Why Are Fewer Loans Going to Minority Business Owners?
Leonard Stephens monitors the recording of a show at OUR TV in Oakland, California, on March 14, 2017. "We want to be an all-stop shop for entertainment, media, radio, TV," said Stephens, who is applying for an SBA loan. (Farida Jhabvala Romero/KQED)
It took Leonard Stephens more than three months to get ready to apply for a loan guaranteed by the Small Business Administration to expand his Oakland-based media company, OUR TV.
On a recent day, OUR TV's programming included documentaries about celebrities like Michael Jordan and James Brown, high school games in the Oakland Athletic League and locally produced talk shows featuring black entrepreneurs and professionals.
The goal is to "inspire" and entertain the hundreds of thousands of Bay Area households that OUR TV reaches through cable channels, said Stephens. Viewership is increasing through the company's online streaming as well, he added.
"People are watching us all over the world. I looked at the analytics yesterday," said Stephens, who plans to use the $500,000 loan he is applying for to build infrastructure and hire employees to reach audiences in Houston, Detroit and other cities. "The loan is very key. You have to have finances to be able to expand."
If Stephens succeeds, he will become one of the few African-Americans receiving SBA loans in California.
The SBA, which aims to help support small businesses so they can create more jobs, guaranteed $5.1 billion in loans in California last year -- most of it through large banks. Only about 2 percent of those borrowers were African-Americans, a sharp drop from pre-recession levels. Latinos, who own more than 23 percent of businesses in the state, received just 13 percent of those loans.
Officials at the SBA say it's challenging to increase sound credit for entrepreneurs in the communities hardest hit by the Great Recession. They argue the agency is trying to expand its efforts to extend more loans to minority business owners through institutions other than banks, especially in lower-income areas.
Critics counter that the federal agency should do more to increase the flow of capital to Latino and African-American businesses, which are an increasing share of the U.S. economy, but are more likely to fail partly because of lower access to capital.
Navigating a Bank Loan Application
The SBA guarantees loans for up to $5 million. If the borrower doesn't repay, the agency promises to cover between 75 and 85 percent of the tab. The goal is to encourage banks and other lenders to take a greater risk on borrowers who have growth potential, but might not ordinarily qualify for financing.
That's why Stephens, a member of the Oakland African American Chamber of Commerce, believes he has a greater chance of qualifying for an SBA-backed loan than a regular bank loan.
At the outset, Stephens consulted with friends and his mother, who worked at a large bank for 42 years, about the best strategy to pursue financing.
Stephens has financed OUR TV through sponsorships, the rental of airtime, and savings from a separate consulting business. He knew the loan application process could be difficult.
Minorities are less likely to apply for bank loans for fear of rejection, according to various studies. When they do apply, they get turned down more frequently than equally creditworthy white-owned firms.
Stephens decided he needed to enlist extra help in order to apply: He hired brokers.
"The brokers are there to utilize some of the banks they've worked with before, that they have a good relationship with," said Stephens, who hired the same firm recommended by a friend who got a loan. "A lot of things that they've told me make a lot of sense."
Their advice included submitting the application to local community banks, instead of national ones, and paying for an accountant to organize years' worth of OUR TV's financial documents.
So far, Stephens says he has paid $30,000 to the accountant and brokers in his bid.
"I've invested a lot of money on these brokers," said Stephens, who is waiting to hear back from the SBA and bank on his loan application. "Talk to me in a few weeks, and then I'll have a better, bigger perspective and hopefully a bigger smile on my face by then."
System 'Not Working,' Say Critics
The SBA is the only federal agency collecting data on bank business loans by ethnicity. The small percentage of minorities among SBA borrowers is a troubling sign for the U.S. economy, said Alicia Robb, an economist who studies minority-owned enterprises and is a researcher at UC Berkeley.
"We are looking at a system that's not working," Robb said. "The whole reason for the SBA program is to try and get people who are underrepresented in business lending to get these kinds of loans."
Nationwide, the number of minority-owned firms has grown significantly to become about 29 percent of all businesses, according to the U.S. Census. But African-American and Latino-owned startups have higher failure rates than other enterprises partly because of lower access to capital, according to research.
"We need the government to really focus on these huge gaps that we see in the market," Robb said. "If these minority businesses had the capital they need, they could create more jobs in their communities."
The SBA Responds
Minority entrepreneurs in lower-income communities have been less able to compete for loans from big banks because of lingering impacts from the Great Recession, said Mark Quinn, who directs the SBA for Northern California.
"Low-income communities had credit scores affected, lenders became more conservative, regulators told lenders they wanted to see more cautious lending," Quinn said. "That combination has ended up reducing the amount and share of our lending to African-American and Latino businesses."
Those who lost homes -- often their largest asset -- during the recession also lost the ability to use those properties as collateral for loans from financial institutions.
At the same time, banks have been reducing the number of business loans under $1 million while increasing the market share for loans above that amount because they are more profitable, according to research. Quinn said that dynamic has left out more Latino and African-American business owners with very small ventures that require less capital.
"You can’t get really the large for-profit lenders to see that it’s profitable to do lots of small loans," Quinn said.
Wells Fargo, one of the top providers of SBA-backed financing in the country, reduced by half the number of all business loans for under $1 million in the Oakland, Fremont and Hayward areas since 2008, according to loan origination figures reported under the Community Reinvestment Act. Other large banks show a similar trend.
A spokesman for Wells Fargo wrote that fewer small businesses applied for financing in 2015 than in 2007, though the bank has started to see an uptick in the number of applicants who are creditworthy.
"Small businesses were hit harder in the recession and have come back more slowly than larger businesses in the recovery," wrote Ruben Pulido, a spokesman for Wells Fargo in San Francisco.
Tackling the Problem
While SBA-guaranteed loans are a small fraction of all the business lending going in the country, the agency's figures offer a glimpse of which businesses are able to grow enough to qualify for bank loans, Quinn said.
He said the SBA is trying various tactics to tackle the issue, including continuing to offer technical support to prepare entrepreneurs on finance and how to qualify for capital; and partnering with Community Development Financial Institutions (CDFIS) and microlenders to make smaller loans of under $250,000.
Many African-American and Latino-owned businesses are "very tiny," he said. "We look to the nonprofit world, lenders whose mission is to reach borrowers in small business communities that we can’t get to through large national banks."
The SBA started a pilot loan program in 2011 that is reaching a greater percentage of black and Latino borrowers, called Community Advantage. Still, that and a microlending initiative were only 5 percent of all of SBA-backed loans in California, according to the agency's figures.
"Nonprofits depend on few people doing fabulous work in their communities," Quinn said. "But the challenge is really how you can scale the volume of activity there."
Reaching Minority Entrepreneurs
SBA-backed loans to the smallest borrowers are originated by organizations like Main Street Launch, a CDFI near downtown Oakland that focuses on veterans and entrepreneurs in lower-income areas.
"We have more flexibility and a closer relation to the borrower that allows us to take the additional risk," said Main Street Launch President and CEO Jacob Singer. "Transaction costs are still high, but we as nonprofits are able to subsidize through philanthropic activity mostly from the banks."
Main Street Launch receives about $2 million each year in loans and grants from large banks, such as Wells Fargo and Chase. That is one way large financial institutions comply with the Community Reinvestment Act, a federal law that obligates banks to help meet the credit needs of the communities in which they operate.
Unlike banks, Main Street works with clients to put together their financial projections, review goals and understand opportunities for their business, Singer said. The organization places a lighter emphasis on potential borrowers' assets and credit scores, but loan officers must still be confident clients will be able to repay, Singer said.
"It’s hard work to qualify for capital, and not everyone should be a small-business person," Singer said. "One of the important things we and our peers do is to not issue credit to someone who is not ready. That can be as valuable a service as giving someone a loan."
Out of 350 inquiries Main Street Launch received last year, they funded 76 loans, which they consider a "pretty normal rate" for lending.
It took years of research before Dominica Rice applied successfully for a $35,000 loan through Main Street Launch to start her first business, Cosecha, in the city's Old Oakland neighborhood.
The self-described "very cautious" chef sought tutoring from local nonprofits, saved $10,000 and spoke to former employers about starting a business -- all while holding a job.
"I took almost five years of interviewing people who I've known and worked with who own restaurants," said Rice, who started working in the restaurant industry as a teen in Los Angeles. "What mistakes have you made, how did you structure your lease?"
Rice described the SBA loan application as "daunting" -- it can take at least three weeks for the most prepared applicants. She said entrepreneurs must be "upfront" and push for the technical advice and help they need from the SBA and nonprofit lenders, to make sure they get that process right.
"Tell them ... I'm a dyslexic Chicana from L.A. Like, this is not my thing," said Rice, who has already repaid her loan. "I'm not the person who's filling out applications or writing essays about how and why you should open a restaurant. I am the person who climbs a mountain to meet a señora who makes mole. That's who I am."
Dishes with Mexican mole sauce are popular in Rice's restaurant, where a long line of customers queued up, awaiting their lunch on a recent afternoon. Eight cooks and employees, most of them Latinas, made fresh tortillas, deep-fried fish fillets and assembled colorful salads in the open kitchen.
"I'm really proud that I've produced jobs for all these moms and grandmas," said Rice, whose daughter is 12. "Business is definitely growing and we have way more staff. Most of my staff is already at $15 an hour or more."