When an institutional investor recently asked us, “Can you share statistics that compare the financial well-being of small businesses that borrow from CDFI loan funds versus those who borrow from conventional banks?” we paused.
It is a fair question, and an important one. But it is also deceptively complex. Comparing outcomes between CDFI and bank borrowers is not as simple as lining up two spreadsheets. The businesses served by CDFIs often start from a very different place: newer ventures, thinner credit histories, smaller balance sheets, and deeper community roots.
Answering that question well means unpacking the role CDFIs play in the broader financial system, how they fill gaps left by traditional lenders, and then looking carefully at what the data actually tell us about borrower outcomes.
At CNote, we spend our days immersed in that data and connected to the CDFIs doing the work on the ground. While there is not a simple one-to-one comparison, there is a rich story to tell about why these institutions exist, who they serve, and the growing evidence that their approach is working.
Why CDFIs Exist and Why Investors Should Care
Conventional banks have long been the primary source of small-business credit. Typical bank borrowers tend to have an established operating history, solid credit, collateral, and the documentation required for conventional underwriting. Many small firms, however, do not fit that mold.
They might be very young, located in underserved communities, have thin or low credit histories, or operate in industries that traditional lenders perceive as riskier. CDFIs were created to fill that gap.
Community-development financial institutions are mission-driven lenders such as loan funds, credit unions, or community banks that focus on serving borrowers and markets mainstream finance often overlooks. By design, they provide capital to small firms that might otherwise struggle to obtain it, or that might face unfavorable terms elsewhere.
For investors, this matters because supporting these businesses helps fuel job creation, economic inclusion, and wealth building in underserved regions. CDFIs not only fill a credit gap but also build a pipeline of enterprises that may later graduate to conventional financing. Investing through CDFIs means participating in a financial system that works for more people and communities.
What We Know So Far
1. CDFI borrowers see stronger credit scores and business profiles
A longitudinal study by the Urban Institute followed more than 22,000 small-business borrowers from five CDFIs, tracking loans originated between 2012 and 2018 and outcomes through 2022. The results were striking:
– Owners’ consumer credit scores improved, with the largest gains among those starting from the lowest base.
– Business credit visibility increased, meaning more borrowers established formal business credit histories.
– Borrowers accessed more credit over time, signaling that these firms were able to build relationships and expand financing options.
Source: Urban Institute – How CDFI Lending Shapes Borrower Credit Outcomes (2025)
2. Banks approve stronger borrowers and serve different segments
The Federal Reserve’s 2025 Small Business Credit Survey provides helpful context. It found that small banks reported the highest “fully approved” rate in 2024, about 54 percent of loan applicants. Overall approval levels remain below pre-pandemic norms, and satisfaction with online and alternative lenders has dropped, often due to higher rates and less favorable terms.
This tells us that banks primarily serve borrowers who already meet traditional credit criteria. CDFIs, in contrast, intentionally reach businesses with lower credit visibility, limited collateral, or shorter track records.
Source: Federal Reserve – Small Business Credit Survey: 2025 Report on Employer Firms
3. Mainstream banks are retreating, and CDFIs are stepping up
While CDFIs are expanding, mainstream bank lending to small businesses has been declining. According to the Federal Reserve Bank of Kansas City’s Small Business Lending Survey (Q2 2024):
– New small-business loan originations by banks declined 9 percent year-over-year compared with the same quarter in 2023.
– Loan balances increased only 4.3 percent during that time, meaning banks are holding existing loans but reducing new lending.
– Loan demand has weakened for nine consecutive quarters, and credit standards have tightened for eleven straight quarters.
Meanwhile, analysis from the Federal Reserve Bank of New York shows that CDFI assets and originations have grown substantially through 2022, reinforcing their role as critical providers of capital in underserved markets.
Sources: Federal Reserve Bank of Kansas City – Q2 2024 Small Business Lending Survey | Federal Reserve Bank of New York – CDFI Industry Data Analysis
What We Do Not Yet Know
Despite encouraging evidence, there are still important research gaps.
- There is no comprehensive, matched comparison between CDFI-financed and bank-financed firms that controls for borrower risk and tracks outcomes such as profitability, employment, or survival over time.
- Because CDFIs serve higher-risk borrowers by design, direct comparisons would be misleading without careful adjustment.
In other words, while we can confidently say that CDFI borrowers are improving their credit and financial access, we cannot yet claim that they outperform their bank-financed peers in profitability or growth. More longitudinal and causal studies will be needed to make that case.
Implications for Investors
From an investor’s perspective, several insights emerge:
- Mission and performance can align. The credit-building and formalization trends among CDFI borrowers show that social impact and sound finance can go hand in hand.
- Early-stage potential. Because CDFIs often work with newer or smaller firms, they help build businesses that may later qualify for bank financing, creating a pipeline for future growth.
- Risk and patience. Borrowers often start from a weaker financial position, so investors should view these portfolios with a long-term perspective and value the risk-adjusted social returns.
- Transparency builds trust. Highlight what is known — measurable improvements in credit and access — while being open about what the data cannot yet prove.
- Complement, not compete. CDFIs and banks serve different but complementary roles. Together, they create a healthier and more inclusive lending ecosystem.
When investors ask, “How do small businesses that borrow from CDFIs fare compared to those borrowing from conventional banks?” the nuanced answer is this:
CDFI borrowers show consistent improvements in credit health and access to business financing over time. They start from a different baseline — often riskier and less visible to banks — but the evidence points to clear financial strengthening after working with a CDFI.
As traditional lenders continue to tighten credit, the role of CDFIs becomes even more vital. They provide the financing bridge for small businesses that drive community growth and economic mobility.
For investors, CDFIs offer more than a mission-aligned opportunity. They represent a way to invest in the real economy, where capital can deliver both measurable impact and sustainable financial outcomes.
About CNote
CNote is an award-winning impact investment platform that channels capital to community development financial institutions (CDFIs) and other mission-driven lenders to build a more inclusive economy. By investing through CNote, institutions and individuals can earn competitive returns while supporting small businesses, affordable housing, and economic mobility in underserved communities.
