CNote Flagship Fund (Review)

CNote is an online platform that lets you invest in community development with as little as $1.

SustainFi May 5, 2021

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Rating: Excellent (4.5 / 5)

CNote Flagship Fund

  • Investment Type: fixed income (note)
  • Certification: B Corp
  • Minimum Investment: $1
  • Advertised Return: 2.5%
  • Maturity: 30 months
  • Liquidity: the greater of 10% of your investment and $20,000 every quarter
  • Open to non-accredited investors
  • Fees and expenses: none
  • Account types: taxable investment accounts and trusts
  • Impact: quarterly updates

Pros

  • Supports an impact investing women-led B Corp
  • No fees
  • No minimum investment
  • Quarterly liquidity
  • CNote lends your money to CDFIs, which are generally safe
  • Diversification (your money is invested in many CDFIs)

Cons

  • CNote is an early-stage startup with a limited track record
  • Limitations on quarterly liquidity
  • Your money is not FDIC-insured

What is CNote?

CNote is an impact investing platform that lends your money to community development financial institutions (CDFIs), which fund small businesses and help build affordable housing. CNote’s Flagship Fund is open to non-accredited investors. They also offer two funds for accredited investors (who must earn $200,000 a year for two years or have a net worth of over $1 million.)

CNote was founded in 2016 by two women, Catherine Berman and Yuliya Tarasava. Catherine Berman, co-founder and CEO, was a Managing Director at Charles Schwab, a leading brokerage firm. Yuliya Tarasava worked in risk analytics at Summit Rock Advisors.

The duo built successful careers in finance but wanted to give back to the community, so they launched a platform that would expand access to credit and close the wealth gap.

CNote was launched with $10m and has since invested around $44 million in its CDFI partners. It is backed by Y Combinator, the leading startup incubator. CNote is located in Oakland, California, and has ten full-time employees.

CNote is a registered B Corp, meaning that they promise to balance purpose and profit and are legally required to consider their impact on their workers, customers, suppliers, community, and the environment.

What are CDFIs?

CNote invests in CDFIs – financial institutions that give loans to communities neglected by the big banks. CDFIs are certified by the CDFI Fund, an agency within the U.S. Department of Treasury.

The CDFI movement emerged in the 1970s in response to concerns about discriminatory lending practices. CDFIs are required to provide loans to underserved markets and populations. They lend to small businesses and affordable housing developers. In addition, CDFIs offer guidance and support to their borrowers. Because CDFIs have intimate knowledge of their communities, they can offer loans on more favorable terms than the big banks. Loan officers at CDFIs can find high-quality borrowers that other lenders may overlook.

Although CDFIs do not seek to maximize profits, they have to preserve capital and are generally profitable. As a result, their financial performance has been similar to that of traditional financial institutions.

There are over 1,100 CDFIs in the U.S, holding $136 billion in assets as of 2019. CDFIs are mostly funded by the federal government, banks, foundations, and wealthy individuals.

The most common way of investing in a CDFI is through a loan fund, whereby loans from individual borrowers are pooled together. Even if some borrowers don’t pay the CDFI back, other loans in the pool should be OK.

Unfortunately, many CDFIs only allow institutional investors and foundations to invest. According to the Opportunity Finance Network, less than 5% of CDFI funding comes from individual investors. Some CDFIs like Reinvestment Fund do take money from non-accredited investors. But the signup process can be complicated, and your money is tied to one CDFI. By contrast, CNote invests in a pool of CDFIs.

How does CNote select CDFI partners?

CNote currently has 19 CDFI partners, including two which lend to a portfolio of CDFIs. At the end of 2020, CNote was about to add four more.

The CNote team does diligence on the CDFIs they invest in, emphasizing CDFIs with longer track records and a history of no losses. The due diligence process takes at least four to six weeks. As part of the process, they review opinions from AERIS, the rating agency that specializes in CDFIs, and the Opportunity Finance Network, the CDFI membership organization.

CNote developed a CDFI-specific proprietary risk model with an emphasis on diversification. The team considers factors like repayment rates, loan delinquencies, and the length of time in business.

What are the terms of the CNote Flagship Fund?

CNote’s Flagship Fund, the only fund available to non-accredited investors, currently pays 2.5% annually over a 30-month term. There is no minimum investment and no fees. (CNote makes money on the spread between the interest they receive from lending capital to CDFI partners and the interest they pay to investors.)

You can withdraw cash every quarter for up to 10% of your investment or $20,000, whichever is greater. The notes are not publicly traded anywhere, and you are not allowed to resell them without written permission from CNote.

The Flagship Fund publishes quarterly impact metrics, like the number of jobs they help create.

The sign-up process is done online. You pick the amount you want to invest, including the option to reinvest your interest, fill out personal information, and link your bank account. (However, we did have some technical issues linking bank accounts to CNote.)

Who is CNote suitable for? Is CNote safe?

The Flagship Fund, the only option available to non-accredited investors, is designed to be a bond fund alternative. (Though there are limitations on how much money you can withdraw each quarter, which is not the case with a publicly traded fund.)

CNote invests in CDFIs with a good track record of financial performance. CDFIs investments are generally considered safe. CDFIs must repay CNote even if the people and businesses who borrow from CDFIs default on their loans. Further, CNote lends to 19+ CDFIs, so they don’t rely on any one CDFI in particular.

However, CNote is an investment product, not a savings account, so your money is not insured. When you invest in CNote, you rely on the promise of CNote (the company) and not on any of its CDFI partners to pay you back.

CNote was founded in 2016. So far, it’s a startup that has yet to generate profits. According to its financial filings, CNote is an early-stage startup that “has not generated significant revenues from principal operations and has not yet proved the viability of its business model.”

What are the other accounts CNote offers?

Promise Account

The Promise Account is designed to be a cash alternative. It is an FDIC and NCUA insured product that supports CDFI banks and credit unions. It offers a 90-day term. The Promise account is available to accredited investors only and has a $250,000 minimum investment.

Wisdom Fund

The Wisdom Fund provides capital to CDFI partners to lend to women entrepreneurs, targeting low-income women and women of color. The fund offers a 60-month term and pays 1% interest. It is available to accredited investors and has a $100,000 minimum investment.

💰 Takeaway

  • We like CNote’s social mission, and the 2.5% return is comparable to some bond funds
  • However, this is not a savings account alternative
  • CNote is an early-stage startup, and your investment is not insured by the government (even though the CDFIs CNote invests in rely on government funds and are generally safe)

Are there other ways of investing in CDFIs?

There are a few other available CDFI investments, in some cases without an intermediary like CNote, but the signup process is more complicated. Calvert Impact Capital is another fund similar to CNote and lets you invest in a pool of CDFIs.

🔔 Read the full review of Calvert Impact Capital Community Investment Note.

You can also make direct investments in CDFI loans through the following Notes:

These investments will tie your money to one CDFI, so you forgo the diversification benefits of investing with CNote or Calvert Impact Capital.


🔔 Looking for other ways to invest with impact? Check our guide to investing in CDFIs, impact real estate, and small business lending here.

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