The above featured photo is of one of LURN’s Semi’a Fund borrowers, José. Who was able to purchase a new fruit cart with capital and coaching from LURN.
Many low-income individuals often become entrepreneurs because they are disconnected from, and unable to, integrate into the formal economy. For many of the same reasons as to why they cannot integrate into the formal economy, they cannot access capital to sustain and grow their businesses. This does not sit well with us. How is it that with growing inequality and rising levels of poverty we cannot find decent ways to better support people that are taking matters into their own hands in hopes of economic prosperity?
Accessing capital in low-income communities is incredibly difficult. Well, let us rephrase that – accessing equitable capital in low-income neighborhoods is incredibly difficult. Predatory lending options are overrepresented in low-income communities. According to data from the Department of Business Oversight from 2016 – “more than 60% of payday storefronts were located in zip codes with higher family poverty rates than the statewide rate.” These lenders require very little from their clients in order to dish out cash, which would be great news for many individuals in low-income communities who often lack credit or other forms of key documentation, but as most of us know, these lenders are considered predatory for very good reasons: payday lenders can still charge a 15% fee on loans up to $300 – for two-week loans, this equates to an annual percentage interest rate of 460%.
What about safer loan options? They exist, but they’re not very accessible. For example, the Small Business Administration (SBA) does offer a decent set of loans with interest rates as low as 6.75%, but the requirements quickly eliminate many low-income entrepreneurs by requiring that a business be in operation for at least 2 years; applicants hold a credit score of 680 or higher; seek to borrow at least $30,000; businesses generate at least $50,000 in revenues for at least one year; and businesses need to demonstrate that they are profitable. According to these guidelines, we believe that a majority of small entrepreneurs in low-income communities would not qualify for SBA loans, based on data that we’ve collected through our portfolio of small businesses who have received microloans through the Semi’a Fund. Here are the stats for the majority of our borrowers:
- Average Loan Size: $7,900.00
- Average Credit Score: 621
- Percentage of Borrowers without Credit: 30%
- Average Borrower Age: 47
- Borrower Gender: 64% Men; 36% Women
- Average Annual Revenues (Gross): $85,000
- Average Number of Years in Business: 6 years
The majority of our borrowers would not qualify for an SBA loan based on credit scores and capital needs. Yet, even if the majority of our borrowers measured up to the financial requirements of the mentioned SBA loan, they would still not meet formal licensing requirements and are undocumented.
Other capital options, such as traditional loans from banks, typically carry interest rates that range between 6-15%, and also require credit scores that automatically disqualify the majority of our borrowers. There is evidence that indicates that what our borrowers would likely experience from major banks, is happening on a larger scale throughout California. According to reporting by KQED, wealthier communities are largely outpacing low-income communities in terms of bank loans and credit card access. And although minority-owned businesses are occuring at rates much higher than those which are not minority-owned, they have higher rates of failure due to low access to capital.
As you can see, the capital and credit playing field is far from level for individuals in low-income communities. Furthermore, recent news indicates that it may even get worse. At the national level, the head of the Consumer Financial Protection Bureau (CFPB) is pushing to relax regulations for payday lenders.
So what can we do to solve some of the issues stressed in this piece? Well, for one, it would be great for national regulations to move forward in a more progressive manner rather than revert to policies that promote individualist economic behavior. For example, instead of loosening regulations on payday lenders, how about we strengthen them by further restricting the amount of interest they can charge for small loans? As for banks, how about we strengthen Community Reinvestment Act guidelines so that banks are required to lower lending requirements and absorb “riskier” investments into their portfolios (By the way, our portfolio of “risky” borrowers is experiencing over 95% repayment as I write this). But in all honesty, we’re not going to hold our collective breath waiting for things to change at the national level. We want to encourage stronger local efforts. We’re incredibly interested in what a municipal bank could mean for many of these issues in Los Angeles. We would love to see a large network of private lenders, such as the Semi’a Fund, work with such an institution as a municipal bank to create financial products that truly support low-income communities. Such a partnership could help mitigate risk and still maintain the grassroots practices of smaller loan funds that result in actual success for low-income individuals. After all, the majority of our borrowers are growing their businesses successfully as a result of our capital and coaching. Clearly there is a lot of untapped potential and the only thing holding back many low-income individuals is the unwillingness of financial institutions to take a fair chance on their success.