Rockefeller Report: Minority Access to Capital Needs Improvement

During federal fiscal years 2017-20, Arkansas lenders made more than $658 million loans through the Small Business Administration’s 7(a) program.

Of that total, only about $10 million or 1.5% went to Black-owned businesses in the state. That’s a woefully low number considering the demographic composition of Arkansas, where African Americans account for 9% of small businesses and 15% of the population.

That statistical disparity was highlighted in the “Arkansas Small Business Access to Capital Study” by the Winthrop Rockefeller Foundation. (Download the PDF.)

“We know small business lenders in Arkansas are very interested in helping everybody they can,” said Cory Anderson, chief innovation officer with the Winthrop Rockefeller Foundation. “We want to start a discussion on creative underwriting and the ways we engage the communities and listen to minority-owned small businesses who need more opportunity to access capital, to see what their needs are and come up with products to meet those needs.”

About 76.7% of SBA 7(a) loans made by Arkansas lenders during 2017-20 ($505 million) went to white-owned businesses. That’s a number that coincidentally almost matches the percentage population of caucasians in Arkansas.

SBA loans aren’t doled out along racial or demographic lines, however. Each loan application stands or falls on its own merits.

“If they apply and they qualify, we’re not going to turn them down regardless of their ethnicity,” said Craig Mobley, chief operating officer at First Financial Bank of El Dorado. “But there can be stringent underwriting criteria, especially for startups.”

The capital access study dug into SBA 7(a) loans as a statistical starting point because the program provides accessible racial data. The Winthrop Rockefeller Foundation unveiled its report, which was developed with the Arkansas Community Foundation, on March 1.

“We were intentional about releasing the survey when we did with the rebooting of the economy about to begin,” Anderson said. “The government will be moving resources around to help businesses get back on their feet, particularly small businesses.

“We wanted to remind folks that the traditional ways we move capital around isn’t working for minorities, and that’s what the research showed. We hope to have an impact on money that reaches minority- and women-owned business.”

A large component of the study was an electronic survey opened to more than 3,000 small business owners throughout Arkansas during an eight-week window. That effort drew a response from 231 who completed the access to capital survey.

“It’s all interesting,” First Financial’s Mobley said of the survey results and study. “That’s the first time I’ve seen it broken down like this.

“The low numbers among minorities is what really stood out to me. I don’t know how we turn that around, but we’re more than willing to help.”

Not surprisingly, the study reported that Southern Bancorp Bank of Arkadelphia made the largest total of SBA 7(a) loans to black-owned businesses during fiscal years 2017-2020: $3.9 million. That represented 9.7% of the bank’s $40.4 million SBA 7(a) loan total for the period.

Reaching out to the underbanked is part of Southern Bancorp’s mission. The survey findings served as a challenge for traditional banks to step up their efforts to help more minority-owned small businesses gain access to capital.

The Winthrop Rockefeller Foundation’s capital access study provided a breakdown on loan approval/denial for small business owners during the past three fiscal years.

Among minority women, 45% were denied, 26% were approved and 29% reported both denial and approval. Among non-minority women, 11% were denied, 53% were approved and 36% reported both denial and approval.

Among minority men 39% were denied, 18% were approved and 43% were approved and denied. Regarding non-minority men,10% were denied, 58% were approved and 32% reported both.

The survey results also delved into why small businesses were unable to get financing from the borrower’s perspective.

For small business owners who had applied for a loan that was denied during the past three years, the top three reasons were the same among minority and non-minority women: Not enough collateral, 24% and 26%; credit score was too low, 24% and 21%; and not in business long enough 19% and 21%.

Among minority men, not enough collateral was the biggest reason for denial at 29% followed by we have no idea and other reasons, both at 18%.

Among non-minority men, the top three reasons for loan denial were all at 21%: not enough collateral, not in business long enough and we have no idea.

That “we have no idea” reason is perplexing.

Did some would-be borrowers just not understand why their loan request was denied? Or were they literally not given an explanation?

For most lenders, the norm is to go over the reasons why a loan request was denied and talk about how the shortcomings can be addressed to work toward approval.

“That is absolutely standard operating procedure,” said Nancy Sims, executive vice president and government guaranteed lending national sales manager at Little Rock’s Bank OZK. “Not every single time does it work out that a loan can be made, but you make sure they know what’s going on every step of the way.”

Download: The full report, with a charts addendum, available as a PDF.

 

Reasons Why

The survey also asked why minority small business owners didn’t seek financing during the three-year period. A prevalent response: concern that their credit history would be an insurmountable obstacle.

The four biggest reasons minority women didn’t apply for a loan or line of credit during the past three years was credit history, 33%; no need for financing, 24%; unaffordable payments, 13%; and other, 11%. Other reasons included not knowing how to apply, not wanting the debt or payment and low profit margin.

Among minority men, the four biggest reasons were no need for financing, 46%; credit history, 17%; insufficient collateral, 13%; and a past denial of credit, 8%.

Among non-minority women, 59% had no need for financing. Credit history, unaffordable payments, insufficient collateral and other, all registered at 9% as reasons for not applying for a loan during the past three years.

For non-minority men, 57% had no need for financing so they hadn’t applied for a loan. Unaffordable payments and applied in the past and was declined, each tallied 14% as the next most common reasons non-minority men didn’t apply.

A big attraction for lenders making SBA 7(a) loans is the agency can guarantee up to 85 percent of loans of $150,000 or less, and up to 75 percent of loans above $150,000. Most 7(a) loans have a maximum loan amount of $5 million.

The massive reduction in risk exposure for lenders still leaves a gap to be filled with collateral and equity that some borrowers can’t provide.

Hillis Schild, communications and community development director for Arvest Bank in central, northeast and southwest Arkansas, said some surrounding states have enacted legislation to create programs to help with that. In Tennessee, a small business jobs opportunity fund was established as a source to reduce the loan gap.

“It provides capital opportunities for those with a higher risk profile,” Schild said. “That’s the premise. It helps mitigate collateral shortfalls and can stretch out the payback period. It does a good job of meeting a gap that traditional lending can’t meet.”

The Tennessee fund was launched in 2010 with $25 million provided in a 60/40 split between banks and state government. Under the enacting legislation, participating banks are eligible for credits on franchise and excise taxes. The lenders receive a credit equal to 10% of their contribution for 10 years.

The Tennessee small business jobs opportunity fund is managed by Nashville’s Southeast Community Capital Corp., a community development financial institution.

The fund’s mission is to provide loans to businesses throughout the state that are unable to access capital to expand operations and create or retain jobs. The fund’s goal is to have a minimum of 15% minority participation.

“It would be a big wheel to turn, but it would be a good one,” Schild said of the possibility of creating a similar small business funding program in Arkansas.

Edward Haddock, Arkansas district director of the Small Business Administration, said the study provided good insights into minority small business owners and their barriers to capital.

“Are we doing enough and focusing on being inclusive?” Haddock said. “That’s where the discussion starts.

“How can we help and extend our relationships deeper into communities of color? More broadly, the discussion is going to get into philanthropy and influencing public policy to make sure there’s more tools available.”

Survey indicated a healthy dose of dissatisfaction with the loan process across racial and gender lines.

But in their experience with the lending process, minority women gave more unsatisfactory grades for “lender’s willingness to assist.” While 32% of minority women gave lenders an unsatisfactory mark, only 14% of white women did. That compares with 18% among minority men and 23% among white men.

“Diversifying the talent pool is going to be an easy win for banks out there serving the community with people of color,” Haddock said. “The issue of trust continues to come up. Who do we trust? And for many, it’s people who look like us and talk like us.

“We have to deal with perception, and all of these other issues to open the doors to capital access for everybody.

“We’re at a new jumping off point to reimagine what can be possible. It will take all of us to bring everybody along and serve every Arkansan who has a dream.”

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Top ($10M+) Arkansas SBA 7(a) Lenders
(FYs 2017-2020)