The Race For More Inclusive Business Capital

I am the SVP of Partner & Lender Strategy at Lendio, the largest marketplace for small business financing.

Over the last eight months, small business owners from underserved communities across America — Black, Latinx, women and others — have been disproportionately hurt. While the pandemic lingers, so does the toll it’s taking on minority communities. Now, more than ever, inclusive capital is of utmost importance.

Recently, it was my pleasure to host a virtual discussion with some of the nation’s leading experts on the subject of serving communities of color and those underserved by traditional banking. As an immigrant woman working in the small business financing industry, the quest to make access to capital more inclusive is dear to my heart. It was an honor to be joined by others in the space working to effect positive change, including Marla Blow, senior vice president of the Mastercard Center for Inclusive Growth; Luz Urrutia, CEO of Opportunity Fund; Everett Sands, CEO of Lendistry; and Anne Haines, president and CEO of DreamSpring.

Here are a few key takeaways, along with some advice for lenders and business owners:

The Paycheck Protection Program emphasized existing barriers.

The unfortunate truth is that people of color are denied credit and banking opportunities more often than white people. According to a 2020 Federal Reserve report, only 23% of Black-owned employer firms had previously received bank funding, compared to 46% of white-owned firms. This year, as business owners sought the precious and finite first round of Paycheck Protection Program loans, this imbalance came heavily into play.

“[PPP] was a perfect example of businesses that had a relationship with a bank,” Urrutia said. “They were at the front of the line, and those that did not were kept at the back of the line. We see it day in and day out. Too many mom and pop shops — which are a source of stability in our communities and families — get turned down for loans from traditional banks.”

Many factors go into those turndowns, but the consensus from this panel is that they stem from a systemic and historical bias toward persons of color. From geographic location to internet access to housing, the cards have been and still are stacked.

“The process, the amount of documentation and the amount of reporting that’s necessary to even complete applications for certain lending programs and certain qualifications that are required, are incredibly challenging and out of reach for a lot of minority-owned businesses,” Blow said.

Lenders can provide better solutions.

Fortunately, like those who participated on this panel, many lenders are mission-driven and dedicated to finding creative solutions to make access to capital more inclusive. Lenders can:

1. Consider moral collateral.

One of the reasons traditional lenders veer away from minority business owners is because many business owners from underserved communities have little to no credit history. But some lenders are focusing on other aspects of underwriting. Opportunity Fund, the nonprofit microfinance organization that Urrutia oversees, focuses on the last two factors of what she calls the Four C’s of Credit: credit, collateral, character and cash flow.

“They may not have a physical asset or a fixed asset, but these borrowers have a lot of moral collateral, which is as important, and what we’ve proven in many cases, even more important than hard collateral,” Urrutia said.

2. Use state programs to enhance a business’s collateral.

When fixed collateral is the big hang-up, there are still other solutions — if lenders are willing to put in the work to find them. Sands’ company, Lendistry, uses state programs to enhance a business’s collateral.

“Forty out of 50 states receive money that they turn into some type of credit enhancement collateral support for small businesses that can be utilized when a small business doesn’t have money,” Sands said. “Now, we still have to be more proactive in getting all 50 states to play in that arena and get the 40 states that did it to obviously do more.”

3. Take a hard look at the bottom line.

For larger lenders, Blow pushes the mission even further: “If you’re a lender and you’ve never lost a single dollar or you’ve never had a single negative year, that suggests there’s more that you could be doing. It means that you can test outside and learn, learn outside your credit box and see how that goes. Change the face of who’s writing the checks and who is sitting across the table.”

The argument for creating solutions isn’t about encouraging lenders not to take appropriate risk, but rather removing the bias in doing so.

Business owners can do their part to ensure readiness when opportunities arise.

While there are lenders and fintech providers pushing for equal access to capital, small business owners can help to improve their standing as well. Business owners can:

1. Monitor their credit score.

Though not the best or only metric by which worthiness is measured, credit still plays an important role. Lenders will pull both personal and business credit scores, so it’s vital for business owners to know them and possibly have an advisor to help raise or maintain them.

2. Understand the peaks and valleys of their cash flow to better manage expenses.

Business owners should start by cutting back on things that aren’t essential, and should always keep personal and business records separate.

3. Tap into other resources.

For business owners in the painful limbo of waiting for stimulus funds, tap into available state, local and community resources, development centers, business associations and grant programs. While not always possible, business owners can also look for ways to pivot to reach more customers.

As our panel discussion wrapped up, I was reminded of one of my favorite quotes from Steve McQueen: “Racing is life. Anything that happens before or after is just waiting.” The race toward inclusive capital affects our entire economy. As a small business community and as a country, we are all in the same vehicle headed toward the finish line. We can’t afford to wait any longer, and we can’t afford to lose.

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