By any reasonable measure, Mara Zepeda was already a success. A daughter of an immigrant father, she attended college on a full scholarship, and had worked as an economics reporter for NPR. She went on to found a tech company that made over half a million dollars in revenue last year, with five employees. Her businesses needed a loan last year to get through a rough patch brought on by Zepeda needing some time off to take care of her mother, who faced a sudden health issue. The bank she called said no.
“The reason I was given is that my company’s revenues were irregular,” Zepeda testified to the Oregon House Committee on Economic Development last fall. “The amount of sales that we processed in the first quarter of  was significantly more than in the prior years that same quarter, and this high growth was a sign of risk. So I was disqualified for a loan.”
A success in her own right, Rep. Janelle Bynum, one of just two black members of the Oregon House of Representatives, was elected in 2016 to represent District 51, which includes the diverse working-class communities of color in East Portland. She and her husband own four restaurants in and around East Portland, having started with just $25,000 from a home equity line of credit. She had just put away $100,000 in a rainy day savings account for the business when the rainy day hit — the financial crisis and Great Recession. One payroll and one order of supplies for the restaurants, and it was gone. When she called the bank to request an increase on their line of credit, the bank told her actually they just decided to decrease it.
“So all of a sudden the rug was pulled out from under me twice,” Bynum testified at the same committee hearing last year. “This is what happens in business, especially if you’re a minority-owned business, there’s not a whole lot else out there to help you.”
Oregon state legislators have not been indifferent to such testimony in the past. The state’s official economic development agency, Business Oregon, has a whole slate of programs created in response to capital gaps identified in recent years through the biannual Oregon Capital Scan, which it partially funds. But while those programs have had some success generating investment and job creation around the state, at the hearing last fall, Zepeda, Bynum and others made the case that those programs still weren’t reaching everyone — in particular, they still weren’t reaching many women and people of color.
“People think that a rising tide lifts all boats,” Bynum testified. “That’s comfortable to think that. But what we really know is, women and minority small business owners, unless you’re intentional about your capital injections and how you structure your laws, it doesn’t lift everybody, it advantages some and disadvantages others.”
Without equal access to capital, witnesses at the hearing said, women can’t grow their businesses as easily as men in Oregon. In Portland, for example, businesses owned by men average $744,741 in annual revenue, while businesses owned by women average just $148,028, according to U.S. Census Bureau data.
The committee went on from that September 2019 hearing to convene a working group meeting in October, including entrepreneurs and organizations working in those communities yet to feel the impact of the state’s support for business investment. Out of those discussions came House Bill 4033, which if passed would establish a “community lender loan loss account program,” designed with input from the kinds of lenders that already reach women- and minority-owned businesses. Yesterday the Oregon House of Representatives held its first hearing on the bill, putting it on the path to a vote during the state’s 2020 legislative session, which is just five weeks along.
Business for a Better Portland is one of the organizations that has been pushing for something more to address the stubborn gaps that remain in access to capital for women and minority entrepreneurs in the state of Oregon. Zepeda co-founded the group along with nine other entrepreneurs, all volunteering their time, initially dubbing themselves as the Portland Independent Chamber of Commerce, or PICOC (pronounced, “peacock”).
“We Googled ‘what is a chamber of commerce’,” Zepeda tells Next City. “None of us really knew. At the time, you would pull up a chamber of commerce website and it was an older gray haired gentleman in a La-Z-Boy recliner reading a newspaper. It was definitely not representing what we’re about.”
Zepeda says they were interested in advocating for policies that traditional chambers of commerce had been either neutral on or adversarial toward. They were business owners that were interested in paying their fair share of taxes so that cities could have a well-funded school system. They wanted to advocate for sustainable transportation rather than more downtown parking. They were interested in addressing the root causes of homelessness and ensuring affordable housing for all.
Their first public event was a fundraiser for the Welcome Home Coalition, which waged a successful three-county campaign to pass a $653 million regional bond in support of developing permanently affordable housing around Greater Portland. From 15 official founding members, Business for a Better Portland now has more than 400 member businesses and counting.
Kate Kilberg co-founded Catalyst Law, one of Business for a Better Portland’s founding members. A Harvard Law grad who spent the first part of her career working for a big firm in Washington, D.C, Kilberg made the two-hour drive to Salem for the October working group meeting with members of the Oregon House Committee on Economic Development.
“Everyone acknowledged there probably is some overt racism and sexism [among mainstream lenders], but what I really appreciated was the discussion went deeper, that it was more structural and historical and cultural boundaries, meaning those populations don’t have the collateral generally, probably don’t have the credit history,” Kilberg says. “I remember one person saying, ‘it’s about who feels comfortable walking into a bank and asking for money.’”
Ashley Henry, executive director of Business for a Better Portland, also gives credit to the Portland Business Journal for informing the discussion. The publication has been reporting on the dramatic drop in small business lending across Oregon due to the consolidation of the banking industry in the wake of the 2008-2009 financial crisis. The U.S. Small Business Administration 7(a) guaranteed loan is designed to encourage banks and credit unions to lend to businesses that wouldn’t otherwise qualify for loans, but in Oregon the publication found 7(a) guaranteed loans to black businesses went from 66 in 2007 to just 6 in 2015.
More broadly, women only received 2.8 percent of all venture capital in 2019 — technically an all-time high. In 2019, women-owned businesses received only 14 percent of 7(a) loans. Black- and Hispanic- owned businesses respectively received only three and six percent of 7(a) guaranteed loans in 2019.
Coming out of the October working group meeting, Kilberg says it was already clear that legislators were convinced of the value in creating a new loan loss reserve program.
The state of Oregon has another existing loan loss reserve program, but it operates through banks and credit unions. The new $5 million loan loss reserve proposed under House Bill 4033 would work through nonprofit lenders or government agencies serving underserved markets, including rural markets as well. Qualified entities would be able to call upon the new loan loss reserve dollars each time they make a loan to meet their various requirements on loan loss reserves.
Kilberg says there were several nonprofit loan funds in the room working group meeting who spoke about the challenge of finding somewhere to get funds for loan loss reserves. As a matter of managing financial risk, for every loan made, a loan fund typically sets aside a certain percentage of the loan amount to cover missed payments or loan defaults across its entire portfolio.
It’s these loan funds who have been filling in what gaps they can when it comes to underserved communities in Oregon. At the September hearing, Nita Shah, executive director of Micro Enterprise Services of Oregon, testified that from 2016-2018 her organization pooled funding from foundations and the public sector to make 533 loans and other investments, totaling $5.2 million — 62 percent of which went to women-owned businesses and 69 percent to business owners of color. One of the loan fund’s three offices is in East Portland.
In addition to chairing Business for a Better Portland and running her company, Switchboard, Zepeda also co-founded the XXcelerate Fund, a new loan fund focused on meeting the capital needs of women-owned businesses like hers using a character-based lending model that doesn’t require credit scores or collateral, but rather uses an entrepreneur’s community reputation as a risk assessment. As Next City covered previously, XXcelerate fund has a policy to set aside $1.50 in loan loss reserve for every $10 in loan dollars it puts out. If House Bill 4033 passes, the fund would be able to call upon the state’s loan loss reserve dollars instead of having to fundraise for those on its own.
Henry says it was appealing to the Oregon legislators that the $5 million for the loan loss reserve was a one-time infusion, as opposed to an ongoing annual budget line item. Every loan fund has a different rationale behind its loan loss reserve policy, set by its board in consultation with financial experts, but if every loan fund used a similar ratio as XXcelerate Fund, $5 million in loan loss reserves equates to a loan portfolio of $33 million. As loans get repaid, the loan-loss reserves can be redeployed into new loans.
Under House Bill 4033, there are also additional funds set aside from state lottery revenues to support the technical assistance or business coaching that loan funds like XXcelerate or Micro Enterprise Services typically provide to current and prospective borrowers in their portfolio. XXcelerate Fund estimates it needs $2.50 worth of technical assistance for every $10 in loans it puts out.
“We see this as a staged effort, far from comprehensive or perfect, but an important first step,” Henry says.
EDITOR’S NOTE: An earlier version of this article contained several errors, including an incorrect spelling for Nita Shah’s name; incorrectly identifying Mara Zepeda’s mother, rather than her father, as an immigrant; and incorrectly stating that Janelle Bynum was the only African-American lawmaker in the Oregon House of Representatives. (Akasha Lawrence Spence was sworn in at the end of January.) The article has since been corrected.
This article is part of The Bottom Line, a series exploring scalable solutions for problems related to affordability, inclusive economic growth and access to capital. Click here to subscribe to our Bottom Line newsletter. The Bottom Line is made possible with support from Citi.
Oscar is Next City's senior economics correspondent. He previously served as Next City’s editor from 2018-2019, and was a Next City Equitable Cities Fellow from 2015-2016. Since 2011, Oscar has covered community development finance, community banking, impact investing, economic development, housing and more for media outlets such as Shelterforce, B Magazine, Impact Alpha, and Fast Company.