Budget Your Business

Bank Series: The Unknown Banking Solution for Under-Capitalized Small Business is CDFIs

• Scott Geller • Season 1 • Episode 46

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E#46: Find Your Bank Series: CDFIs - Scott sits down with Leah Fremouw to unpack a part of the financial ecosystem most small business owners have never heard of: CDFIs, or Community Development Financial Institutions. Leah explains how CDFIs differ from traditional banks, why they exist, and how they’re designed to say “yes” in situations where banks often can’t. From small-dollar loans to layered financing structures, CDFIs focus on access to capital, especially for underserved and under-resourced businesses.

The conversation digs into how CDFIs actually manage risk, why their charge-off rates are often lower than traditional lenders, and how their hands-on approach helps business owners navigate challenges before things go sideways. Leah shares real examples of how CDFIs partner with banks, fill financing gaps, restructure high-interest debt, and improve cash flow in ways that materially change a business’s trajectory.

Scott and Leah also explore what makes a business a good fit for a CDFI relationship, why knowing your financial story matters more than a 40-page business plan, and how capital should support growth—not create stress. They discuss the importance of treating banking as a relationship, not a transaction, and why business owners should be more critical consumers of financial services.

The episode wraps with practical guidance on how to find a CDFI, when to bring one into the conversation, and why trusted financial partners matter long before you actually need the money. For business owners who feel like they’re “just a number” at their bank, this episode opens the door to a different way of thinking about capital, risk, and support.

Podcast Recommendation: Renegade Capital Podcast

Find out more about Leah Fremouw: $LINKTOPERSON

www.bridgingvirginia.org 

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Leah Fremouw:

Getting set up for success and having a partner on the other side of that will be really important because not everything's gonna go as planned. And when you have a bad month and you need to let them know or have an interest-only holiday, do you have someone that you can call and trust that they will get they have your back? Or are they gonna start to ding you and you're worried about being sent to collections? So that and fees and deposit accounts, all of that is negotiable.

Scott:

Welcome to budget your business, the podcast for small business owners who want to learn how to financially plan for every aspect of their business. I'm your host, Scott Geller. Today I'm joined by Leah Freemau of Bridging, Virginia, as part of our new episodes series around finding the right bank. This is part of the series where I'm inviting bankers or experts in the banking field to bring their perspective around helping business owners find the right type, the right size, and the right fit for their small business. Welcome, Leo. Morning. How are you? I'm doing great. Thanks for coming on board. Yeah, I'm excited to be here. So the traditional banks, the way I'm breaking this series down is you have your primary three categories that as a former Federal Reserve bank employee, I kind of went with their definitions. You have the global systemic, kind of the important banks. Those are over over 100 billion in assets. That's the first. The second is large banking organizations. Those are over 100 billion assets, but they're not globally systemic. You have your regional banking organizations, and then you have your community banking organizations. So those are the kind of the some of the more well-known, but then there's others. You have online banks, you have SNLs, you have credit unions, and you have CDFIs. And that's why I asked Leah to come on board with us today, because she's the expert that I know has been working with CDFIs for for quite a few years now to help us understand the CDFIs. So Leah, let's just kind of get started here. Let's start with a softball. And what is a CDFI and how does it kind of compare to some other banks?

Speaker 2:

Yeah, no, so a CDFI or a community development financial institution is a um lending institution, or that their core function is finance and investments. Um so and they work all across the country. There's about 1,400 of them in the United States. I'm comparing that with some of the banking partners that you just mentioned. There's 3,000 banks. Um, and I'm not including credit unions in that number, too. So again, it's a small, it's a small sector, but uh I mean, I'm biased, uh, highly impactful. Uh, because not only do we do lending and provide banking services like deposits and car loans and things like that, but we also have a mandate to do a minimum of 60% of our financial and service activity in what we would call underserved or under-resourced markets. So CDFIs have to drive capital and create access in things like affordable housing projects, small business owners that are historically left out of traditional financial institutions or financial systems, probably providing support services that looks like counseling and capacity building at a project level. So if a small business owner has never had a loan before, you know, it takes a little bit to get comfortable with that process. And so we're built to support our project and our part client community partners in that process. How do you get ready for lending? How do you get your financials in order? Do you have your taxes on the real estate project side? It might be that there's tax credits involved, or there's a local government grant program that is helping to subsidize some of the financial stack, as we call it. And uh CDFI professionals are experts in their field and are used to walking partners through that process to get them to the capital tool that needs that they need to make the project happen. So that's how we're different. We partner a lot with banks and other more traditional institutions to do this work. And in fact, a lot of us in one deal, there could be three or four financial institutions involved as we layer in our different resources and I would say our risk tolerance. That's the other thing, too. That our federally regulated institutions have a different tolerance for risk and where they where they can say yes. CDFIs uh across the board probably say yes to deals that banks and other credit unions uh can't or won't say yes to.

Scott:

And that's interesting, Leah, where you're saying you know that they they're able to say yes where banks can't. Does that make CDFIs riskier for businesses to work with?

Speaker 2:

Um I don't think so. And actually the the stats back that up. Um if you look at what we call charge off rates, or in other words, uh loans that have gone bad, uh the the borrower is not able to pay, and uh, you know, the lending institution would write it off. Um CDFIs across the board are below 1%, usually 0.5% of charge off rates if you look at their portfolios. The other thing is that we, you know, because of how we're built and like kind of the support that is part of our expectation, is like we are walking with our borrowers and usually can help kind of earlier before a deal would go bad, or a borrower would have time making or have a problem making payments on time. We're like in the mix with them because a lot of us are viewed as a trusted partner. Speaking from Virginia's experience specifically, we have borrowers call us first when things start to go, you know, off plan and say, hey, bridging Virginia team, my contractor didn't show up, I'm gonna be late, or or the contract didn't come through, or the federal grant. We're hearing a lot of that right now is not coming at this point. And so, how do we can I get an interest-only holiday? Can I defer payments? How do we restructure this? Because I, you know, I'm gonna have a big payment here at the end of this month, but I'm not ready to pay off that balance. And so I think, yeah, like our risk tolerance on paper might be a little different than our more financial or traditional institutions, but we're in the mix with them, so we're prepared for it. We support our borrowers through that. And ideally, everybody is kind of stable uh throughout the process.

Scott:

And if a CDFI is operating with other banks, whose responsibility is for it to bring these other banks to the table? Is it the business owners? Is it is it yours at the or or yours or your or others at the at the CDFIs?

Speaker 2:

I think it it depends um on how the kind of the project comes together. Um I would say just from my experience, uh we and other CDFI professionals, we kind of have an interesting view of money and how money can come into a deal. So if I meet a borrower that has a banking relationship and needs more, so Bridging Virginia, it's a small business CDFI. We lend from 15,000 to 100,000. So I meet a borrower that needs 200,000 or 150. That's above our max. But they have a banking relationship that they value and it feels like an actual relationship, not just a transaction or they're not just a number. And so the conversation might be okay, bar business owner, talk to your lender at your bank, see if they can do most of the deal. And then Bridging Virginia can come in and fill in the gap that they can't do and actually help mitigate the risk on the bank's side. Because we're, again, we're a little bit more risk tolerant most often. Other times it works the other way, where they have the loan, they're ready to, you know, they can, they've got the pre-approval, but they're missing a piece of it. And it might be something like they've got a loan to buy the building, but they have to move their staff or like they're kind of concerned about payroll while making that transition and using all their resources for the acquisition. So they might get a separate loan from a CDFI like or a line of credit to have working capital while they're going through that transition.

Scott:

Okay. You mentioned the uh building uh bridging Virginia, and we kind of skipped over your background, but why don't you tell us a little bit about yourself and bridging Virginia?

Speaker 2:

Yeah, so um back to actually to your first question about what a CDFI is. Um it's funny because I didn't know what one was until I started working for one, which was um in 2016, I joined the team at Virginia Community Capital, now known as Locus, and had the privilege of working with the community innovation team. And we did a lot of the support services and kind of the market engagement for that larger CDFI. It's a statewide organization, about 20 years old now. Um, and so we would work with the local town manager or the real estate developer to kind of connect resources, maybe get a foundation involved or an impact investor. Um, we had a teammate in Southwest and Southwest Virginia, and she was doing uh business accelerator programs, one-on-one business counseling. And so I got had a um a great time working there for about six years. And then in 2022, I jumped over to be the first employee at Bridging Virginia. We were founded um out of COVID, um, which was initially a project led by Harrison Rodet, who is a good friend and now my board chair. Uh I didn't start there, actually. It was a cold call to VCC when he uh wanted to be part of the solution making uh during the height of COVID. And it was $100,000 to provide a guarantee or what we call a loan loss reserve for a credit union to fund five Black businesses that you know had a COVID impact. Um, because of the resource there, the credit union could ignore credit history, COVID impact, those things that they would normally kind of use to say no. Um and so from there, um what was clear was that this gap in the market for businesses, the 15,000 to 100,000, was not being served. So not only was the uh demographic of the business owner a barrier. Um, if you look at the banking system and systems of capital, uh it's very it's very racist, it's very sexist, you know, if you go back in history. So that was one focus. The other thing is that the size of the loans that we do, um, we call them small dollar loans. Some would say microlending, but um, institutions don't make money on those loans. So if you think about a $50,000 loan at 10%, that's five grand. You know, that's not paying anybody's salary. So no one was really doing that type of lending, specifically in the rich market. So we um we formed the nonprofit. I went over to be the first staff person in 2022. We did our first direct loan to a nonprofit so actually, so they could buy a building. We provided a line of capital so they could uh move their team and have that buffer. Um and since then, we've been able in our partnership with the Metropolitan Business League, not only to do close to a million dollars of lending, direct lending into the hands of small businesses, but partnering with them on some grant programs and the Kiva program, which is a crowdfunding loan, a 0% um loan from $5,000 to $15. We have about $2.5 million out in our communities since 2022. That's fantastic.

Scott:

You've touched on this in a few different ways, but is there a kind of quote perfect business that a CDFI work can work with?

Speaker 2:

I would say no, in that like similar to a CDFI, you've met one, if you've met one CDFI, you've met one CDFI. You know, every business owner is unique in their problem solving, their tenacity, what they're passionate about. And some of them are a little bit more prepared for a lending relationship because they already have QuickBooks set up, they already have a banking relationship, maybe they've had a credit card for the business before. Others, this is their first time coming into a debt relationship. Maybe they've had you know horrible experiences with a banking partner where they were treated poorly, or they did what they needed to do at the time and used a personal credit card or got that merchant line that was really high interest. And so their credit kind of sucks, you know, but they did what they needed to do for the business. Um, so we bridging Virginia prides itself on meeting the business owner where they are. And what we are built to do is to kind of customize the loan product, whether it's a term loan, which is very similar to a home mortgage where you have a fixed monthly payment and you get all the cash at once, you know, sometimes that's a great tool to buy a piece of equipment or to um staff up or you know, scale into your next version of itself, or it's a line of credit. For us, all of our rates are under 10%. So a line of credit functions like a credit card, but our rates are a lot better than even your normal V said MasterCards at 10%. So given on what they're trying to solve for, um, we work really closely with them to figure out what the best angle is because we will meet someone and they say, I need $50,000 to buy the truck. We get into their financials, we learn about their credit history and find out that they have um predatory debt or high interest credit cards. And if we just refinance the high interest debt, all of a sudden cash flow is better and they can buy the truck on their own because now they've gone from $12,000 a month, which is something we just this is true, like real live example. $7,000 a month in just debt for a restaurant owner, just refinancing the merchant lines that they had through Toast and another vendor, they're down to $4,000 of debt a month. And so that's you know, that's $7,000 delta. I mean, that's huge for that restaurant to be able to do what they need to do on their own.

Scott:

Understood. So what are some of the kind of characteristics of a business that works that a CDFI would work well with? Are there any key characteristics or or styles maybe that a CDFI does work well with?

Speaker 2:

I think this goes a little bit beyond the CDFI. So for a business to be success, successful managing debt, you know, it really is, and we get questions all the time about, you know, oh my business plan and and kind of like the what they are focused on. And the businesses that know their financial story and their numbers and how that ebbs and flows are the ones that can manage the debt relationship after the loan closes. And so while we'll get business plans and you know, you do need to think about your market and your purpose and your competition, but 40 pages of that is not as useful as maybe some high-level strategic goals, some you know, monthly action items, and really paying attention to your financials. So your operating budget, your burn sheet, or I would say your cash flow sheet. So how is your spending? How's your income, you know, offsetting the spending? And is that are you gonna have cash in three months or are you gonna burn through it? You know, those are the types of management tools that if they don't walk in with them, we help them set up. And then through our kind of monthly or quarterly check-ins, depending on the relationship that we set up, we're asking them to continue to focus on those. And what is your what is your financial story and path and and staying focused on that? Because that's what that's what bridging is built for, is the money piece. Um, we partner a lot with other business support organizations like the Metropolitan Business League, Small Business Development Centers, and then they're they're built to do different types of of work with business owners, but the bridging Virginia team really focuses on the capital.

Scott:

And most CDFIs work with business owners to kind of help put some of that administrative and and financial structure around it. Because I see this all the time as well, Leah, where a business might even be successful and they may not, but they just don't know because they don't, you know, they're excellent at what they do, they're not excellent at the finance or the accounting side. So do most CDFIs kind of help them understand that? They should be.

Speaker 2:

And I would say that not all CDFIs behave like CDFIs, you know, and that's that's an issue in our industry where through the the industry has been around since 1995 officially, it's older than that, but the certification from the Fed came through around that time. Um, some of the CDFIs behave like your more traditional banks and sales goals and bigger deals with more interest income have become the priority. But if the CDFI really is focused on the community impact, the the lenders and the team will be the sales goals aren't as important as the impact goals. And so we should be supporting clients through those processes because that's what we're built to do. You know, if we're not doing that, then we're acting like you're more traditional institutions.

Scott:

And um Right, I understood. So let me flip my my question the other way. Are there certain businesses that CDFIs don't work well with? Or or or it's not maybe it's it's not the right match?

Speaker 2:

Um I think there would be businesses that, again, just speaking from bridging's example, that we might encourage them to go to a more traditional institution because they don't need us. You know, we have philanthropic dollars, we have impact investors that have kind of community goals aligned with their investment in us. And if a business is bankable, which means credit score is probably above a 700, cash flow is not questionable, they've been in business for 10 years, then they don't need us. Any bank would probably compete for their their relationship. So sometimes it's a hey, you're great. We would love to bank you, but you don't need us. Let me send you over to a community bank that we work with all the time, and they're gonna take great care of you because you're a great deal. But yeah, I don't think there's not, I mean, there's not a business that we wouldn't bank. It's just a matter of setting the impact priorities over the kind of the closing the deal priority.

Scott:

And that makes sense, and that that's kind of what I was expecting. The answer uh and there are, right? There's good matches, and and then there's maybe where they fit better somewhere else. So thank you. That that was a that was a really good explanation of that. So I I'm a Carolina Panthers fan. My team won yesterday. They've they've finally have a winning record. They have a stadium with Bank of America written on it. You see Bank of America ads everywhere. You see a branch, most corners of every city and town. CDFIs you don't see on too many stadium rights. So how does how does a banker find a CDFI? Yeah, not a banker. How does a business extremely find a CDFI?

Speaker 2:

Yeah, and that's that's part of our um problem, actually, is it's we're an unfortunate secret. As I as I mentioned, there's 1400 of us across the country, there's not 20 of us here in the state of Virginia. Um, I would love for bank credit union and CDFI to be something that my neighbor, not in the financial sector, knows, you know, because you know, what are we, how are we working? Um a lot of our credit unions and CDFIs, like you might already know them. You just might not know that they're a certified institution. So websites like the the federal CDFI fund at the Department of Treasury, there's a list you can look at your state and find CDFIs that are listed there. The Opportunity Finance Network is another national organization that again you can go and search for your state or certain names and figure out who what CDFIs might serve your area. And then the Virginia CDFI Coalition is a Virginia based organization, and we have a list of our membership on the website there too.

Scott:

Okay, those are some great resources. We'll we'll try to make sure those are those are in the Notes in case somebody doesn't can pull those out easily. It's it sounds to me like CDFIs work mainly locally. Is that true or is it a broader reach?

Speaker 2:

So some of the bigger ones like Lisc, Momentous Capital, CEI out of Maine, there's some bigger ones, uh the reinvestment fund, they have a multi-state or national presence. But most of us probably are really locally focused, place-based. So even bridging, Virginia, we technically have two offices, one in Richmond and one in Hampton Roads. But I will, and until April of this past year, the Hampton Roads was kind of a satellite office, if you will. But now that we have a full-time person that is from there, lives there, works there, like now I feel like bridging can say we're we're growing our presence in the market because we actually have a local person that knows the relationships and can be that resource. So I think a lot of CDFIs do that. They have embedded teams or teams that are in the markets that know the um and have that place focused for their market engagement.

Scott:

And then would you recommend that business owners that feel like they might not be getting everything they need from their banker, ask their banker? Could a CDFI relationship help my situation? Sure.

Speaker 2:

Sure. And I would say that don't be surprised if the banker doesn't know what a CDFI is. I think it you could start there, but as a business owner, if you're having a conversation with your banking relationship relationship manager, whether that's the person that helped you set up your deposit accounts, or you actually have a lender that you're talking to. It's okay, I need $100,000. You have, you know, you're going to have some concerns based on what I've already showed you. What if I can get another lender involved to back up what you're trying to do? So I think it's it's getting kind of ideas from your banking partner about where the gaps are, where the risk needs to be filled, and then helping, and then maybe that's where CDFIs can come in. And that's one thing I say a lot to business owners is that the as you're running a business is hard work, you're not expected to know what you don't know. So if you're good at, you know, running the restaurant and the menu and the types of in the food, accounting is probably not your thing. And that's okay. Legal stuff is probably not your thing. And so whether you have a professional resource or you have a neighbor sitting around what I would call your kitchen table or your kitchen cabinet, how is that banker part of that? Is it a relationship that you feel like you can go to them before you actually need them? Are they are they answering your emails in a timely way? Are they willing to brainstorm as you're thinking about buying the building before you've even seen it? Like, is that do you have a partner from your banker or are you just a number? And if you feel like you're just a number, then there's probably another banker in your community that would be happy to have your relationship and work with you as a partner. So be a critical consumer of your banking relationships. I think a lot of us um lean into the ease of like the online transactions or kind of those things. But when it comes to um using, I like to say, I you can finally get to a point where you can use other people's money, you know, i.e. a loan through your bank, getting set up for success and having a partner on the other side of that will be really important because not everything's gonna go as planned. And when you have a bad month and you need to let them know or have an interest only, do you have someone that you can call and trust that they will get they have your back, or are they gonna start to ding you and you're worried about being sent to collections? So that and fees and deposit accounts, all of that is negotiable. They'll send you a term sheet, but all of those things can be edited. So know that when you're walking in there, you you have power in that dynamic.

Scott:

Leah, I love what you just said because that's the the last section here, because that's exactly why I wanted to put this series together. Is I talk to business owners and that that they don't not all of them understand what a bank can do for them. And really the business is not there for the bank, the banker and the bank is there for the business. And what you just said completely captures the whole intent of the series. So thank you for that. You you threw out kind of an example earlier, but I'd love to do you have maybe another success story that you you could share with us? Oh gosh, so many.

Speaker 2:

Um, we have 33 clients, so I would say all of them are success stories, but um, I guess it's been really cool to be, you know, a small part of the business owner's story. And there's there's one business owner, and it's a family that I'm thinking about, where they don't have the restaurant anymore. But I used to eat at that restaurant. I met them through a program that Culinary Concepts, which is a program from a chef out of Charlottesville. They're doing uh kind of a food entrepreneur accelerator. They've done six six cohorts now. The restaurant owner threw that, and they were moving from kind of a hot bar, a buffet style where they're catering and taking their food to Elwood and Whole Foods and stuff to actually a frozen product line. So actually getting to meet her and say, I've enjoyed your cooking for years. You were my first exposure to Ethiopian food back when I was at VCU, and now we're a small, small part of what they're doing as they're um scaling into products instead of a restaurant experience. So that's been really cool for me personally. And I know that the team, if they were on this with me, they would have other versions of that where we get to shop and eat and kind of know the businesses by name and face. And so that's I mean, that's all like for me a personal success that I get to be in this work every day. Um, because it's it's not me doing the hard stuff. I mean, the business owners like I mean, it takes a lot to jump in there and do it, and it's hard work, and our communities are better for it. You know, it's because of them that we love to eat, you know, play, work in the city of Richmond or in Norfolk or wherever. It's you know, if you think about it, it's a coffee shops, it's breweries, it's a local theater that all makes us want to live there and stay there. And um I think we take that for granted. So it's just in a society, and we like 65% of our economies on the back of small businesses. So just being in that mix and and being a small part of that as they grow and do their thing has has been a great ride.

Scott:

Thanks for that. That is definitely a success story, so thank you. I like to wrap up all of our shows with one to three immediate takeaways that our listeners could literally put into action as they turned off the podcast. This could be something you've already mentioned around CDFIs, around business planning. You you you've seen a few businesses over the years. What do you had to share with our listeners?

Speaker 2:

I think that the relationship with a banking organization is important. One, establish a business banking account now, especially if you're a newer business. You don't want to blend your personal and business finances. So, and making sure that that banking partner you feel really good about and that it's a partnership. And so doing that now or getting a better relationship. If you already have done that, but it's feeling kind of gross. Listen to your gut, find a better partner that can be part of your story and that you feel good about having them around you. Um, so that would be the first one. The second one goes back to, you know, this the as you're building a relationship with a capital provider, we care about the money. We care about the story that the money can show us. And so you don't have to know how to, you know, build a spreadsheet and like kind of be like the savant in investing, but you do need to know where your income and your expenses are gonna hit and the cadence of that and how you're going to sustain, grow it, you know, whatever. So focusing on the financial story and when you are sharing that with people outside of your world, it's hard because it's very, very personal to you as a business owner. This is everything you've probably poured your family, blood, sweat, tears, all of that. So it is going to feel vulnerable when you open that up. And other people are literally assessing, and their job is to poke holes in it. But remember, it's an objective story, it's an objective information. It's numbers. And if you can kind of go on that ride, know the numbers, but remember, like that's that's the objective part. They did, you know, like this. The um, sorry, I'm rambling a little bit. You might can edit this out. Yes. Just that it will feel uncomfortable. You need to know your numbers. And, you know, back to the relationship you have with the lender. They're your advocate in that organization, whether it's a bridging Virginia or a Wells Fargo, you know, they need to know how to tell your story to somebody else that's never gonna meet you and whose job is it to poke holes in it. And so just getting ready for that and being mentally prepared that this isn't gonna feel great. They're gonna ask questions about things that you thought you answered three times, but you know what? It wasn't clear to that person, you know, five rooms over that never met you. So it's it's not an easy process, but once you get through it once, especially I'm thinking about the debt stuff, you know, the next time you go through it, it should be a lot easier.

Scott:

Uh being mentally prepared is is really key, I think, because it is a different conversation than business owners are used to. So yes, I I agree with that. One more ask, and that is do you have a podcast or book recommendation for us?

Speaker 2:

Yeah, um, so this is a little self-serving, and I'm only I'm only promoting uh the podcast I'm involved in because I haven't been as uh involved this year. But Renegade Capital is out there right now. We talk about different types of um CDFIs, impact investing. If you want to align your financial wealth with impact goals or climate goals, how you do that. So Andrea Longton and Ebony Perkins have kept that series alive and well, and it's a weekly podcast right now, and there's lots of great guest speakers and other CDFI resources that are linked in that um shows tool notes and on the website.

Scott:

Well, thank you. We'll definitely add that to our to our list for our listeners. Well, Leah, this has been great. We're coming up on our time here. How could people reach out to you or find you in case in case they want to get in touch?

Speaker 2:

Yeah, so bridging Virginia is wwbridging virginia.org. Um, if you're interested in lending, we have a contact form there. We don't um we don't take online applications until we've talked to you to make sure that debt is a good idea and that we're a good fit. So if you're interested in lending, go through that process. Myself, um you can find me on the website there and email me directly. I'm also a part of the Virginia CDFI coalition. So if it's not a bridging Virginia specific stuff, but you want to know more about our sector here in the Commonwealth, happy to be a resource there. And and Scott, I can give you my email if you want to link that in the the show notes.

Scott:

Well, well, Leah, thank you. I I appreciate you coming on on board today and and representing Bridging Virginia as well as all CDFI. So thank you. Thank you. Thank you. Thank you for having me. All right, folks, that's it for today. If you like the show or found something useful, I'd ask that you share the podcast with another business owner or someone that that might enjoy listening. Thank you for attending, and I welcome you next time on budget your business.