Brooklyn is home to some unique small and growing businesses. An all-organic worker-owned grocery, an immigrant-owned tech company, a worker-owned accounting cooperative, a cooperatively owned production company, to name just a few.
But when it comes to small business loans, Brooklyn is not unique. Like almost everywhere else in the country, it’s been a tough few years. “Small business lending is just recovering to its pre-2008 levels, and that’s because of a number of factors,” says Andrew Hoan, president and CEO of the Brooklyn Chamber of Commerce.
Every day in the U.S., 8,000 small business loans get denied, and reasons can include low personal credit scores, lack of credit history, lack of collateral, or racism and sexism.
The Chamber, which helps Brooklyn small businesses (not just members) prepare financial statements and fill out applications to get loans, recently got a grant from the U.S. Treasury to launch its own small business loan fund.
In a typical year, Hoan says, they do between 30 and 50 loan packages. In 2015, they helped small business owners secure over $2 million in financing. But in the current tough lending climate — and in a borough that would be the fourth-largest city in the U.S. if it was on its own — the Chamber sees a need for the dedicated fund, especially one that focuses on serving people of color and immigrants.
People of color are still more likely to be denied loans, and women are half as likely as men to get outside financing to start or acquire a business — even though black women are the fastest-growing demographic of entrepreneurs. New post-financial crisis regulations are also a factor, limiting the risk that banks can take on, especially for small business borrowers with low credit or limited credit history, Hoan adds.
Alternative lenders, especially online lenders, have been stepping into that gap. Non-bank lenders typically have faster underwriting and shorter decision processes. It’s not hard to find an online lender that promises a decision within 24 hours. Alternative lenders distributed around $3 billion in 2013, double the previous year, according to the U.S. Small Business Administration (SBA). But that doesn’t necessarily mean their borrowers are happy: According to the 2015 small business credit survey from the Federal Reserve, only 12 percent of small business owners were satisfied with online lenders, compared with 38 percent who felt satisfied with a small business loan from a community bank. Survey respondents cited high interest rates and lack of transparency as the main issues with online small business lenders.
Since the financial crisis, the Chamber has seen an uptick in denials for loan packages that didn’t look all that different from approved packages pre-financial crisis.
“For whatever reason, regulations, restrictions, lack of credit history because maybe they were immigrants, they were getting denied even though they were good loans,” Hoan says.
The Treasury grant will help the Chamber build the fund and become certified as a CDFI. It will be the 50th CDFI in NYC, but just the fifth located in Brooklyn. The Brooklyn Cooperative Federal Credit Union, also a CDFI, has about $2.5 million in business loans out of its $15.5 million loan portfolio, with most of the rest in home mortgages or real estate. It has two brick-and-mortar locations in central Brooklyn, in neighborhoods that are 95 percent minorities.
Out of 1,962 SBA-backed loans there in fiscal year 2014, only 81 went to African-American borrowers and only 175 to Hispanic borrowers. Overall, Brooklyn’s population is 45 percent white, 35 percent black and 20 percent Hispanic.
“It was shocking to see how low the numbers were in terms of lending, how disparate the difference in what you would call in-need groups that the federal government identifies, like immigrants, minorities,” says Hoan. “It reinforced the necessity of something like this.”
Hoan anticipates it will take about a year to set up the CDFI, but they will make a few loans out of their initial funding, probably in the $10,000-$30,000 range. Other key tasks on the agenda include establishing an advisory board that can speak for the target population of immigrants and people of color — one of the options for satisfying the requirement that federally certified CDFIs maintain accountability to their targeted community.
“It should be reflective of the clients that we serve,” says Hoan.
In terms of impact, while the Chamber will track number of loans and dollar value of loans as it has been doing for its loan packaging services, they’re also working currently with New York University’s Wagner School of Public Service & Policy to create an “impact meter” that will cover all of the Chamber’s direct services, including the new small business loan fund. For each of their programs, they’re hoping that it will show the true economic impact for each dollar spent, through jobs created, revenue growth and other factors still being determined.
“It’s not an exact science,” says Hoan. “We want to translate as best we can how each one of these loans or how helping recruit an employee to a company, what would that do to the Brooklyn economy.”
The Equity Factor is made possible with the support of the Surdna Foundation.
Oscar is editor of Next City. Before that, he was a Next City contributing writer and 2015-2016 Equitable Cities Fellow. Since 2011, Oscar has covered community development finance, community banking, impact investing, equitable and inclusive economies, affordable housing, fair housing and more for media outlets such as Shelterforce, B Magazine, Impact Alpha, and Fast Company.