Shavon Marley of Marley Trucking who received a CDFI loan from Carolina Small Business Development ... [+]
Ensuring PPP Loans Go To The Businesses That Need Them The Most
While the Paycheck Protection Program (PPP) was intended to help small businesses hit hardest by the Covid-19 crisis—those owned by women and people of color—it failed to deliver on its promise. From the beginning of the program on April 3 to the end on August 8, struggling minority owners received aid later than their white counterparts, according to an analysis of the program’s data by the Associated Press.
ZIP code data with the greatest proportions of white residents received loans at twice the rate of areas with the smallest proportions of whites. Data by gender is not available, but because women are more likely to be nonemployer firms and in sectors most impacted by the pandemic—personal services, retail, and restaurant—it is expected they would have experienced a similar pattern as ZIP codes with a lower concentration of whites. "Almost 60% of women business owners state they don't have the same access to capital that men have," said Candace Waterman, president and CEO of Women Impacting Public Policy (WIPP). It is the largest nonpartisan advocacy organization for women and minority entrepreneurs.
In response to criticism, the pattern did improve in the final four weeks. Banks began approving loans to smaller businesses and the pool of providers was expanded to include more Community Development Financial Institutions (CDFIs) and fintechs, which are more likely to have lending relationships with women and people of color. CDFIs were created to lend to groups that banks deem risky.
But still, more could have been done.
The program was not clear about the terms of loan forgiveness and the documentation required. "The smallest businesses often don't have the same kinds of systems and documentation that large businesses do," said Joyce Klein, director of the Business Ownership Initiative at the Aspen Institute. It conducts research and advocates on behalf of micro and small business owners. "There are very few [struggling] businesses that want to take on debt when they are uncertain they will have the revenues to repay it. Anything that the government can do to get something that's like grants in the hands of very small businesses is critical."
"The other challenge of PPP is that it ran largely through banks, particularly at the beginning," said Klein. CDFIs and fintech lenders need to be an integral part of PPP loan distribution. "If you create a program that's run largely through the banks, you're going to miss large numbers of business owners who just typically don't have lending relationships with banks."
Funding Beyond Relief Aid
"When we come out of the crisis, who is going to be lending to businesses that are owned by women and people of color?" asks Klein. Banks have tightened their credit standards and it will take a while before they return to previous levels. The Federal government has approved $12 billion in funding to CDFIs and Minority Designated Institutions (MDIs) as part of its $900 billion COVID-19 emergency stimulus funding package. This includes $3 billion in emergency support through the CDFI Fund to provide grants and other financial and technical assistance and a $9 billion Emergency Capital Investment Program administered by the Department of Treasury to provide low-cost, long-term capital investments to MDIs and CDFI depositories.
"Free up liquidity for those companies that are holding small business loans," said Klein. The loans were good loans when they first originated. "Let's get those loans off their balance sheet."
"Create a facility where banks (or other entities, like foundations or corporations) would sell to the Fed Equity Equivalent Investments (EQ2 ).* It's an investment vehicle that expands sources of equity capital for CDFIs. Unlike for-profit corporations that can raise equity by issuing stock, nonprofits have traditionally built their capital base through contributions, philanthropic sources, or through the accumulation of retained earnings. An EQ2 is a long-term, deeply subordinated loan with features that make it function like equity. The new stimulus plan doesn’t include funding for Treasury that would make it easier for the Fed to do this (because Treasury would cover any losses).**
In response to the inequalities exposed by the pandemic and the Black Live Matter movement, banks increased their funding to CDFIs. Fintech startup, CNote, developed a fully insured cash management product that enables corporations to earn market-rate returns while doing social good. Mastercard and the Mastercard Impact Fund are collectively deploying $20 million into CNotes' Promise Accounts. The accounts provide recovery and growth funding to small businesses in underserved communities via CDFIs and Low-Income Designated credit unions. CNote will be making more corporate announcements.
If we are going to close the gap in funding to minority- and women-owned business, CDFIs not only need more funding but underestimated entrepreneurs need to know about this affordable source of capital.
Don't Make Women Choose Between Access To Capital And Access To Markets
Access to markets is critical to all businesses. Having customers who spend billions on goods and services, such as the Fortune 1000 or government agencies, increases your chances for high growth. Whether it's corporate or local, state, or federal government contracts, business owners who are part of communities that have been historically marginalized—such as women and people of color—are not receiving contracts on par with white men. Becoming certified as 51% minority- or women-owned opens doors to business development opportunities and training.
When minority- and women-owned businesses seek equity investment to fund growth, if investor ownership exceeds 49%, these businesses lose their socioeconomic status. "Senators Marco Rubio and Maria Cantwell introduced the Women and Minority Equity Investment Act. It allows women-owned businesses to take investment from women-owned equity firms and still meet the obligation of being unconditionally owned," said Waterman. When she was vice president and chief staff of WBENC, Waterman implemented that rule for them. This organization oversees the women-owned business certification program for corporations.
Both WIPP and The National Women's Business Council (NWBC) strongly support this act. NWBC is a federal advisory committee established to serve as an independent source of advice and policy recommendations for the President, the US Congress, and the US Small Business Administration (SBA) on issues of importance to women business owners and entrepreneurs. Waterman is optimistic that it will pass this year.
Ensuring Equal Access To Credit Requires Accountability
Klein is working with the Responsible Business Lending Coalition (RBLC) on the need for data showing who is getting capital, by product, and at what price. RBLC is a network of nonprofit and for-profit lenders, investors, and small business advocates that share a commitment to innovation in small business lending while ensuring responsible lending practices. Dodd-Frank Wall Street Reform and Consumer Protection Act was approved in 2010. However, section 1071 requiring financial institutions to report demographic on small business loans has yet to be implement.*** Economic disparity highlighted by the pandemic, as well as Black Matter and MeToo movements, make it more critical than ever before that section 1071 gets authorized.
What government policy changes do you think are needed to help women-owned businesses?
*Quote update to reflect banks not CDFIs make loans.
** Updated to mention that the new stimulus plan doesn’t include funding for Treasury that would make it easier for the Fed to do this (because Treasury would cover any losses).**
*** Updated to reflect that Section 1071 of Dodd-Frank has been authorized. It has yet to be implemented.
