Entrepreneur in a low income area? Good luck getting a bank loan
Businesses in low-income census tracts in Alameda County, including the area where Maya is located, received significantly fewer bank loans and credit cards than wealthier business districts in 2015, according to a report. KQED analysis of the most recent federal public data.
Economists say this indicates an unmet need for bank credit among entrepreneurs in majority minority and underserved communities. This in turn prompts small business owners to obtain more expensive loans which can eat into their profits and limit their ability to be successful.
Big banks and other lenders counter that many entrepreneurs – especially in communities hardest hit by the Great Recession – are struggling to meet the criteria that qualify them for responsible financing.
[bizLoanNoLoans]Higher rates for business owners with low credit
Three years ago, Maya encountered a serious cash flow problem and tried to apply for a credit card at her bank, but was turned down.
“They said my credit score wasn’t high enough. I never got a loan or a credit card, not even for $ 50, from a bank,” said Maya, who instead turned to a more expensive loan of $ 5,000 from a nearby non-bank lender.
He did not want to name the lender because he always pays them an additional $ 3,000 in interest.
“You know they charge you too much interest, but because of your economic situation you have to take it, “Maya said.” Although later you are in hell and it’s a long way to finish paying . “
Maya’s loan is at an annual percentage rate (APR) of approximately 35 percent. But he could have paid a lot more. Hundreds of thousands of borrowers face triple-digit interest rates in California, according to the Department of State Enterprise Supervision.
Credit companies need to charge more to provide much needed access to credit for customers who wouldn’t get it at banks, said Thomas Leonard, executive director of the California Financial Service Providers Association, which represents dozens of non-bank lenders.
“The rates are going to be higher for customers who have less credit. And what you see is that interest rates are really becoming a product of risk,” said Leonard, a former banker.
“Unequal access” to credit
Latinos are business creation at a faster rate than other groups in the country. But their businesses have higher failure rates or grow at a slower pace in part because they have less capital, said Robert Fairlie, an economist at UC Santa Cruz.
“They’re less likely to get bank loans. They’re less likely to be able to tap into the wealth of family and friends or the wealth of the neighborhood. So all of these things sort of work against them,” said Fairlie, who has researched minorities. companies owned for two decades.
This unequal access to credit, Fairlie said, contributes to the huge wealth gap in this country as small businesses generate jobs and wealth for their communities.
The median wealth of white households in this country in 2011 was $ 110,000, compared to less than $ 8,000 for Latinos and African Americans, according to the US census. Median wealth – also known as equity – is the difference between assets, such as income, savings, and a house – and liabilities or debts.
Spokesperson for Wells Fargo and JPMorgan Chase, the the biggest banks in the United States, said increasing lending to small businesses in various communities is a priority.
“We want to make all possible responsible loans to help creditworthy small businesses look for credit,” wrote Ruben Pulido, spokesperson for Wells Fargo in San Francisco. He added that credit preparedness, including the ability of small business owners to show they are able to repay, is one of the main factors limiting the granting of additional loans.
Both banks donate and lend millions of dollars to Oakland area nonprofits. These nonprofits work with diverse, low-income small business owners to help them access credit. It means training them on how to qualify for loans and lend money from the big banks to these entrepreneurs.
Banks are required to help meet the credit needs of the communities where they operate as part of the Community Reinvestment Act (CRA), a federal law that was passed almost 40 years ago. The law increased the flow of credit to low-income areas, according to various studies.
Yet the business district where Raul Maya’s store is located received only 45 loans and credit card lines of $ 100,000 or less in 2015, far fewer than the city’s wealthier neighborhoods with a comparable number. companies, according to The data reported by major financial institutions under the CRA. A recent to study parts of Los Angeles, San Diego, and Chicago by the Woodstock Institute found disparities in bank lending by income and race.
KQED has focused on loans of $ 100,000 and less because, according to experts, they are more likely to support small local businesses.
The federal agency that oversees and rates large national banks based on their rating agency performance, the Office of the Comptroller of the Currency, has declared that he is aware that more work is needed to resolve the “remaining important issues” on the implementation of the law. The OCC has revised its review procedures to make them more rigorous.
Crowdfunding as an inexpensive alternative
After getting her high interest loan from the non-bank lender, Maya found out that she could get a cheap loan through the Kiva crowdfunding site. The association provides entrepreneurs in the United States and abroad with a platform to raise funds for zero-interest loans.
“Owning a business is a great way to build wealth. (But) the wealth gap persists. So we’re trying to break that paradigm,” said Jonny Price, head of US operations at Kiva.
With the blessing of the City of Oakland, the organization has stepped up crowdfunding for local small business owners. Kiva is also trying a new tactic in Fruitvale by meeting face to face with entrepreneurs who have technical or language barriers.
One Tuesday morning, a dozen women entrepreneurs, some with children, gathered around a table in Maya’s store and lent each other $ 100 through Kiva. Then, they become eligible to start raising funds up to $ 2,000 from the organization’s global pool of lenders.
Bety Ugalde, a single mother of three, sells shoes imported from Mexico. She said her business is taking off. Before opening it, she had two jobs as a cook, only getting three hours’ sleep some nights, but still couldn’t afford rent.
“Now I feel happier because I have this business and a part-time job and I can make ends meet,” Ugalde said in Spanish. She added that she planned to use her loan to store more goods.
Maya oversees all of this activity in her store. He is busy bringing coffee and sweet bread to women entrepreneurs at weekly meetings.
“The good thing is you can lend that money again to a new person who is just starting out,” Maya said. “I tell them, we have to be united. We have to support the new people who are coming.”