Viviana PernotSBA LOANS
Karl Belfonti, 57, of Wildwood Crest, owner of The Gym at 10th Street in North Wildwood, walks outside to show property of a seasonal outdoor workout space. Wednesday, December 9. (The Press of Atlantic City/ Viviana Pernot)
Besides fewer sources of capital from friends and family, that also means fewer assets to use as collateral for business loans from banks and other institutions. Hence the continued racial disparity in access to capital for minority-owned businesses. Small Business Administration (SBA) loans to African-American borrowers declined 47 percent between 2009 and 2013, even as overall SBA loan volume rose around 25 percent.
VEDC, a Los Angeles-based community development financial institution (CDFI), is betting a combination of creativity and intentionality can help drive racial equity in small business lending despite the racial wealth gap. They recently partnered with JPMorgan Chase to launch a $30 million National African American Small Business Loan Fund. JPMorgan Chase provided a $3 million grant to seed the fund, and the rest will come from other sources.
We wanted to challenge ourselves to improve our African-American lending numbers," says OC Isaac, VEDC's vice president for national strategic initiatives.
Eligible small businesses must be at least majority-owned by African-Americans, and located in NYC, Chicago or LA Loan sizes will run from $35,000 to $250,000, and VEDC expects businesses to use the loans to expand, finance equipment, address short-term cash flow needs and provide contractor lines of credit.
VEDC facilitated $20,089,594 in loans in 2014, which created 329 new businesses, and created or retained 2,147 jobs. Around 70 percent of their clientele are minority- or women-owned businesses, and 75 percent are located in low- to moderate-income areas. Historically, they estimate 20 percent of their lending has gone to African-American-owned businesses.
"We believe we can do more. We believe we should do more," Isaac says. "We also want to demonstrate to the marketplace that it's not a situation of lack of demand, it's that there isn't a creative product suite out there that can really address the needs of this demographic.
Through the work of this fund, VEDC intends to learn what that product suite should look like, Isaac says. Based on feedback from clients and loan officers, they have been constantly tinkering with loan parameters, including minimum loan size.
I thought we were going way low with small business loans at $35,000, but we might have to go down to $25,000. There's a need down there," Isaac says. Staffers meet weekly to discuss such changes to the funds policies.
To make smaller loans responsibly, VEDC can take advantage of its 39-year history.
We started off as a microlender," Isaac explains. "That really taught us what was truly important with regards to safeguarding the capital we put on the street to a high-minority borrower base.
Microloans are defined in the US as business loans below $50,000. The average microloan is $13,000. In 2013, VEDC closed 210 microloans (totaling $2 million) along with 70 small business loans (defined as loans above $50,000 -- totaling $12 million).
"So it's a quasi-microlending program within a small business lending program, which allows us to address a broader audience, one that's more representative of the African-American business population, says Isaac.
There's also no credit score minimum for applicants to the fund.
"We want to make sure we understand the story behind the credit situation for the entrepreneur," Isaac says. "There's reasons why credit might be impaired, but those reasons don't necessarily have to render you ineligible for loan capital.
A further component to the fund is technical assistance. VEDC has developed a customizable platform that leverages technology to help clients manage their business and receive technical assistance for problem areas on a tailor-made basis. A diagnostic goes out to clients at the start of their loan to get an understanding of each business's baseline, allowing VEDC's advisers to be more efficient in how they provide support.
"It's a one-on-one customized consultation process for every business that comes through the fund," Isaac says.
The platform is essentially in beta, but Isaac says they would be open to having others use it once it's in a more refined stage.
Really, the whole fund is a beta.
The concept really is we get a pool of 250, 300 businesses to really assess what works," Isaac says. "We don't know everything right now. We feel strongly about certain elements, but we're making minor modifications all the time.
Intentionality is central. As Isaac says, We've done this in different ways, other shops have done this, but we feel it's never been dealt with so directly. Hopefully it could lead to creation of other elements. We're just one small piece in a larger system.
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By Benjamin Pimentel
You have a great idea for a small business based on a promising market opportunity. Youre ready to take the plunge.
But theres a problem: money. You dont have any. Neither do you have savings nor potential investors to tap. And your credit is in such bad shape that a loan from a bank or an online lender is probably out of the question.The newer your business, the higher the hurdle
Bad credit, generally defined as a credit score between 300 and 629, is a dilemma for any entrepreneur looking for small-business loans. Its generally not impossible to overcome, but its a lot harder to do so when youre just starting out.
I would say its going to be tough to find bank financing, says John Dzida, vice president at Bank of San Francisco.
Most banks evaluate would-be borrowers based on a scoring model that looks very heavily, first, at credit, says Fred Crispen, senior vice president at Celtic Bank in Florida. If theyve got bad credit, theyre not going to score on that model, especially if theyre a startup.
Online lenders are generally willing to offer so-called bad credit small-business loans. But these are usually available only to small businesses with a proven track record. Startups under a year old likely wont qualify.
We dont typically offer startup loans for businesses that are newer than 12 months old, Candace Klein, chief strategy officer at Dealstruck, tells NerdWallet. But for startups that are 1 to 5 years old, we really focus on cash flow.Look toward nonprofits and microlenders
If you have bad credit and are looking for a startup loan, your best bet is institutions with a different risk appetite than a traditional bank, Dzida says, which usually means microlenders and nonprofit groups.
Sandy Mackovich, senior business development officer at Working Solutions, a San Francisco Bay Area lender focused on small businesses in low-income communities and those owned by women and minorities, agrees.
In fact, she says, you could get a fairly good deal. Bad credit business loans typically mean more expensive financing. But thats not necessarily the case with nonprofits and microlenders geared to helping women or minority entrepreneurs, or those from low-income and economically disadvantaged communities.
Its not necessarily more expensive, Mackovich tells NerdWallet. We wouldnt send you to a 20 percent loan because you have a high-risk personal credit. It may be 9 percent or 10 percent, but thats as high as it would go.How to improve your chances
To qualify, you should have a rock-solid business plan and, more importantly, show that youre working to fix your credit and that youre determined to set your finances in order.
Mackovich has this advice:
Take steps, even small ones, to fix your credit
Your bad credit may be attributable to a variety of factors. For example, you could be wrestling with a mountain of credit card debt and have fallen behind on payments.
Make a plan to set your finances in order, Mackovich says. If youre behind on your payments, you need to be current on those.
This is key, she says: If youre already behind, nobody is going to work with you. They want to see that youre meeting your obligation.
Then show that youre dead serious about it
For example, you could negotiate a plan to pay down a credit card bill, or to settle a collections account, and then show that youre sticking to that plan.
So you get on a payment plan with your credit card and you show that for a couple of months you can make those payments on time, Mackovich says.
Thats an important step toward persuading a nonprofit lender like Working Solutions to consider you for a startup loan.
We can work with you if you can at least get started paying on a regular basis for a couple of months, because it shows that you balanced your budget in a way, Mackovich says.
It may take time for you to completely fix your credit, but getting a business loan despite bad credit would allow you to demonstrate the viability of your business. After youve been in business for a year, more financing options could open up, including online lenders.
Cash is king when seeking a small-business loan, says Klein, of Dealstruck, and a business that is able to keep a positive trajectory in cash flow can overcome nearly any credit score.
To get more information about funding options and compare them for your small business, visit NerdWallets small-business loans page. For free, personalized answers to questions about financing your business, visit the Small Business section of NerdWallets Ask an Advisor page.