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The Equity Factor

Boston Offers Critical Lending to Minority-Owned Small Businesses

But funding source is under threat.

From the 2016 Boston Small Business Plan (Credit: City of Boston Mayor's Office)

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Eight dollars. That’s the median net worth for native-born black households in the Boston metropolitan area. Median net worth for white households in Boston is $247,500.

The racial wealth gap is at the root of many problems in racially segregated cities, and Boston, despite huge demographic changes since 1980, remains a segregated city. In that year, the city was more than 90 percent white. By the 2010 census, that percentage was down to 75 percent. Current available census data puts Boston at 53 percent white. And yet, white households in Boston are still most likely to be living in a neighborhood that is at least 80 percent white, regardless of income.

A year ago, the city put forth the Boston Small Business Plan, outlining the situation facing its small businesses. Support for minority, immigrant and women entrepreneurs was priority number one in that plan, which called out racial wealth disparity as a major factor in preventing Boston’s growing percentage of households of color from earning their fair share of small business loans or revenues.

Last week, Boston Mayor Marty Walsh announced the creation of a new Business Capital and Finance Unit, to “prioritize small business lending in historically underserved neighborhoods and demographics to support job creation in low-to-moderate income households and the revitalization of neighborhood commercial districts.”

It takes money to make money, and the city is aiming to put some of its money where its mouth has been regarding racial disparities. The loans are promised as gap financing to cover the cost of rehabbing existing buildings, new construction and expansion, purchasing equipment, and startup costs. Gap financing means the city anticipates that loans will be repaid most likely by the small business refinancing with a bank, credit union or other lender within a few years of the city making the loan. (Citing risk, banks typically don’t lend to a startup that doesn’t have at least two years of solid revenues, or maybe even two years of positive cash flow.)

Again, if you’re a white resident of Boston, you are most likely to live among other white households whose median household wealth is nearly $250,000. So you are likely to have friends and family that can invest in your business or give you a loan to get your business going until you reach the point where a bank will give you a loan. If you’re black, the other black households around you have a median household wealth of $8.

With the new gap financing program, the city hopes to see a rise in the growth of businesses owned by minorities, immigrants and women in its otherwise healthy small business capital landscape. As noted in the Boston Small Business Plan, there are more than 400 existing small business capital providers in the city, including banks, credit unions, private equity and venture capital funds, accelerators, angel investors, microlenders, and CDFIs (community development financial institutions). Altogether, these institutions provided around 11,000 loans, totaling $491 million to Boston’s small business in 2014, according to figures compiled for the plan.

Citywide, there were 288 small business loans per thousand small businesses in Boston, but as the report also notes, not every neighborhood got equal treatment. Some neighborhoods saw a higher ratio of small business loans per small business than others. Aggregating some of the most diverse neighborhoods — East Boston and the West End, as well as neighborhoods in the southern two-thirds of the city, including Dorchester, Hyde Park, Longwood Medical Area, Mattapan, Mission Hill, Roslindale and Roxbury — the city found that these areas received 23 percent fewer loans than would be expected based on the number of businesses in these neighborhoods.

The city promises to target its flexible gap financing in such neighborhoods.

However, the source of funding for the Business Capital and Finance Unit, is a federal Community Development Block Grant, and CDBGs could be in jeopardy.

The grants are distributed annually by the federal government to state and local governments, based on a formula that mostly reflects population, alongside other factors. The vast majority of CDBGs go toward housing, public improvements or public services. A small — and shrinking — percentage gets devoted to economic development every year: from nearly 8 percent in fiscal year 2001 to less than 5 percent, or $112.8 million, in FY2016. Overall, CDBGs have historically been an easy target for cuts under sequestration or just general budget cutting. Annual CDBG funding peaked in 1995, at $4.5 billion, and has gone down nearly every year since. In FY2016, annual CDBG entitlement funding was down to $2.3 billion.

Now, though President Donald Trump has promised revitalization of U.S. cities, the Washington Post reported Wednesday that his administration is considering mostly ending CDBGs in the next federal budget.

The Equity Factor is made possible with the support of the Surdna Foundation.

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Oscar is Next City's senior economic justice 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.

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Tags: small businessbostoncommunity development block grants

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