How credit unions can close the equity gap for minority business owners
2020 shined a light on the countless inequities Black and brown people face daily.
Whether it’s the often-disregarded pay gap or the traumatic realities that in fact police brutality is real, societal problems facing minorities have undoubtedly become top-of-mind for individuals and corporations alike.
One of the most impactful and jarring discoveries during the anti-racist movement of 2020 were the unfortunate statistics around the funding and revenue gap for diverse entrepreneurs. Studies show that minority and women entrepreneurs account for the largest percentage of ventures in the US but are receiving less than 15% of venture capital funding (Case Foundation, 2018).
Additionally, PPP disbursement was less than obtainable for BIPOC small business.
As a small business coach and a community builder for Black women entrepreneurs, I’ve seen first-hand how the lack of funding and education can stifle the growth of entrepreneurs who look like me. Access to funding, advocacy and support are often put behind costly paywalls and even layers of bureaucracy that is simply impenetrable without assistance.
Luckily, it seems like times might be changing and these injustices aren’t falling on deaf ears.
More than $50 billion dollars were pledged to Black entrepreneurs and communities from some of the largest corporations and banks in our country according to the San Francisco Bay Review.
Although we are still waiting to see the impact of these commitments, for the first time in recent history, diverse entrepreneurs saw a shift in support and advocacy for their businesses.
As the dust settles on the immediate pledges from corporations and banks, there is still a need for financial institutions to make sizeable changes to the way they support, bank and fund diverse businesses. It is not enough to make a one-time statement, pledge, or investment.
BIPOC businesses truly need hands-on support and advocacy through all stages of entrepreneurship to close the funding and revenue gap for these brands.
Credit unions have a key niche and opportunity to offer innovative and ground-breaking support for these entrepreneurs. As non-profit, member owned communities, you have the power to close the funding gaps for diverse entrepreneurs in ways that retail banks cannot.
As a BIPOC business advocate, trusted technical assistance provider and small business owner, here’s a few core ways credit unions can stand in the gap for minority businesses:
Increase transparency with underwriting
Historically, loan underwriting processes have been inherently biased against diverse, low-income and immigrant entrepreneurs. Although more businesses are starting and revenues are increasing, still only 23% of Black businesses receive bank loans (Fed Small Business, 2020)
It is understandable that not every business will qualify for a loan. However, there needs to be an increased level of transparency with requirements to qualify for this funding.
Although underwriting is a fluid and case-by-case process by design, there is a core framework of the type of businesses you can fund. Being honest and transparent about this framework will set the goals needed for these small businesses to achieve. Simply put, small businesses can’t ace the test without the rubric.
Sharing your baseline qualifications on your website and hosting loan workshops are a couple of ways to go above and beyond for small businesses.
Be a leader in innovative technical assistance and small business education
Being transparent with your loan underwriting practices is a quick win.
However, transparency doesn’t mean that these businesses will still qualify. Normally, the role of a financial institution stops at loan package review, but credit unions can go a step further by investing in innovative technical assistance practices for small businesses.
As lenders, you know what an investible business plan looks like.
You know the baseline credit score, documents, and collateral requirements. Because of this, you have a unique opportunity to build or invest in technical assistance programs that directly promote the loan qualification of diverse entrepreneurs.
The business model is very clear.
A small technical assistance investment upfront could yield more revenue from loan and interest payments on the back end. Additionally, credit unions can continue to differentiate themselves as a trusted pipeline for diverse entrepreneurs and the preferred funder for BIPOC entrepreneurs in their communities.
The Metro Detroit Black Business Alliance in Detroit, MI is conducting a very similar and ground-breaking program. They’ve partnered with several southeast Michigan funding partners to create a qualified pipeline of small businesses. Those who go through the Capital Connect program will receive customized technical assistance support to develop a loan-ready funding package that will be fast tracked and approved by the funding partners.
Investing in innovative learning and technical assistance programs like the Capital Connect program will ensure that you cultivate BIPOC entrepreneurs and position them for long-lasting banking relationship and funding.
Be relationship builders
Lastly, credit unions and financial institutions should work harder to build personalized relationships with BIPOC business owners in their communities.
It is no secret that Black and brown people have had a level of mistrust with banks. With historic mistreatment of diverse Americans including predatory financial systems still in low-income and urban areas today, there is an information gap around banks and credit unions.
On the other hand, a personal relationship with a banker is the number one factor to receiving small business support, funding, and opportunities.
Knowing this key element in business growth, makes it unfortunate that relationships are oftentimes not cultivated between diverse entrepreneurs and financial institutions. As an entrepreneur myself, I didn’t realize just how important a banking relationship was until I started applying for lines of credit during my first few years of business.
Since this is truly a knowledge gap and a fear for BIPOC entrepreneurs, credit unions have a unique advantage to initiate these relationships before and during client onboarding.
Credit unions should educate their relationship bankers on the historic relationship with BIPOC businesses and encourage innovative ways to build trust with these entrepreneurs. You can go further by educating your community on what “relationship banking” truly means and offer insight into how these relationships can open doors for them.
More importantly, seek out these relationships personally. Do not wait until diverse entrepreneurs come to you.
Due to small business education not being as readily available and well-known for diverse entrepreneurs compared to white entrepreneurs, it requires more marketing and recruiting efforts from you, the credit union, to build the relationships.
As we enter in an era of radical change and providing access to equity for BIPOC businesses, it is the responsibility of financial institutions to lead the way in transformative practices.