compromising financial controls and oversight. Research from the Minneapolis Federal Reserve found that character-based measures used by CDFIs could predict loan delinquency even better than traditional credit scores. This validates the relationship-based lending approach that CDFIs have developed through years of community engagement and embeddedness, institutional knowledge that cannot be replicated by conventional lenders operating with standardized underwriting criteria.
The Absence of Viable Alternatives
The Federal Reserve data illuminates a critical reality: there isn’t a line of traditional lenders waiting to serve CDFI borrowers. Nearly half of loan fund respondents reported small business lending as their primary business line, providing small loans up to $50,000 for businesses with five or fewer employees, exactly the type of lending that doesn’t fit traditional bank models. In essence, CDFIs innovate where others cannot, and when CDFIs disappear, this segment of the economy doesn’t get served differently – it simply doesn’t get served at all, or worse, it gets exploited by predatory lenders.

Financial innovation and flexibility are especially important when the economy strains and employment numbers fall. Studies of past economic downturns, particularly the Great Recession (2008-2009), indicate that community development lenders (like credit unions and CDFIs) maintained higher lending levels than mainstream banks, particularly in low-income communities. Research from the Federal Reserve and the Urban Institute has shown that CDFIs were instrumental in financing small businesses, affordable housing, and nonprofit organizations when traditional banks cut back. During the 2008-2009 Great Recession, traditional banks significantly tightened lending standards while CDFIs sustained or increased lending activities. Opportunity Finance Network (OFN) reported that its member CDFIs increased small business lending by 23% between 2008 and 2010, despite the broader credit crunch. The countercyclical nature of CDFI lending makes them powerful community resilience agents during economic uncertainty, which makes the Trump Administration’s threats to The CDFI Fund and key community financing programs at EPA, USDA, HUD, and others all the more dire.
Reduced Crisis Response Capacity
CDFIs have proven themselves as essential infrastructure for community resilience, especially during economic downturns and natural disasters. During COVID-19, these institutions served as critical channels for emergency relief funding, often reaching small businesses that couldn’t navigate traditional bank bureaucracy quickly enough to survive. Beyond economic downturns, CDFIs consistently step into the gaps left by natural disasters that destroy homes and disrupt business operations.

The value that CDFIs bring as front-line investors and organizers was on display in the aftermath of Hurricane Helene’s devastation of Asheville and Western North Carolina. Within days of the disaster, a local small business-focused CDFI, Mountain BizWorks, launched WNC Strong. Anchored by Mountain BizWorks, the coalition raised $65 million and deployed over $36 million in direct recovery loans to 621 small businesses across 24 counties, retaining 5,041 jobs. When their survey found that 96% of local businesses were impacted with average losses exceeding $300,000, Mountain BizWorks provided technical assistance in both Spanish and English, ensuring underserved entrepreneurs could access recovery capital that traditional banks wouldn’t provide to storm-damaged, temporarily closed businesses. Similarly, the Foundation for Appalachian Kentucky launched its Southeast Kentucky Flood Relief Fund within hours of historic flooding ripping through Eastern Kentucky counties in 2022. They raised nearly $2 million and facilitated funding for individuals, families, local nonprofits, small businesses, and farmers when traditional financing wasn’t available. After the devastating February 2025 floods struck the region again, they responded with their Appalachian Crisis Aid fund, partnering with Invest 606 and the Appalachian Impact Fund to provide flood relief grants to 97 small businesses and 39 farms, precisely the kind of rapid, targeted assistance that helps communities maintain local ownership and economic stability rather than losing assets to outside buyers during vulnerable recovery periods.

Capital Onramps:

Understanding When CDFIs Need Different Tools

Grants: Building the Foundation
When CDFIs Need Grants

Grants typically cover the costs that can’t be supported through loan income—the community engagement work, technical assistance, and relationship building that make CDFI lending possible but don’t generate revenue. New CDFIs need grants for startup capital and core infrastructure like loan origination systems, compliance frameworks, and initial staffing. Established CDFIs need ongoing grant support for expanding into new markets, piloting innovative programs, or deepening their community engagement in underinvested areas where loan volume alone can’t cover program costs. Think of grants as an investment in what makes CDFIs different from banks. A CDFI working with first-time homebuyers might spend 20 hours helping a family understand the mortgage process, improve their credit, and navigate down payment assistance programs. That relationship-building work is essential to their mission, but doesn’t fit traditional lending economics.
Recoverable Grants: Bridging to Sustainability
When CDFIs Need Recoverable Grants:

These work best when CDFIs are building toward specific capacity milestones or weathering temporary challenges. A CDFI might need recoverable grants to build loan loss reserves that will unlock larger lines of credit from banks, or to expand into a new geographic market where they expect to achieve sustainability within three to five years. Federal programs often require matching funds, making recoverable grants particularly valuable for CDFIs accessing CDFI Fund awards or New Markets Tax Credits. Recoverable grants also help CDFIs during economic downturns when their borrowers face stress, but the CDFI’s long-term viability remains strong. The “recoverable” aspect gives investors some protection while providing CDFIs with patient capital that won’t disappear during difficult periods.
Below-Market-Rate Loans: Scaling Proven Programs
When CDFIs Need Below-Market Loans:

Once CDFIs have proven their model and established consistent revenue streams, below-market loans provide capital for scaling without the uncertainty of grant renewals. These work particularly well for lending capital, the funds that CDFIs deploy directly to borrowers. A CDFI with a strong small business lending program might use below-market debt to double their lending capacity, knowing they can service the debt through loan income while still offering competitive rates to their borrowers. Below-market loans also fit well for real estate development projects where CDFIs can point to specific assets and revenue projections. The predictable cost of capital helps CDFIs offer more competitive terms to their borrowers while building institutional credit history with investors.
Market-Rate Investments: Full-Scale Partnership
When CDFIs Need Market-Rate Capital:

Mature CDFIs with strong financial performance can access market-rate capital for large-scale expansion or complex projects. This might include securitization activities, secondary market sales, or major real estate developments where the CDFI can offer market returns while maintaining their community focus. Market-rate capital also becomes important when CDFIs are ready to leverage institutional debt markets or work with banks seeking Community Reinvestment Act credit. The key is that CDFIs at this stage have demonstrated they can generate returns sufficient to service market-rate debt while maintaining their mission focus.

Tackling “Too Risky” Head-On

Let’s talk honestly about what keeps asset allocators up at night when they consider CDFI investments. More often than not, it’s the fear of capital loss. So let’s examine what might cause an impact investor to lose capital and see what the data actually reveals.

General Economic Volatility

CDFIs have demonstrated remarkably stable performance even during challenging periods. According to OFN’s analysis, average net charge-off ratios decreased from 1.11% in 2018 to 0.51% in 2019. CDFIs actually improved loan performance during economic uncertainty. Even CDFI loan funds serving the highest-risk borrowers maintained charge-off rates around 1.25%, comparable to traditional small business lenders. Even during the 2008 financial crisis, when more than 500 banks collapsed across the country, all 500 CDFI loan funds certified by the U.S. Treasury not only survived but expanded lending above pre-recession levels. Independent research commissioned by the CDFI Fund found that CDFIs carried “no more risk of financial failure than mainstream financial institutions,” even after controlling for mortgage market exposure during the crisis.

And when it comes to actual capital protection, CDFI investors have multiple safety nets to ease concerns about loss of capital. CDFI banks and credit unions carry standard FDIC and NCUA insurance protecting deposits up to $250,000 per account, the same coverage as any mainstream bank, while specialized programs like the CDFI Bond Guarantee Program provide full federal backing for qualified loans. Even uninsured investments in CDFI loan funds benefit from first-loss capital structures where foundations and government grants absorb initial losses before private investors take any hit. The reality is that investing in a CDFI often carries more explicit protections than buying corporate bonds or making direct impact investments, yet somehow the perception of risk persists despite decades of data proving otherwise.

Unpredictable Federal Support Levels

Federal programs like the CDFI Fund’s Financial Assistance awards, New Markets Tax Credit, and Capital Magnet Fund provide the patient, flexible capital that allows CDFIs to make below-market loans and serve borrowers that banks typically reject. These programs act as multipliers – where a single $500,000 award can leverage millions in additional private investment. Most critically, this funding lets CDFIs maintain their mission without choosing between financial sustainability and community impact.

While the proposed FY26 budget cuts are deeply concerning, and the policy shifts of recent months even more troubling, it’s important to acknowledge that CDFIs have navigated federal uncertainty before. The CDFI Fund lacks a permanent appropriation, making funding levels uncertain year to year. I’d like to offer three important bits of context or recent developments:

These proposed cuts haven’t been voted on by Congress, where CDFIs have historically enjoyed strong bipartisan support. Previous administrations have proposed zeroing out the CDFI Fund without success. Experienced CDFI leaders remain cautiously optimistic that bipartisan support will prevail, and some level of funding will be appropriated.
On July 21, the U.S. Treasury named Dietrich Douglas as Acting Director of The CDFI Fund following the resignation of Director Pravina Raghavan, which occurred amid the FY25 CDFI Fund applicant award cycle. Many are viewing this as good news, both because the Acting Director has experience working at the Fund and because it provides leadership stability during the funding cycle.
The New Markets Tax Credit achieved permanent extension through H.R.1, securing $5 billion in annual allocation authority. This milestone, long advocated by CDFI and community development professionals nationwide, demonstrates what coordinated advocacy can accomplish and ensures this critical tool remains available.

Strained Capital Base & Operating Resources

Reducing or eliminating federal programs would undeniably create new operating realities for CDFIs and delay important community investments. However, CDFIs have built diversified funding models that blend public, private, and philanthropic sources. The CDFI Fund estimates that for every $1 awarded, recipients leverage $8 from other sources—banks seeking CRA credit, state and municipal partnerships, foundations, and private investors. This 8:1 leverage ratio demonstrates how CDFIs use mission-driven capital to attract substantial additional investment and create multiplier effects throughout their communities, and it strengthens financial resilience.

Compared to traditional banks, CDFI capital costs (or weighted average cost of capital “WACC”) stay remarkably stable, which makes financial projections and managing operations more predictable. While traditional banks saw their borrowing costs swing wildly as the Fed raised rates 475 basis points from 2021 to 2023, CDFIs kept their WACC in a tight range of 1.9-2.9%. Why is this? Well, it relates to that 8:1 leverage ratio mentioned above. CDFIs don’t rely on any single funding source. They blend patient capital from foundations, below-market debt from mission-aligned banks, federal programs, and earned revenue. It’s not just about multiplying dollars. It’s about creating a diversified capital structure that provides enough predictability for CDFIs to balance mission and financial goals.

The data tells a consistent story. CDFIs have weathered recessions, political swings, and market volatility while maintaining portfolio performance that matches or exceeds traditional lenders. They achieve this through deep market knowledge, patient workout strategies, and diversified capital structures that reduce dependence on any single funding source.

Though I would be remiss if I didn’t take the opportunity to remind folks that this business model, while resilient, often requires grant subsidy. Self-sufficiency ratios, levels of earned vs. contributed income, vary based on CDFI size, lending focus, and geographic operating market. Still, the general rule of thumb is that CDFIs operate at 70% self-sufficiency, meaning they need grants to cover 30% of expenses.

The textbook definition of sustainability is the ability to be maintained at a certain rate or level. In 1987, the United Nations’ Brundtland Commission defined it as “meeting the needs of the present without compromising the ability of future generations to meet their own needs.” Unfortunately, the use of this term in grantmaking and investing is not about maintaining, meeting needs or seeking balance. It’s used to define when we will no longer need each other.

We need each other more than ever. While our roles eventually change, those roles should never be defined in a way where we are no longer working with each other and supporting a collective mission. To this end, I hope that we can arrive at a shared understanding of “sustainability” — a definition that elevates a shared goal of prosperity for everyone, and an understanding that we need a deep and long-lasting solidarity to achieve that goal.

Rudy EspinozaCEO of Inclusive Action for the City, a CDFI serving Los Angeles County and beyond–https://nextcity.org/urbanist-news/cdfis-sustainability-and-trumps-skinny-budget

Get Inspired & Get Connected

Use the database below to familiarize yourself with the types of investments others are making into CDFIs, and then peruse the leader directory to connect with local CDFI leaders about their capital needs!

We’ve compiled over 100 publicly disclosed investments in CDFIs from foundations, corporations, and government entities, representing nearly than $400 million in deployed capital. The dataset reveals the diverse array of financial tools available for CDFI investment, from traditional loans and grants to equity investments, guarantees, and recoverable grants, each serving different risk-return profiles and impact objectives.

For prospective CDFI investors, this resource demonstrates how peer institutions structure their investments, including typical terms (ranging from 3 to 15 years), return expectations (from 0% program-related investments to market-rate returns), and impact focus areas. The data shows that successful CDFI investing isn’t one-size-fits-all. Community foundations often provide patient, below-market capital for local initiatives, while larger foundations deploy multi-million dollar investments for systems-level change, and corporations blend business objectives with community impact through strategic investments.

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Guidance on Building Investment Relationships

For CDFIs: Making Your Case

Ask for What You Actually Need

You won’t get what you don’t ask for. Research what tools your potential partner currently offers, but don’t limit the conversation unnecessarily. If you need both grants for community engagement and below-market debt for lending capital, present the case for both. Ask what the investor might need to see to try something new with you. Maybe they’ve never made an impact investment, but they’re curious about it.

Help Them Understand the CDFI Field

Many potential investors will be new to community development finance. Help them understand how capital flows through your organization and what you use it for. Talk about your earned versus contributed income and your self-sufficiency ratio. Explain that you need grants because of your community engagement work, technical assistance, and focus on underinvested communities, activities that create impact but don’t generate revenue. Discuss your weighted average cost of capital and how specific investment terms help your end borrowers. If a foundation offers you a 2% loan instead of a 5% loan, explain how that helps you offer a small business owner a 7% loan instead of a 10% loan, and what that means for a family trying to expand their restaurant, or how that improves the financial outlook for a community real estate project.

Be Honest About Your Constraints

If there are investment restrictions or terms you can’t accept, explain why rather than just saying no. But also be willing to flex where you reasonably can. If a place-based funder wants assurance that their capital will stay local, work through what that might look like. Maybe you can guarantee that their specific investment serves borrowers within a certain geographic area, even if other parts of your portfolio operate statewide.

For Investors: Approaching CDFI Partnerships

Bring Curiosity to the Conversation

Yes, you have resources they need, but approach these conversations with genuine curiosity about potential mutual benefits. CDFIs often have deep community knowledge, relationships with other local organizations, and insights about economic development that could inform your broader grantmaking or investment strategy. The CDFI might be reaching out for capital, but they could also become a valuable partner for understanding community needs.

Do the Work to Grow Your Understanding

Don’t be afraid to ask simple questions or do background research to understand both the CDFI industry and your local partner better. Read their annual reports, look at comparable organizations, and ask peers about their experiences. The Federal Reserve Banks publish excellent research on CDFIs that can help you understand how these institutions fit into the broader financial system.

Start Where You Are

If you haven’t made an impact investment before and don’t have established guidelines, that’s okay. Ask peers how they made their first CDFI investment, or bring a board champion to early conversations. That board leader can help you think through what might work within your organization and what you’d need to develop new investment policies. Remember that many successful CDFI partnerships started with small investments that grew over time as both sides learned to work together.