A major impediment to bridging this gap is the disparity in funding for small businesses. Now more than ever, municipal governments need to step into small-business lending to right the wrongs of the past and help business owners who’ve been excluded from investment and opportunities. It's a worthy effort that should be strengthened and supported in urban and rural communities alike.
The U.S. Economic Development Administration’s Revolving Loan Fund (RLF) program is an essential tool in supporting this transition. With $950 million currently funded through the RLF program across 500 local, regional and state funds and community development financial institutions — $700 million of that invested since March 2020 — this program and the local leaders distributing these funds serve a key role in meeting the needs of local business owners where traditional banks won’t.
There are many challenges to reaching community members who have never received or even applied for a small-business loan and who may not be “bankable” by private-sector standards. In working with more than 120 RLF-recipient small-business lending programs through the Equitable Lending Leaders program created by Recast City and the Institute for Local Self-Reliance, three barriers stand out: First, there is broken trust across our communities resulting from injustices in combination with a lack of relationships across racial, ethnic, gender and rural divides. Second, there is a lack of knowledge about local or regional RLF programs that can help small businesses with lending and technical assistance in the absence of a willing bank. And third, many lending programs defer to banks to bring them into a loan deal to provide gap financing and reduce the risk to the bank, which perpetuates any bias on the part of the bank.
Thankfully, a number of municipal governments and statewide programs are leading the way on how to achieve more-equitable outcomes with their small-business lending. These best practices can be adapted across local governments to create an even bigger impact:
• Invest in programs to reach more people purposefully. Springfield, Ohio, launched its Community Navigators pilot program in 2021 to reach directly into the communities historically excluded and underserved by traditional small-business lending. The program dedicated $1 million to hire people from the target communities, train them to conduct outreach into their neighborhoods and help business owners and the loan team understand each other’s needs before entering into a relationship. The program builds trust by working with people from the community to share information and build real relationships with local business owners.
• Combine technical assistance with funding. Denver brings historically underserved businesses together in a cohort program to train them, connect them with mentors and other business owners, and help them develop their business growth plans — all factors that increase their likelihood of success and then help them qualify for a loan. Launched with $15 million from the city’s cannabis sales tax revenue, the program combines direct technical assistance with capital investment to increase wealth-building opportunities for historically excluded populations.
• Remove barriers from the cost of the loan. A 2021 survey by the Vermont Community Loan Fund (VCLF) found that Black business owners were disproportionately reliant on high-cost credit card debt, seemingly due to a lack of access to investment from “family and friends,” the fear of bank denial stemming from historical and present experiences of racism and discrimination, and continuing bias where loan officers do not understand their businesses. VCLF created the Justice Forward Fund to address these inequities. It engages in microlending to develop trust with communities of color, reduces loan rates from 7.5 percent to a maximum of 3 percent to ensure that the loan itself does not contribute to a business’ failure, and waives all of the typical fees from application to closing.
Local jurisdictions are at the forefront of addressing small-business lending inequities to reduce the racial wealth gap and rural poverty. The time is now for more municipalities, state governments and regional organizations to adopt the models, dedicate the funding and ensure that programs like RLF work alongside local resources to create more-equitable outcomes for small businesses.
Governing's opinion columns reflect the views of their authors and not necessarily those of Governing's editors or management.
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