What’s Missing? How Bankers and Community Development Finance Practitioners Can Reach Diverse Business Owners and Neighborhoods in Detroit
The Minority Capital Access forum in October 2014, hosted by the Community Development and Policy Studies Department, brought together panels of experts to reflect on recent efforts in Detroit to support small business owners, and to identify strategies that help funders connect with minority businesses with capital.1
Panelists representing banks and nonprofit lenders delivered a realistic assessment of the capital landscape and structural challenges facing many small business owners. They discussed the impact of the slow recovery and depressed real estate values on equity and collateral values in certain Detroit neighborhoods and the relative paucity of credit-building opportunities for entrepreneurs of color.
Panelists, however, conveyed an optimistic message regarding the increasing assortment of offerings within the capital continuum. The organizations represented at the forum provided a sense of these opportunities. In terms of nonprofit lenders, the Detroit Development Fund described itself as a “double-A ball club for banks” – the last stop one would make before establishing a borrowing relationship with a commercial lender. Lending between $50,000 and $250,000, and requesting three years of operating history compared to the three years of profitable operations that banks typically require, the Detroit Development Fund relies heavily on low-cost (or free) capital for its loss reserves. Another CDFI, the Community Reinvestment Fund (CRF) based in Minneapolis, is one of 14 non-bank lenders with certification to originate SBA (insured) 7(a) loans of $50,000 to $4 million, but unlike most banks that offer this product, CRF targets borrowers of color or those located in low- and moderate-income census tracts in Detroit.2 These kinds of organizations are lending to the businesses that typically do not fit bank underwriting criteria, such as start-ups (in general), franchises, gas stations, and restaurants. Most recently, the Detroit Development Fund received additional (low-cost) capital for loss reserves, allowing the organization to lend for retail start-ups. An increasing number of requests for retail loans had come into their pipeline, and foundations understood how filling storefronts would have the potential to strengthen a community.
In terms of banks, traditional lenders are layering funds with resources from nonprofits and government to create, in their words, more "patient" sources of capital and to extend the capabilities of senior debt providers. In 2014, Urban Partnership Bank, a CDFI, collaborated with the Michigan Economic Development Corporation and Invest Detroit (a non-bank CDFI), among other community organizations, to lend $10 million to small business, nonprofits, and real-estate investors. In the past year, Fifth Third Bank invested (with other banks and the Michigan Economic Development Corporation) in two funds, one called Grow Michigan, a subordinated debt fund of $500,000 to $3 million for lower/middle market enterprises in largely low to moderate income areas; and another called Develop Michigan, which finances commercial real estate projects with a focus on low- and moderate-income communities.
In addition, banks have gotten involved in credit-building activities such as the partnership between PNC and LISC's Twin Accounts program, to help potential borrowers improve their credit scores.
As important as capital is, panelists suggested that improving the way information about these resources is transmitted may be just as valuable to minority business owners. Bankers and community funders agreed that many small business owners would benefit from better connections to information ";brokers" to let business people know about many existing resources. Currently, many start-up firms, and even existing small and medium minority-owned businesses, do not know about the types of capital or assistance available and appropriate for their businesses. An intentional effort to connect business owners and relevant resources would go a long way to help credit- and resource- impeded business (and prospective business) owners.
One innovative approach has been for institutions to fund "translators" or consultants with ties to economically and socially disadvantaged communities who provide development and mentoring services to business people. The Detroit Microloan Collaborative funded this type of technical assistance so that intermediaries could address soft skills, such as helping business people build confidence, and provide financial management and business development assistance.3 Some panelists emphasized the need for long-term technical assistance after a loan is made, as well, particularly for nascent entrepreneurs who do not have extensive business experience.
An alternative approach to connect entrepreneurs to business resources is to use new technologies and online tools. For example, Fundwell developed an online eligibility tool to match small business owners with a spectrum of lenders. Pacific Community Ventures has an offering called Business Advisory Services, whereby a small business, for a flat fee, obtains a certain number of matches to business advisors. In Michigan, a program called Companies to Watch highlights and brokers resources for medium-sized companies that are in the second stage of growth. For small and medium-sized businesses, panelists identified organizations like the nationally-funded Manufacturing Extension Partnership Program that offers technical assistance for new technologies to U.S.-based manufacturers. The challenge for small business people is both to know where their business fits along the capital spectrum and to know what resources are available to them.
Another way to ensure that entrepreneurs get the information they need is to enhance the skills and capacities of the service providers themselves. One large bank recently discovered that its staff's limited understanding of the small business ecosystem impeded them from steering potential borrowers to the correct (continuum of) services. In addition, regardless of the demographics of a business owner, an important component of mentoring is functional and industry-specific information. The same content experts who advise people on running a retail business, for example, cannot be expected to advise a manufacturing firm or a high-tech spin-off from a university. According to one panelist, only a small number of intermediaries grasp the importance of connecting minority-owned businesses to the innovations taking place at incubators, research labs, and university offices of technology and commercialization. One way for intermediaries to get a better understanding of the particular industries and niches of their small business clients is to examine, and possibly even develop, market data. A study recently commissioned by a local foundation was able to identify the supply chains for growing ;industries in southeast Michigan, and the various ways that minority owned small firms can serve these industries (logistics, design, engineering, workforce development, etc.). This approach has yielded results even when the opportunities are not in the high-growth or high-tech areas. Thus, one of the most impactful ways to help businesses reduce their risk profile, according to one panelist, is for intermediaries to help small businesses identify their first, second and even third customers, to ensure that revenue is sufficiently diversified.
In addition, minority entrepreneuers need intermediaries able to provide referrals across the financing spectrum. While the minority business community depends heavily upon debt, other types of capital, including private equity, venture capital, and even crowd funding, remain largely underutilized. Most organizations that work with minority business owners do not have sufficiently trained (or experienced) staff to advise on sophisticated transactions themselves, nor do they have the resources to contract with someone with that expertise. Consultative groups for minority-owned businesses, such as Meda in Minneapolis, rely on partnerships with corporate volunteers to advise on any type of business need that walks from access to private capital to mergers and acquisitions. In addition, the minority-led National Association of Investment Companies represents minority-owned and managed private equity firms that invest in ethnically diverse communities. However, limits on this type of expertise mean fewer mergers, acquisitions and joint ventures take place among business owners of color. This deficiency is important given the well-documented lack of equity capital among minority entrepreneurs, according to panelists, and the fact that equity capital is often needed for minority entrepreneurs to grow.
1 This forum was part of the CDPS Detroit Small Business Project, and was presented in partnership with the Asian Pacific Chamber of commerce, Michigan Black Chamber of Commerce, Michigan Hispanic Chamber of Commerce, the Michigan Minority Supplier Development Council and the Michigan Small Business Development Center.
2 JPMorgan Chase Foundation provided the $7 million grant as part of the foundation's CDFI Collaboratives program, a $33 million commitment to help CDFIs and small business lenders jumpstart job creation in low- and moderate-income communities in Chicago, Denver, Milwaukee, Detroit, Seattle, Buffalo and the New York City Metro area..
3 The informal collaborative includes the Detroit Development Fund, the Michigan Women’s Foundation Detroit Micro-Enterprise Fund and is funded through a $5 million line of credit from Huntington Bank LifeLine Consultants offers the business development and mentoring services.