The Future of Small Businesses: How Federal Cuts to CDFI Funding Threaten Local Economies

Across the United States, Community Development Financial Institutions (CDFIs) have played a pivotal role in supporting small businesses, particularly those in underserved and low-income communities. However, recent federal budget proposals threaten to slash hundreds of millions of dollars from CDFI funding, raising concerns about the future of countless entrepreneurs and the local economies they sustain.

Understanding CDFIs: A Lifeline for Small Businesses

CDFIs are specialized lenders that provide financial services to individuals and businesses unable to access traditional banking. Since their inception in 1994, CDFIs have distributed over $7.4 billion in loans to small businesses nationwide, according to the U.S. Department of the Treasury. Their focus extends to women-owned, minority-owned, veteran-owned, and rural businesses, helping bridge the gap in economic opportunity.

Federal Funding Cuts: What’s at Stake?

In March 2025, a new executive order and proposed budget bill aimed to reduce CDFI funding by approximately $300 million. This move is expected to have a cascading effect, potentially limiting access to capital for thousands of small businesses. According to the U.S. Small Business Administration, small businesses account for 44% of U.S. economic activity, and any disruption in their funding can have far-reaching consequences.

“The CDFI fund, essentially getting defunded, will have ripple effects down to small businesses, which essentially will result in lack of access to capital for a lot of these businesses,” says Nim Patel, CEO of the Colorado Enterprise Fund.

Real-World Impact: Stories from the Ground

For entrepreneurs like Kyle McGee, CDFI funding was the key to transforming a vision into reality. With a loan from the Colorado Enterprise Fund, McGee opened a unique golf café in Wheat Ridge, Colorado, offering indoor golf simulators and a welcoming community space. Without CDFI support, McGee and many like him would be unable to secure the necessary capital due to strict requirements of traditional banks.

In Colorado alone, CDFIs have provided $715 million through 35,000 loans, fueling startups and established businesses alike. These funds support not only retail and hospitality but also affordable housing, childcare, healthcare, and manufacturing.

Wider Economic Consequences

The potential loss of CDFI funding could disproportionately impact minority and low-income communities, where access to credit is already limited. According to the Federal Reserve’s 2023 report, 40% of small businesses in underserved areas cited lack of financing as their primary barrier to growth.

CDFIs also play a critical role in economic resilience. During the COVID-19 pandemic, CDFIs were instrumental in distributing emergency relief to small businesses, helping them survive unprecedented challenges. The Brookings Institution highlights that CDFIs were able to reach businesses that mainstream lenders often overlooked.

Adapting to Change: What’s Next for CDFIs?

While some organizations, like the Colorado Enterprise Fund, have diversified funding sources and may weather the cuts, many smaller CDFIs lack such resources. The risk is that these vital lenders could scale back operations or close entirely, leaving a void in local economies.

Industry leaders remain committed to their mission. “We’ll still go through the compliance. We’ll still go through all of the processes that we need to maintain our certification. And then fingers crossed that there’s a change in approach,” Patel explains.

Policy Responses and the Path Forward

Advocacy groups and business coalitions are urging Congress to reconsider the proposed cuts, emphasizing the long-term benefits of supporting small businesses through CDFIs. The National CDFI Coalition argues that every dollar invested in CDFIs generates up to $12 in local economic activity, a return that far exceeds the initial outlay.

Policymakers are also exploring alternative funding mechanisms, such as state-level grants and public-private partnerships, to sustain CDFI operations in the face of federal reductions.

Conclusion: The Stakes for Main Street America

The fate of CDFI funding is more than a budget line item—it is a test of national commitment to inclusive economic growth. As federal support hangs in the balance, the resilience of America’s small business ecosystem depends on innovative solutions and continued advocacy. For entrepreneurs like McGee, the hope is that their dreams—and the communities they enrich—will continue to thrive.

For more information on CDFIs and their impact, visit the official CDFI Fund website.