CDFI Capitalization Planning

Capitalization and fundraising are ongoing endeavors for CDFIs of all types and sizes, especially as the CDFI industry continues to grow in order to meet the diverse financing needs of a wide range of communities and markets.  As the expansion of a CDFI is principally based on available capital to meet increased demand, capitalization planning becomes an essential activity for any organization that wants to grow in a smart and responsible manner.

The challenges of capitalization and fundraising are inherently different depending on the type of CDFI.  For example, CDFI banks and credit unions are able to capitalize through deposits from their members, whereas nonprofit CDFI loan funds do not have this ability.  Regardless of the type of CDFI, there are several key factors that an organization should consider as part of the capitalization planning process:

• Types of Capital – In general, CDFIs are capitalized through a mix of debt and equity capital, as well as grant funding and donations.  While grants and donations are not expected to be repaid, debt capital must be repaid, but there are unique low-cost debt instruments available to CDFIs such as the equity equivalent (EQ2) and program-related investments (PRIs).
• Sources of Capital – There are a wide range of sources through which CDFIs can access the various types of capital mentioned above, including individual donors and investors, foundations, banks, and corporations, as well as local, state, and federal governments.
• Leadership in Pursuing Capital – The success of a CDFI’s capitalization and fundraising efforts are largely dependent on the efforts of an organization’s board and executive team.  As such, it is important to make sure that the board and executive team are actively engaged and on board with the process and have the ability to successfully tap their personal and professional networks to build relationships with funders.

FUND Consulting has completed numerous capitalization plans for clients across all CDFI categories.  Our most recently completed capitalization plan for a business loan fund client grew out of a market study that FUND completed for the organization, which indicated need and demand for the organization’s products and services its target market.  The capitalization plan laid out a blueprint for the organization’s board and executive team to grow its capital base over the next two years, including recommendations on both debt capital and grant funding opportunities.

How is your CDFI capitalized?  What strategies are you currently pursuing to expand your organization’s capital base?  If you organization is interested in getting a good introduction to CDFI capitalization, check out the resources on the CDFI Fund’s Capitalization Resource Bank webpage.