Investors are looking for reasons to say yes to small businesses in low-income regions: NPR

It is not uncommon for people who want to start a business in low-income neighborhoods to have difficulty getting bank loans. But more and more investors are specifically looking to help businesses in these regions to reverse the disinvestment cycle.

"There is always a reason to say no to a borrower – we are looking for reasons to say yes," says Lauren Grattan, founder of the San Diego-based Mission Driven Finance investment company. She explained that her company did not take into account her personal credit rating. "We are looking rather at the validity of the business and how you can repay your income."

His business aims to bridge the gap between more traditional, for-profit investments and philanthropy focused on economic development.

Project Reo Collective, a coffee shop in Paradise Hills, a low-income neighborhood in San Diego, is a company that could have used this type of help.

The cafe is located in a small shopping center near a Mexican restaurant and a mobile phone store. Most of the time, the coffee is filled with people working on laptops or hanging out while drinking Mexican mochas or lavender lemonades.

"The Reo Collective project began with five families coming together to clean up the neighborhood here," said Tommy Walker, one of the owners. "A lot of people in the neighborhood said," We would like to have a place to go out, somewhere we have a cup of coffee, meet our neighbors, do homework or study. ""

Walker says that after a successful first year, he went to a bank to apply for a US $ 4,000 loan for an espresso machine. But he was not lucky.

"They said," No, you do not qualify because you do not stay long enough, "he says.

A disinvestment problem

It is common to encounter difficulties in obtaining such a loan to small businesses, according to data compiled by the Woodstock Institute, a non-profit organization, in a report entitled "Patterns of Disparity". It appears that between 2012 and 2016, about one in five businesses in low-income regions in the United States had received bank loans or even business credit cards. This compares with almost three out of five businesses in high income areas.

"You have a cycle that somehow perpetuates the fact that the neighborhood is less business friendly," says Spencer Cowan, the researcher who compiled the data. "Business does not start, so employment remains depressed Job opportunities do not exist in the neighborhood Existing businesses are not growing."

He says it can also lead businesses to predatory lending.

That's what happened to Natalie Gill. After running her flower arranging business at home, she wanted to expand to a flower shop and a coffee shop called Native Poppy.

"I had two years of experience with profit, but I was denied for every loan for which I tried," she says.

An ordinary small business loan has a 5 to 10% interest, but it has taken out a loan from an online company. "The interest rate was 18% and I had to pay it in three years, which was a risk that I was willing to take because I had no other choice ", she says.

Banking investment vs. community investment

Carty Davis, an investment banker at C Squared Advisors, has restrictions on banks.

"A bank can not just say," I really like this person. I'm going to get on this list because I know it's going to be successful, "he says." They have a good business plan, but if they have no equity to put in the deal or even money to invest, it will be very difficult to get a loan approved. "

Davis says banks have certain criteria that must be met, such as a good credit history. He suggests that if potential borrowers do not have this, they can turn to the federal small business administration.

But here's the problem for low-income communities: these loans always require large down payments or a home equity, which business owners may not have.

There are other ways to obtain financing, for example from a company such as Mission Driven Finance. In addition to investing in small community businesses, Mission Driven Finance also helps people looking for small business loans to better understand the technical aspects related to borrowing money to open or expand. a company.

According to Lauren Grattan, founder, it is investing in neighborhoods that really need it. Because when businesses succeed, they hire locally and the whole community benefits.