Breaking The Cycle Of Disinvestment In Lower-Income Communities | KERA News

Breaking The Cycle Of Disinvestment In Lower-Income Communities

Apr 6, 2019
Originally published on May 5, 2019 4:41 pm

It's not uncommon for people who want to start businesses in lower-income neighborhoods to have trouble getting bank loans. But increasingly, there are investors looking specifically to help businesses in those areas, with the aim of reversing the cycle of disinvestment.

"There's always reasons to say no to a borrower. We are looking for reasons to say yes," says Lauren Grattan, a founder of the San Diego-based investment company Mission Driven Finance. She explained that her company doesn't look at personal credit scores. "We instead look at the validity of the business and how well can you repay from the business earnings."

Her company's goal is to fill the gap between more traditional profit-motivated investing and philanthropy that focuses on economic development.

One business that could have used help like this is Project Reo Collective, a coffee shop in Paradise Hills, a lower-income neighborhood of San Diego.

The coffee shop is situated in a small strip mall near a Mexican restaurant and a cell phone store. On most days, the cafe is filled with people working on laptops or hanging out while drinking Mexican mochas or lavender lemonades.

Two specialties of the Project Reo Collective coffee shop are its lavender lemonade and Mexican mocha.
Claire Trageser / KPBS

"Project Reo Collective started out as five families who got together ... cleaning up the neighborhood here," says Tommy Walker, one of the owners. "A lot of people in the neighborhood said, 'We wish we had somewhere to hang out, somewhere we grab a cup of coffee, meet our neighbors, do some homework or study.' "

You have a cycle that kind of perpetuates that neighborhood being less friendly to business. Businesses don't get started. So employment stays depressed. The job opportunities aren't there in the neighborhood. Businesses that are there don't expand. - Spencer Cowan, Woodstock Institute

Walker says that after a successful first year, he went to a bank asking to borrow $4,000 for an espresso machine. But, he didn't have any luck.

"They said, 'No, you guys don't qualify because you haven't been around long enough,' " he says.

A problem of disinvestment

Having trouble getting a small-business loan like this is typical, according to data compiled by the nonprofit Woodstock Institute in a report titled "Patterns of Disparity." It shows that between 2012 and 2016, only about one in five businesses in low-income areas across the United States received bank loans or even business credit cards. That's compared with almost three in five businesses in higher-income areas.

"You have a cycle that kind of perpetuates that neighborhood being less friendly to business," says Spencer Cowan, the researcher who compiled the data. "Businesses don't get started. So employment stays depressed. The job opportunities aren't there in the neighborhood. Businesses that are there don't expand."

He says it can also drive businesses to predatory lending.

I had two years of experience with profit, but I got rejected for every loan I tried for. - Natalie Gill, small-business owner

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

"I had two years of experience with profit, but I got rejected for every loan I tried for," she says.

A normal small-business loan has 5 to 10 percent interest, but she took a loan from an online company. "It was at 18 percent interest, and I had to pay it within three years, which was a risk I was willing to take because I had no other options," she says.

Bank investment vs. community investment

Banks are restricted in whom they can choose for loans, says Carty Davis, an investment banker with C Squared Advisors.

"A bank can't just say, 'I really like this person. I'm going to take a flier on them because I know they're going to be successful,' " he says. "They have a good business plan, but if they don't have equity to put into the deal or cash to put into the deal, it's going to 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 don't have that, they can go to the federal Small Business Administration.

But here's the issue for lower-income communities: Those loans still require big cash down payments or home equity, which business owners may not have.

There are alternative ways of getting financing, such as from a company like Mission Driven Finance. In addition to investing in small community businesses, Mission Driven Finance also helps people looking for small-business loans better understand the technicalities of borrowing money to open or expand businesses.

The point, founder Lauren Grattan says, is to invest in neighborhoods that really need it. Because when businesses succeed, they hire locally and the entire community reaps the benefits.

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AARTI SHAHANI, HOST:

People who want to start businesses in lower-income neighborhoods often have trouble getting bank loans, but there are some investors looking to help. Claire Trageser from member station KPBS in San Diego reports.

CLAIRE TRAGESER, BYLINE: This strip mall on the outskirts of San Diego has a Mexican restaurant, a liquor store and a coffee shop. The coffee shop is called Project Reo collective. It's filled with people working on laptops or hanging out while drinking Mexican mochas and lavender lemonades.

TOMMY WALKER: Project Reo Collective started out as five families who got together from cleaning up the neighborhood here.

TRAGESER: Tommy Walker is one of the owners.

WALKER: A lot of people in the neighborhood were saying, we wish we had somewhere to hang out, somewhere we could grab a cup of coffee, meet our neighbors, do some homework and study.

TRAGESER: The neighborhood, called Paradise Hills, is in a lower-income part of town. Walker says, after a successful first year, he went to a bank asking to borrow $4,000 for an espresso machine.

WALKER: They said, no, you guys don't qualify because you haven't been around long enough.

TRAGESER: This experience is typical, according to data compiled by the nonprofit Woodstock Institute. It shows that between 2012 and 2016, only about 1 in 5 businesses in low-income areas across the country received bank loans or even business credit cards. That's compared to almost 3 in 5 businesses in higher-income areas.

SPENCER COWAN: You have a cycle that kind of perpetuates that neighborhood being less friendly to business.

TRAGESER: Spencer Cowan compiled the data.

COWAN: Businesses don't get started, so employment stays depressed. The job opportunities aren't there in the neighborhood. Businesses that are there don't expand.

TRAGESER: He says, it can also drive businesses to predatory lending. That's what happened with Natalie Gill. After running her flower arranging business out of her home, she wanted to expand to a flower shop and cafe.

NATALIE GILL: I had two years of experience with profit, but - I don't know what it was, but it was just - I got rejected for every loan I tried for.

TRAGESER: A normal small business loan has 5% to 10% interest, but she took a loan from an online company.

GILL: It was at 18% interest, and I had to pay it within three years, which was a risk I was willing to take because I had no other options.

CARTY DAVIS: The bank can't just say, I really like this person; I'm going to take a flyer on him because I know they're going to be successful.

TRAGESER: Carty Davis is an investment banker with C Squared Advisors.

DAVIS: They have a good business plan, but if they don't have equity to put into the deal or cash to put in the deal, it's going to be very, very difficult to get a loan approved.

TRAGESER: Davis says banks have certain criteria, such as a good credit history. He suggests that if potential borrowers don't have that, they can go to the federal Small Business Administration. But here's the issue for low-income communities - those loans still require big cash down payments or home equity, which business owners may not have.

LAUREN GRATTAN: There's always reasons to say no to a borrower. We always are looking for reasons to say yes.

TRAGESER: Lauren Grattan is a founder of the investment company Mission Driven Finance. She says, increasingly, there are investors looking specifically for ways to address this inequality.

GRATTAN: Mission Driven Finance does not look at personal credit scores. We instead look at the validity of the business and how well can you repay from the business earnings.

TRAGESER: That allowed someone like Julie Reader (ph), the publisher of small local newspapers in the outskirts of San Diego, to get a $100,000 loan over 18 months with 8% interest - a typical business loan.

JULIE READER: They were very concerned with, what kind of job opportunities was this going to bring for the community, how was this going to help nonprofits in the community?

TRAGESER: But Mission Driven Finance has only given out a few loans so far. And there aren't many other investment companies like it, which means there's still significant inequality in lending to businesses in lower-income areas. For NPR News, I'm Claire Trageser in San Diego. Transcript provided by NPR, Copyright NPR.