What’s the Difference Between Payday Lenders and CDFIs?

2018-01-11T09:20:19+00:00 January 23rd, 2017|Blog|0 Comments

Financing a small business can sound tough, especially if you’re building something from the ground up. Between buying or renting the building, paying wages, and the legal fees involved in entrepreneurship, you might need a lot more money than you originally expected. One of the easier solutions to a financial roadblock is a Small Business Loan. But before you begin your online search, learn how CDFIs can help get your business started off right, and how they differ from payday lenders in the online marketplace.

CDFIs (or Community Development Financial Institutions) are not-for-profit organizations providing alternative financing to business owners. Rather than making a profit off the loan, CDFIs instead are focused on positive community impact and generating sustainable businesses in their area. This means loans you receive from a CDFI help fund more entrepreneurs and educate your neighbors. Some even offer extra support to underrepresented demographic groups looking for equal small business opportunities.

Payday loans are more popular online, but much worse for the business owner. These are small short term loans ranging between $100 and $1,000, but with interest rates often higher than 400% and finance charges up to 33% of the actual amount borrowed. This is higher even than credit card interest rates, and can fatally harm a new or growing business. Unfortunately, the rates are purposefully difficult to understand at first glance, and the lenders engage in predatory practices and perpetuate “debt traps,” where business owners are forced into a cycle of repeatedly borrowing money.

Learn more about avoiding payday loans, and get a list of local CDFIs in your area! Visit VEDC.org/contact and talk to our seasoned staff. We’ll help you get started with your own business funding in our coverage areas, or put you in touch with another trusted community lender.

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