There is a pressing need for more data on small business lending in the United States, and the Consumer Financial Protection Bureau should implement section 1071 of the Dodd-Frank Act to collect data from banks on their small business lending.
There continues to be significant differences in what type of credit, or loan, is available to men and women, minorities and non-minorities, urban versus rural, and underserved and well-served communities. Differences are manifested in loan terms: interest rate, length of amortization, fees, and availability. Small Business Administration (SBA) lending to women and minorities continues to be disproportionately low relative to their representation in the population. According to a 2016 Stanford Graduate School of Business national study, in 2015, 27 percent of Latino small businesses had never heard of the SBA, and 71 percent had never heard of SBA Small Business Investment Companies (a growing vehicle for commercial bank equity investments into small businesses).
Over the past year, the National Association for Latino Community Asset Builders (NALCAB) has released research on Latino small businesses in state and local markets around the country. Its key findings include:
- Latino-owned businesses operate in diverse industries and markets;
- Latino-owned businesses represent an enormous growth market for small business lenders and a key driver of economic growth, especially in states like California and Texas;
- Latino-owned businesses have, on average, less annual revenue and staff than non-businesses and distinct credit/collateral profiles to which, given the growth potential, lenders should adapt their underwriting; and
- Community development financial institutions (CDFIs) play a critical role in opening access to capital for Hispanic-owned small businesses and act as a bridge to larger financial institutions.
Although banks seem more willing to make credit available to borrowers with less than stellar credit, they are not willing or able to analyze credit in a safe but creative manner. Often borrowers are forced to seek merchant cash advance loans, which are based on a business’s credit card processing and corresponding gross cash flow and ignore the business’s ability to repay loans. Merchant cash advances typically have higher rates and shorter amortization and choke off desperately needed cash flow. The Federal Reserve Community Advisory Council sees low-income people of color and immigrants (who do not qualify for traditional credit or choose not to use it) being particularly hurt by this industry. There is also a shortage of Sharia-compliant financing, which impacts Muslim business owners.
Several jurisdictions in the South are working to advance economic inclusion strategies, including anchor institution engagement, minority-owned business development, and targeted workforce and hiring strategies. There is a need to develop the capacity of small and minority-owned businesses, particularly black-owned businesses, to attract new capital and to increase the availability of capital for these businesses. Lack of loan funds available for local CDFIs is a significant challenge. Leveraging Community Reinvestment Act requirements to encourage financial institutions to make equity-equivalent investments, loans, and loan-loss reserve grants to local CDFIs will help alleviate this challenge. A new report from Prosperity Now confirms that black entrepreneurs in the South are challenged by “limited startup capital, limited managerial and industry experience, and lower-revenue industries, i.e. retail.”
For additional reading on this topic, check out “Stuck From the Start, The Financial Challenges of Low- and Moderate-Income African-American Entrepreneurs in the South” by Spectra Meyers and Pamela Chan.
Our team of experts at Aquaria Funding Solutions has years of experience providing women, minorities, and other underserved groups with the capital they need to realize their small business goals. Contact us today to establish your impactful small business program!