Panel
Opening Up Capital Access for Underserved Small Businesses
Milken InstituteAron Betru, Jorge Castillo, John Lewis, Mark Robertson, Eileen Sánchez, David Siegelmann, Garrett Smith, Karina Morga, Frank All, Eric Mundugu, Jen Price
- Small businesses are identified as the cornerstone for building meaningful lives and addressing wealth gaps, particularly as 83% of U.S. employment falls outside the S&P 500.
- Median wealth for African American households declined from $6,800 to $1,700 between 1983 and 2013, while Hispanic median wealth fell from $4,000 to $2,000 during the same period, with projections suggesting it could take 200 years for African American households and 80 years for Hispanic households to catch up to non-minority levels without intervention.
- Pacific Coast Financial, celebrating its 40th anniversary, targets borrowers with average revenues ranging from $250,000 to $1.5 million and projects that 60% of its portfolio consists of African-American or Latino-owned businesses.
- Demographic shifts include the Hispanic population in Baltimore doubling since 2010 and Hispanic-owned business ownership growing by 42% in the last two years, a rate 15 times faster than any other demographic nationally.
- Regional disparities in Los Angeles County are noted, where African Americans comprise 9% of the population but own only 7% of businesses, while in Compton, 34% of businesses are African American-owned and 54% Hispanic-owned, and in Inglewood, these figures are 46% and 40% respectively.
- Access to capital, information, and new markets is required for success in underserved areas, alongside government-funded programs for business planning, succession planning, and SWOT analysis.
- Banks must maintain strict underwriting standards regarding cash flow, collateral, and a two-to-three-year business history to avoid excluding viable businesses or exposing them to predatory lenders charging interest rates up to 96% or ranging from 20% to 80% via fintech.
- Traditional financial institutions are expected to provide patient money and structured facilities, with a strategic need to graduate businesses to at least 40 larger banks once they scale beyond the typical CDFI asset size of approximately $20 million.
- Regulatory frameworks like Dodd-Frank and potential CFPB rollbacks are cited as potential drivers of unintended consequences that could worsen lending outcomes or keep institutions restricted indoors due to paperwork burdens.
- Incubators are predicted to appear during economic downturns but disappear during recoveries, whereas those focusing on underserved communities are expected to address equity solutions, despite 97% of African-American businesses and over 50% of Hispanic businesses remaining sole proprietorships with fewer than five employees.
- A two-year collaborative effort by the Partnership for Lending in Underserved Markets aims to enhance investor capacity on both debt and equity sides, though currently, no businesses in Mark Robertson's portfolio have graduated to the public market.
- Deployment of capital is emphasized as the critical need, with organizations reporting record levels of loan capital, while the lack of bankers with cultural competency and trust issues rooted in historical experiences are viewed as significant barriers to effective capital allocation.
- Predatory lenders and the loss of home collateral value during the Great Recession are highlighted as major risks that have wiped credit scores and destroyed community value for extended periods, necessitating a focus on investor capacity and proper risk dispersion.