Getting turned down by a bank for a business loan may feel like failure and a personal rejection, but it is often the best thing that can happen to a business owner. Banks operate under strict regulations that don’t fit all situations. When the fit isn’t right, a good banker will refer the borrower to a Community Development Financial Institution (CDFI) that offers support services to increase the business’s odds of success. CDFIs are nonprofit organizations with advisors and consultants who work with borrowers to manage their businesses.

Joshua Smith, New Mexico Senior Vice President of Washington Federal Bank (WaFd Bank), regularly refers small businesses to CDFIs when they aren’t fully established or operational.

“Sometimes these folks don’t have entity documents, they don’t have articles of incorporation, they don’t have an EIN,” he said. That’s when Smith tells the customer, “Let’s get you partnered with a local small business support organization to get you to a point where you can come back to me.” Often, these support organizations are CDFI’s.

Low credit score, little or no collateral, and requests for an amount less than $5,000 are other reasons borrowers might be referred to a CDFI, where they can get help raising their score or preparing the business for a more manageable loan that offers less financial stress for the owner.

“As a banker, I never like to say no to someone,” said Smith. “I like to say maybe not us right now, but let’s help you partner with someone who can help you meet your goals.”

Smith feels CDFIs are an important component of New Mexico’s financial environment.

“CDFIs are vital in the sense that not only do they play a part in facilitating credit, but they play a huge part in facilitating financial literacy, business plan development, and also just giving people a confidence that they have resources to support them as they build small businesses.”

Consulting comes with the loan

Randy Peralta, who was referred to a CDFI when he started GRS Services after 28 years working for others, said the business education he received as part of his LiftFund loan was a big help. “Having experience in the propane industry did not necessarily prepare me to handle all of the business and operational aspects,” he said.

Co-owners Kenny DeLapp and Esther Frederickson of the home building company Albuquerque Joinery were pleased with their line of credit that offered consulting services from The Loan Fund CDFI. “We feel so much better equipped for the next house in terms of tools and employees, but also in our knowledge of our business overhead and the time involved in our particular handmade way of building,” said Frederickson. The couple, who thought they only needed a line of credit when they were turned down by a traditional bank, received much more than money from The Loan Fund.

Lola Beavers helped her children with business finances when they started an in-home catering business, but when it was time to transition into a full-scale restaurant, she sought a loan from the CDFI DreamSpring. The lending relationship helped the family survive the pandemic when their restaurant couldn’t serve curbside after a kitchen fire. Thanks to DreamSpring financing, Frank’s Famous Chicken and Waffles in Albuquerque is thriving and was featured by Guy Fieri on the Food Network show Diners, Drive-Ins and Dives.

Home-based businesses are often the biggest CDFI referral winners. The business development organization WESST reports that more than 70 percent of business registrations in Rio Rancho are for home-based businesses. WESST assists many of them with short-term, fixed rate loans that start at $500. A loan condition is participation in WESST workshops that offer business literacy and connections to other resources.

WESST is where Sandia Pet Products new owner Veronica Fuller learned about services offered by New Mexico Manufacturing Extension Partnership. MEP, another nonprofit organization, helped Fuller improve cash flow at the company that is the exclusive manufacturer of pet products for New Mexico United and the UNM Lobos.

Banks first

WaFd Bank’s Joshua Smith believes the first place borrowers should go for a loan is their existing bank because they already have a relationship there. “Banks really attempt to be a broad partner for the business community,” he said. And that commitment to customers and community translates as a strong desire to get customers to the right lender, even if his bank is unable to offer a loan to every applicant.

“DreamSpring told me about a company they helped with a loan when the business was just getting started,” Smith said. “That company, Bosque Brewing, is now one of the largest breweries in New Mexico.”