Poor or No Credit Business Loan Options: Grants, CDFIs, Alternative Lenders

By Jay DesMarteau
TD Head of Commercial Distribution

For business owners with no or poor credit, traditional bank loans may be out of reach. In these cases, your search for a business loan may include looking at alternative lenders and Community Development Financial Institutions (CDFIs). Small business grants may also be worth pursuing – especially since you do not have to repay the grant money you receive. Each of these options is very different, so it pays to do your homework to see if one is right for you.

Business funding from grants

What is a small business grant?

Often overlooked, grants can be a source of funding for some niche industry start-ups that provide a specialized product or service, or for businesses that are owned by people a grant-giving institution is looking to support. For example, business grants might be available for minority-owned or women-owned businesses or for a business with a mission that aligns with the grant-giving institution.

Benefits of a business grant

Grant funding is provided by a business, organization or individual for a designated purpose, and this funding is not paid back. As a grant recipient, your business can gain credibility from association with the individual or organization that provides the grant. In addition to funding, the organization providing the grant may also be able to provide specialized support and training.

Drawbacks of business grants

The grant application process can vary for each type of business grant and grant applications often require significant work as the information you provide will be compared against other grant applicants. Also, the decision may take some time and there may be conditions on how the funds can be used. Some grants are one-time awards – these tend to be smaller in size and not recurring year after year. Other grants may provide funding in phases with clear milestones that need to be achieved before additional funds can be received.

Want to learn more? Check out Grants.gov† and Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR)† programs.

Borrowing from a Community Development Financial Institution (CDFI)

What is a CDFI?

For borrowers who may have low to medium credit scores and are looking to find competitive lending rates, community development financial institutions (CDFIs) can be a good fit. CDFIs are mission-driven financial institutions that have been certified by the U.S. Department of the Treasury’s CDFI Fund. They include credit unions, banks, non-profit loan funds and venture capital funds that operate to serve low-income communities. Check out a full list of certified CDFIs at www.cdfifund.gov†.

How do you get a loan from a CDFI?

The "Community" piece of these loans means you'll first need to meet the CDFI's definition of the local community they serve. Borrowers will also need to meet other key requirements for a CDFI loan – such as completing the application, providing financial statements and documenting how the funds will be used. CDFIs often offer perks like a local office, educational workshops and on-the-ground support – and some CDFIs also participate in SBA guaranteed lending programs. Many borrowers appreciate the benefits of a CDFI's strong sense of community and networking with other clients through events.

What to be aware of with CDFI lending

If you're looking at CDFI funding, be aware that it may have higher interest rates and fees compared to a bank, since CDFIs coordinate funding from private sources. However, CDFI rates and fees usually will have a lower cost to borrow compared to alternative lenders.

If you're interested in exploring your options with a CDFI lender, the following institutions are supported by the TD Charitable Foundation to provide capital to small business owners from Maine to Florida:
Grameen America†
Local Support Initiatives Corporation (LISC)†

Getting a business loan from an alternative lender

What is an alternative lender?

Alternative lenders are for-profit lenders that are not FDIC-insured like traditional banks. This means they are often not regulated for the same borrower protections that a bank typically would have. These firms may specialize in a few high-demand loan products for small businesses with fast application and decision times. Alternative lenders may also be more likely to approve loans for borrowers with low- to mid-tier credit scores and for whom banks may not provide competitive pricing.

Alternative lenders may appear to be an attractive option due to the streamlined way they might finalize agreements with their clients. However, borrowers should be alert to potential downsides to these loans such as higher interest rates, as well as more aggressive repayment schedules, with greater penalties, than regulated bank lending.

3 things to consider with an alternative lender

1. Is the interest rate communicated in Annual Percentage Rate (APR)?

When a lender only communicates terms like "daily percentage rate" this can be a red flag because the rate communicated in APR is easier to compare across different types of financial institutions.

2. Do the terms and conditions allow the lender to change how often a loan payment is required?

For example, can your payment be changed from monthly to daily and how much notice is provided to the borrower? A change like this could dramatically increase the amount you need to pay back each month and could end up costing you additional interest payments as well.

3. If you borrow from an alternative lender, could your loan be sold to another lender?

Some borrowers using alternative lenders may experience having their loan being sold multiple times, which can make it hard to track who is currently servicing the loan and who to reach out to for questions.

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