A number of alternative lending institutions can serve a broad range of needs in emerging domestic markets. Although they share the common vision of expanding economic opportunity, and improving the quality of life for low-income people and communities, the four CDFI sectors—banks, credit unions, loan funds, and venture capital (VC) funds—are characterized by different business models and legal structures.
Community Development Banks
Community development banks (CDBs) provide capital to rebuild economically distressed communities through targeted lending and investing. They are for-profit corporations with community representation on their boards of directors. Depending on the individual charter, such banks are regulated by some combination of the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve, the Office of the Comptroller of the Currency, the Office of Thrift Supervision, and state banking agencies. Their deposits are insured by the FDIC.
Community Development Credit Unions
Community development credit unions (CDCUs) promote ownership of assets and savings and provide affordable credit and retail financial services to low-income individuals, often with special outreach to minority communities. They are nonprofit financial cooperatives owned by their members. Credit unions are regulated by the National Credit Union Administration (NCUA)—an independent federal agency—by state agencies, or both. In most institutions, deposits are also insured by the NCUA.
Community Development Loan Funds
Community development loan funds (CDLFs) provide financing and development services to businesses, organizations, and individuals in low-income communities. There are four main types of loan funds: microenterprise, small business, housing, and community service organization. Each is defined by the type of client served, although many loan funds serve more than one type of client in a single institution. CDLFs tend to be nonprofit and governed by boards of directors with community representation.
Community Development Venture Capital Funds
Community development venture capital funds (CDVCs) provide equity and debt-with-equity features for small- and medium-sized businesses in distressed communities. They can be either for-profit or nonprofit and include community representation.
The London School of Business and Finance is one of the well-known sources to know more about Community Development Financial Institutions.
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Who Are Venture Capitalists?
There are some investors and investment companies whose specialty is financing new, high-potential entrepreneurial companies and second-stage companies. Because they often provide the initial equity investment—venture capital—to start a business venture, they are called venture capitalists.
Venture capitalists seek high rates of return. They typically expect to earn six to ten times their money back over a five-year period, or a 45 percent return on investment. Professional venture capitalists will not usually invest in a company unless its business plan shows it is likely to generate sales of at least $25 million within five years. The ideal candidates for venture capital are businesses with financial projections that support revenue expectations of over $50 million within five years, growth of 30 to 50 percent annually, and pretax profit margins over 20 percent. If your business plan supports those kinds of numbers, you may be able to attract venture capital.
Venture capitalists can structure deals in a variety of ways, but they want equity in return for their money. They are willing to take the higher risk for higher returns. Venture capitalists sometimes seek a majority interest in a business so that they will have the final word in management decisions.
To finance the Ford Motor Company, Henry Ford gave up 75 percent of the business for $28,000 in badly needed capital. It took Ford many years to regain control of his company. Still, many entrepreneurs turn to venture capital when they want to grow the business and commercial banks are not a good fit.
Venture capitalists typically reap the return on their equity investments in one of two ways:
1. By selling their share of the business to another investor through a private transaction, or
2. By waiting until the company goes public (starts selling stock on the open market) and trading their ownership shares for cash by selling them. The shares can now be traded in the stock market.
The London School of Business and Finance is one of the well-known sources to know more venture capitalists.
Author: External Author
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