Minorities and women do not have the same access to capital as their white male counterparts, a systemic issue that can be addressed through education, outreach and more diversity among lenders, a panel of Arkansas bank leaders and a small-business owner said Monday.
The panel, hosted by the Winthrop Rockefeller Foundation, presented findings from a study about racial and gender disparities in loans to small businesses. “The Arkansas Small Business Access to Capital” report is part of Winrock International’s ABC’s of Equity series.
Julia Chears-Young, Ph.D., of Precise Data Consulting was one of the panelists and gave a presentation on the report's findings.
The report said that while American Indian-, Black- and Hispanic-owned businesses make up 13% of the state’s small businesses, they received less than 2% of the nearly $1 billion in Small Business Administration (SBA) loans awarded in Arkansas over the last five years.
Women-owned businesses — one-third of the state’s small businesses — received as little as 5%, the report said.
It also said that nearly 75% of Arkansas’ minority entrepreneurs depend on personal cash and funds for financing, compared to 55% of their white counterparts. Those entrepreneurs applied for lending at a lower rate but were denied at a higher rate, too.
Barriers to applying and receiving loans included lenders’ concerns about credit history and collateral and borrowers’ negative experiences with traditional banks. The study also found that minority business owners who received loans rated the Arkansas SBA and Community Development Financial Institutions as the most favorable lending sources.
Download: The full report, with a charts addendum, is available as a PDF.
Sherece West-Scantlebury, president and CEO of the Winthrop Rockefeller Foundation, noted that the study was done before the COVID-19 pandemic, when small businesses were growing.
“We found that — despite that growing trend, despite the importance of entrepreneurship to Arkansas' economy — small business owners, particularly women, people of color and other underserved populations, face significant barriers to accessing capital from banks and other traditional resources,” she said during a webinar Monday that unveiled the report’s findings.
The pandemic exacerbated the inequities, she said.
“In Arkansas and nationwide, but particularly in Arkansas, these widespread disparities in capital access have gotten worse as the Paycheck Protection Program has relied on our existing system of financial institutions — a system that has traditionally excluded a disproportionate number of people of color and women who were unbanked or underbanked,” she said. “Moreover, the only capital available to the smallest businesses is often accompanied by exorbitant interest rates and confusing payment terms.
“We absolutely must ensure that long-term equitable responsible capital is available to enable small businesses to thrive and survive in Arkansas.”
The other speakers included Edward Haddock, district director of the Arkansas Small Business Administration; Miguel Lopez, chief community outreach officer for Encore Bank; Hillis Schild, director of community development for Arvest Bank; Darrin Williams, CEO of Southern Bancorp; and Bridgette Perkins, CEO of Elite Trucking LLC.
Barriers to Business
Perkins, whose company hauls gravel, sand and asphalt for general contractors, said things would have been different for her business had she been able to get funding from a traditional financial institution. She recalled using her savings and working full time when she was founding her company.
“Knowing and having knowledge of where to go and who to talk to, that's key, that's major,” she said. “Starting off, I did not know that, and I paid for that. Because, number one, it matters which financial institution you choose to do business/banking with. It very much matters. I did not know that there was a difference.”
Perkins said that for many banks, a business that hasn’t been around for two years is “a red flag.”
The other speakers talked about what their organizations were doing to make it easier for minorities to access capital.
Haddock said that, five years ago, 15% to 20% of the state’s banking institutions were offering SBA loans. His goal has been to increase that percentage, and he emphasized that offering those types of loans minimizes the risk of lending to new borrowers.
“The banking environment and the culture of the banking environment is risk adversity,” Haddock said. “And so our products — and integrating our product offerings into their banks — really helps them fill out their toolbox to find borrowers like Miss Perkins here, and really extend credit to them when normally their credit policies wouldn't allow them to do that.”
Williams said intentionality is key. Southern Bancorp is a Community Development Financial Institution whose mission is to provide credit and capital access in low- and moderate-income census tracts.
“How we do it is being very intentional,” he said. “You have to actually have aggressive outreach programs to reach those communities.”
Williams said Southern Bancorp has bank branches in Black, brown, rural and low-income communities — places where other banks have closed.
But margins are key, he said.
“If we don't make any money, it doesn't matter how good we are, because we won’t be around long enough to do it,” he said. “So you can actually do this and make money. It's not just good sense. It's actually good business.”
He said banks could partner with nonprofit loan funds, examine their loan policies for biases, and diversify their lending talent to help close the lending gap.
Reaching the Underbanked
Lopez said Encore has hired an SBA team and is proactively reaching out to the unbanked and underbanked.
“But we also realize that it's really hard to go from unbanked or underbanked to getting an SBA loan, right? There's got to be kind of in-between,” he said. “So we're in talks right now with Goodwill of Arkansas and Goodwill in Dallas to open small business centers on their campus to bring in entrepreneurs and say, ‘Hey, you know, here's what an SBA loan is, here's why it might make sense, right? Here's what the [Arkansas Economic Development Commission] is offering.”
Arvest’s Schild said entrepreneurial support organizations are needed to direct small-business owners to banks because they can act as a trusted adviser in their communities. They can also offer opportunities like micro-loans from SBA, which is something traditional banks can't do, she said.
Lopez said one of the biggest challenges he sees in the Latinx community is that a lot of the businesses are started by first-generation immigrants who are working toward citizenship. So comprehensive immigration reform is needed, he said.
“I think, if and when that happens, you're just going to see a boom in small businesses because the quintessential American dream is to start a business, right?” Lopez said. “Whenever I asked my mom, you know, why wasn't she scared to start a store, she said she'd already done the scariest thing in the world, which was to leave her home. So when you put that zeal inside someone, and you give them capital, I think the sky's the limit.”
West-Scantlebury said the banking system “was not intended to work on behalf of women, and Black and brown folks, and it does not.
“So there needs to be some intentionality to ensuring that it does, so that Arkansas small businesses can thrive in the future,” she said.