The economic landscape has changed significantly in recent years. Costs are rising. At the same time, interest rates have climbed dramatically, narrowing the potential funding options for many small businesses and startups.

This squeeze has an outsized impact in some communities. If you've felt the pinch and are looking for a potential source of funds, a CDFI could present the perfect option.

However, these alternatives to traditional financial institutions don't suit every small business. You'll need to know whether they make sense for you. In this article, you'll learn what a CDFI is, how CDFI lending works, and how to get started on the process.

What is a CDFI?

About a third of Americans would struggle to cover a $400 emergency expense. At the same time, nearly 12 million people in the U.S. have turned to payday loans at some point in the past year. Almost 5% of households don't have a bank account at all.

Imagine what happens when someone in these circumstances has a killer business idea. The likely outcome: nothing. Without the financial wherewithal or access to capital, that endeavor never becomes anything more than a dream.

What can we do when prospective entrepreneurs are shut out of traditional financial institutions? They might have great ideas, along with stellar business and leadership acumen. But because of their economic situation, they don't have the kind of resume necessary to secure the funding they need from a typical bank.

That's where the CDFIs come in. The acronym stands for "community development financial institutions." These organizations participate in a federal government program meant to serve "individuals and communities that are underserved by traditional financial institutions," as the program describes the mission.

Generally, this means low-income communities, both in urban and rural areas. The institutions involved also consist of both for-profit and nonprofit entities. They must be certified by the government program to become CDFIs. Institutions can include:

• Banks
• Credit unions
• Loan funds
• Venture capital funds

Some of the funds available through these programs comes through the federal government program. However, the CDFI must match the awards with funds from an outside provider.

How do CDFIs work?

The government created the CDFI program in an attempt to nurture economic growth in locations that need a jump-start. The program summarizes its purpose this way:

"Many small businesses and critical community development projects lack access to the capital investment necessary to spark economic growth in their communities. ... [The CDFI program] actively works to address these issues by investing federal resources — which are matched with private funding — in CDFIs working to serve low-income and underserved people and communities."

The government created the CDFI program in an attempt to nurture economic growth in locations that need a jump-start.

The program itself offers financial backing in various forms, as well as technical assistance and training. This can include educational resources and practical support.

The CDFIs come in various forms. They differ in the structure of the financial support given. The main categories include:

• Community Development Loan Funds (CDLF): These represent the most common type of CDFI, with more than half of reporting CDFIs falling into this category. These would be a prime place to start when looking for funds for your small business, as they not only provide enterprise loans, but often practical support as well.

• Community Development Banks: These for-profit institutions offer loans to businesses. Another good place to look for your startup.

• Community Development Venture Capital Funds (CDVC): This category holds a very small share of the overall CDFI program. However, as the name suggests, these entities are focused on business investments.

• Community Development Credit Unions (CDCU): These alternatives to banks are more consumer-focused. However, they may have services that could help your business, such as bank accounts. CDCUs are non-profit financial institutions owned by their members.

Why should small businesses look into CDFIs?

We've looked at the overall structure of CDFIs and how they are meant to help individuals and businesses in low-income communities. But what does all this mean for you specifically? How can your startup benefit from reaching out to a CDFI?

To start, it's important to understand the scope involved. More than 100,000 businesses have received support through these efforts. Along with funding for affordable housing units, CDFIs have originated more than $38 billion in loans and investments.

In terms of the advantage you gain from going this route, the main benefit comes from access. You can qualify for support from CDFIs even in situations where you'd likely get turned away from traditional financial institutions. Because of their specific mandate, these organizations take a wider view of the situation.

For instance, CDFIs put less emphasis on credit scores. This means you can qualify even if your borrowing history has some blemishes. Unlike mainstream financial institutions, they are willing to take different risks, because their mission involves more than protecting the bottom line.

How to get a CDFI loan

So far, we've looked at the basic structure of CDFId and how they hope to help businesses in certain communities. If you're interested in pursuing support from a CDFI, what's your next move? How should you proceed?

Here are a few steps you can take to get started on the process:

Discover opportunities in your area

CDFIs are based on communities — that's their underlying purpose. As such, your geography matters. As you begin the process, review what opportunities exist around you.

Learn the process

Once you create a short list of potential opportunities, research the steps you'll need to take in order to obtain support. Talk to the individual CDFIs. At the same time, take a deep dive into the program in general. Learn the standards and stipulations that govern the overall process.

Check the requirements

Understanding what CDFIs are looking for represents a key step. From there, you need to look internally. How well do you fit the expectations? This will let you know what opportunities to pursue and whether you need to make changes to become a better candidate.

Collect your documents

Get your paperwork together. CDFIs have many distinctions compared to traditional financial institutions. But you'll still need to make your case. Gather the documentation you'll need to complete the process.

Communicate with the CDFIs

As you narrow your list, make communication a critical priority. Stay in close contact with your chosen CDFIs, especially as you get deeper into the process. This way, you'll understand what's expected of you and know how to put your best foot forward.

Should you turn to a CDFI?

CDFIs aren’t for everyone. However, these organizations offer benefits that are right for some small businesses and startups. Use the information provided here to determine if a CDFI lender would work for your business.