By Luz Urrutia
Shortly after graduating college, I applied for a $500 credit card from my employer (a major bank) and was turned down because as an immigrant, I lacked a credit history. Years later, I was a co-founder of a mission-driven, for-profit community bank in Atlanta providing affordable financial services to Latinx consumers and small businesses. We tried to raise $10 million in equity but were only able to raise about one-third of our target — until we did the exact same pitch to investors with a male co-founder by our side.
Twenty years later, not much has changed. These types of stories are familiar for certain communities — women, immigrants and people of color — that face systemic inequities when it comes to accessing capital. And over the past 18 months, the Covid-19 pandemic has put these inequities into sharper focus.
For example, Latinx entrepreneurs were disproportionately impacted by the Covid-19 pandemic. As millions of small businesses shuttered across the U.S., almost twice as many Latinx-owned businesses closed as white-owned businesses from February 2020 to April 2020. A huge contributing factor was limited access to capital. A Stanford survey found that Latinx applicants had their Paycheck Protection Program (PPP) loans approved at half the rate of white-owned businesses.
This is a tragedy for individual business owners and devastating for our whole economy. Access to affordable and responsible capital is an important step to building equity for the Latinx community. In this country, along with homeownership, business ownership is an important means of building wealth. Recognizing this, the number of Latinx-owned businesses increased 34% over a decade, making them the fastest-growing segment of U.S. small-business owners.
It’s clearer than ever that policymakers, private capital providers, nonprofits and philanthropists must work together to invest in long-term solutions for Latinx entrepreneurs. We cannot simply replicate the broken financial system that existed before the pandemic. We must do better.
Community Development Financial Institutions (CDFIs) are helping to lead the way. For example, our nonprofit supports Latinx entrepreneurs by providing financial services and free, expert advice to grow their business. Last year, over 40% of the 2,778 small businesses supported by our fund were Latinx-owned.
During this pandemic, policymakers on both sides of the aisle have recognized the crucial role CDFIs play in supporting the most underserved small businesses and have made historic investments in them. But these investments can’t dry up once the crisis has passed; we must entirely revamp the way capital is provided to underinvested entrepreneurs.
In fiscal year 2020, CDFI program awardees made over a million loans and investments totaling more than $25.4 billion, creating and maintaining thousands of jobs and generating millions in downstream economic activity in the form of wages, taxes and spending. This is just the tip of the iceberg though when talking about CDFI impact.
There is so much unmet demand and potential in the communities we serve, as showcased by the fact that CDFIs applied for three times the amount of funding appropriated for 2020. It’s critical that Congress appropriate $1 billion for the CDFI Fund on an annual basis, which will allow these organizations to not only continue their work but also begin exercising their full potential.
Of course, CDFIs can’t do this alone. Filling these systemic gaps requires collaboration. The California Rebuilding Fund, which my nonprofit participated in, brought together community groups, lenders and the state government to provide low-interest loans to businesses across the state — more than 90% of which had historically lacked access to affordable credit. This type of model leverages the existing relationships and infrastructure CDFIs have in underserved communities to most effectively channel capital and other support.
This private-public model has already been put into practice. The Washington State Small Business Flex Fund, for example, provides flexible, affordable loans to support Washington’s smallest businesses — particularly those in historically under-resourced and underbanked communities. Supported by the Washington State Department of Commerce, the fund has worked with local CDFIs to provide over $9.5 million in loans to more than 110 small businesses and nonprofits in need of economic assistance.
To expand on these models and to offer more choices to small-business owners, federal and state authorities should reexamine domicile lending requirements for CDFIs. While restricting lending authority to companies with headquarters or offices within a state makes prudent sense from an oversight perspective, CDFIs are certified by the Treasury Department. Removing inadvertent or explicit state bars to lending would allow CDFIs to help provide capital and business advising services to the small businesses that are too often left out. This is important considering that states will soon be receiving millions of federal dollars to create or expand lending programs to underinvested communities; domicile requirements would preclude CDFIs from participating and leveraging these programs.
The challenges facing Latinx entrepreneurs are not new, but the tools to solve them exist. After decades of closed doors, we must work together to open a window of opportunity for anyone pursuing the American Dream.
See Original Article at Forbes