Equitability still sought in commercial lending

To serve minority-owned businesses seeking commercial loans more equitably, financial institutions should update lending guidelines, increase awareness of available loans, and serve in a mentorship capacity, some business owners and community observers here say.

Kiantha Duncan, president of NAACP Spokane, said that commercial lending to minority small business owners historically has been “nearly impossible.”

Much of that, Duncan said, is due to the fact that people of color are less likely to have the financial footing to start or expand a business.

“Because, historically, there’s been an issue with people of color being able to borrow money or have assets like homes, (accessing private lending) has been difficult,” she said.

Those who have less personal capital with which to launch their business have a tougher time getting commercial loans, she said.

For example, minority business owners are less likely to have the collateral many lenders require.

“They’re at a point of saying, ‘I realize I have this good thing, this product, this idea, and I need a little more support to make it happen,’ but they don’t have what it takes to get the loans,” Duncan said.

According to a 2019 survey of consumer finances conducted by the Federal Reserve, Black families have less than 15% of the median wealth of white families – $24,100 and $188,200, respectively. Hispanic families have about 20% the median wealth of white families, at $36,100.

Much of the wealth American families have is often tied up in inheritances and real estate – both of which Black and Hispanic families are less likely to have.

The survey shows that in 2019, about 17% of white families expected an inheritance, compared with 6% of Black families and 4% of Hispanic families.

Among young families, 46% of white families own their home, while that’s true of 17% of Black families.

Bob Hemphill, owner of 30-year-old Spokane restaurant Chicken-N-More, said finding funding for minority-owned businesses isn’t always a roadblock.

“There’s a lot of funding for minority-owned businesses,” Hemphill said. “It’s about knowing where to apply and what’s available.”

Hemphill said that between the U.S. Small Business Administration, banks, and nonprofit organizations, thousands of dollars are available to individual minority business owners.

Securing a commercial loan, however, can be more difficult than seeking other forms of funding.

Ben Cabildo, president of AHANA, Spokane’s multiethnic business association, said that many of the underwriting guidelines for commercial loans make lending to minority-owned businesses more difficult.

“If you want to get a business loan, you have to have collateral,” Cabildo said. “Because of the racial wealth gap, because there’s no generational wealth with multiethnic communities, collateral is out of the question.”

Credit reports also sometimes cause issues, he said.

“When multiethnic businesses don’t have that generational wealth, sometimes they do get some credit, but it’s at very high interest because they have no (prior) credit or their credit score is low,” Cabildo said. “There’s inequity in interest rates for loans to multiethnic businesses.”

That’s especially concerning in the time of economic turmoil associated with the COVID-19 pandemic, Cabildo said, as the roughly 450 minority-owned businesses in AHANA’s Spokane County directory are typically smaller and financially fragile.

“This pandemic and the economic downturn associated with it have really impacted many of our businesses,” Cabildo said. “Some don’t have the power to remain in business because they have no capital.”

Lars Gilberts, assistant vice president of community development and impact at Numerica Credit Union, said his institution has begun to look more carefully at equity in commercial loans, including lending rates and interest rates.

Gilberts said financial institutions should be more dedicated to providing minority-business owners with alternatives, such as a commercial line of credit, if a commercial loan isn’t feasible.

Financial institutions also can function as connection points for minority-owned businesses, Gilberts said.

“We’re looking to make sure we’re identifying diverse businesspeople within the community who can work with our members and other business folks,” Gilberts said.

“We realize that our members in the community don’t just need a bank account. They don’t just need a loan. They need resources and support,” he continued. “Even if that’s not our job, it’s our opportunity to be able to connect our members in the community to those resources.”

Duncan said she’d like to see more banks and credit unions launch mentorship programs for minority entrepreneurs who aren’t necessarily at the point of needing funds but have a business plan that will eventually necessitate approaching a financial institution for capital.

“Let’s start at the beginning, because that way, banking institutions can help them to make the right steps along the way,” Duncan said.

“So when they get to the point of commercial lending, they don’t have a bunch of hoops to jump through, because they’ve already been guided to that door.”

Vince Peak, CEO and co-founder of Spokane-based online farm-to-consumer market, Share Farm, is involved in a program through the University of Washington that isn’t far off from Duncan’s mentorship idea.

Peak said he’s in a cohort of minority entrepreneurs and business owners working with MBA students through Washington’s Michael G. Foster School of Business.

The program, which runs through March 8, pairs each business with a team of MBA students that performs financial assessments, risk analysis and forecasts, and creates a loan package for the business to submit for bank approval.

“You work with an institution to learn the ins and outs, create a financial timeline, and then execute on the loan at the end of the program – if your business meets all of the marks throughout the program, and you’re deemed fit to receive this business loan,” Peak said.

It’s good timing for Share Farm, Peak said, as the company has tentative plans to expand in 2022 – plans that he declines to reveal, other than to say Share Farm will require a commercial loan for real estate.

“We’re an 8(a) business, so we work directly with the SBA on a lot of projects currently,” Peak said.

The SBA’s 8(a) Business Development Program helps socially and economically disadvantaged entrepreneurs gain access to capital.

“We’re probably going to go with a 7(a) loan from the SBA, but have our bank help us prepare our documentation for it to improve the odds of success in the process,” Peak said.

SBA-backed 7(a) loans often are used to start or expand businesses.

Peak said his existing relationship with U.S. Bank influenced his decision to involve the bank in the SBA lending documentation process.

So far, Peak said he’s learned the importance of bookkeeping that aligns with standardized financial practices.

“A lot of records aren’t characterized correctly or documented at all, but that’s because a lot of people are unfamiliar with bookkeeping,” Peak said. “This is what the bank is saying is one of the biggest setbacks when trying to lend to small businesses.”