When John Stapleton decided to launch a café in Birmingham, he was advised against approaching mainstream banks for support, as they were unlikely to provide funding. Instead, he sought assistance from a lesser-known community lender.

A year after obtaining a £140,000 loan from two community development financial institutions (CDFIs), his establishment, 1000 Trades in the Park, is thriving, offering quality pub-style food in the Bearwood area and employing 13 part-time and five full-time staff.

“Turning to banks was not a viable option for us,” Stapleton remarked. “The appeal of the funding we chose was that it was backed by the government and came with slightly more favorable terms. They were more accommodating in the withdrawal process. I could collaborate on our business strategy and financial projections with some greatly supportive individuals.” The lenders involved were BCRS and ART Business Loans. Interestingly, part of their funding stemmed from a £43 million facility provided by Lloyds Bank to these alternative lenders.

The demand for CDFIs to finance small businesses across the UK is at an all-time high. A recent analysis by challenger bank Allica revealed that lending from mainstream banks to small enterprises is now £90 billion below the levels recorded between 1997 and 2004.

Stapleton, 44, allocated a substantial portion of the loan toward refurbishing the kitchens in the grade II listed premises he rents from the local council. He was one of the initial beneficiaries of a £62 million Community Investment Enterprise Fund (CIEF) awarded to three CDFIs last March, which was partially funded by Lloyds Bank.

Stephen Deakin, CEO of BCRS, described the funding as a “game changer” for the non-profit lender. “We share the same challenges as our clients,” he explained. “Our main hurdle is securing enough long-term capital to expand BCRS and assist the number of SMEs we aspire to support. It would be immensely beneficial if more banks emulated Lloyds by providing funding and referrals to CDFIs.”

CDFIs operate as non-profit organizations aimed at supporting viable businesses that are capable of repaying loans but face difficulties accessing capital from traditional banking sources for various reasons.

“Businesses may experience a challenging trading year, but there can be valid explanations for it,” Deakin noted. “They can clarify how they plan to overcome those challenges in the future, and we can support them if their forecasts provide a solid basis.”

BCRS reported that it has distributed over £100 million in loans since its inception 23 years ago, boasting an economic impact of £518 million. Initially serving the Black Country, the CDFI has expanded its reach across the West Midlands and into Wales in 2023.

“Customers approach us because they face addressable issues within their businesses, and after these are resolved, just a few years later, we are pleased to help them transition back to mainstream financial institutions. That signifies success for us—facilitating clients’ return to conventional finance,” Deakin stated.

Unlike traditional lenders, CDFIs exhibit a strong connection to their communities. Deakin mentioned that BCRS employees either reside in or are close to the areas they serve, which fosters a genuine investment in local enterprises.

However, small businesses considering CDFIs should be aware that loans typically come with slightly higher interest rates compared to high street banks. Deakin acknowledged, “It costs more than what a bank would charge for a straightforward lending situation. But it’s not a direct comparison, as it’s not a scenario a bank would fund. We must price for risks accordingly.”

The Responsible Finance trade body announced last week that CDFIs lent £141.6 million to startups and small enterprises in 2024, marking a 39 percent increase from £102.1 million in 2023.

Theodora Hadjimichael, CEO of Responsible Finance, expressed optimism regarding major banks’ growing interest in CDFIs. “Mainstream banks and CDFIs are complementary, and partnerships with institutions such as Lloyds and JP Morgan Chase already enable CDFIs to assist a greater number of small businesses in their growth and resilience,” she said. In 2024, JP Morgan Chase pledged £4 million to aid community lenders in modernizing their systems for improved operational efficiency and better interactions with mainstream banks.

Hadjimichael emphasized that more funding is forthcoming, as two CDFIs have recently been approved as lenders under the “Community Enable” funding initiative, a £150 million, two-year program launched by the British Business Bank, which is the government’s economic development agency, in November.

Despite this positive trajectory, Hadjimichael cautioned that challenges remain in acquiring the necessary funding to support businesses. “It is essential for more banks to collaborate with CDFIs, whether it be through investing capital for lending or establishing referral networks,” she stated. “Banks can leverage the local expertise and personal approach of CDFIs to drive economic growth, create jobs, and reduce inequality, all while cultivating future banking customers.”

Nevertheless, smaller CDFIs may continue to face funding shortages. Karen Davies, founder and CEO of Purple Shoots, a CDFI providing modest loans across Wales, the West Country, and Yorkshire totaling £5,000 or less, reported that her organization has been unable to access recent funding opportunities.

Due to financial constraints, the lender has had to pause lending for June and July, citing a lack of funds. “We could assist many more individuals. All those eager to start or desperate to launch a business will have to wait,” Davies lamented.

She has secured a funding arrangement with BCRS that will provide 10 percent of their lending profits over the next three years. With more partnerships like this, Davies is optimistic about her ability to assist additional businesses.

“To achieve nationwide coverage, we will need a total of £7 million over five years, which is a relatively small amount given the substantial profits banks generate,” she concluded.