A community nonprofit lender takes a new approach to small business lending in Chicago – it will no longer consider credit scores or collateral when deciding whether an applicant should get a loan.
The decision to drop two standard lending measures is part of a global shift in strategy at Allies for Community Business, formerly known as Accion Chicago, which lends $ 500 to $ 100,000 to small businesses in need. difficult to obtain traditional bank financing.
Now it is bolstering free coaching services offered to entrepreneurs while expanding access to funds after seeing small businesses struggle to navigate rapidly changing regulations and financial aid programs during the pandemic.
The change means ditching some of the standard tools lenders use to limit risk, but should help level the playing field for entrepreneurs in underserved neighborhoods, especially on the South and West sides of Chicago, said Brad McConnell. , CEO of the organization.
“The way traditional loans work just doesn’t work, really, for the communities we care about here,” he said. “If you rely on the same old measurements and request the same super complicated documents in the same way, you’re going to continue to get the same results. Well-organized and relatively well-off people will do well because they have a lot of help, and others won’t.
An August report from the Federal Reserve Bank of New York found that black-owned businesses are less likely to have obtained financing from a bank than white-owned businesses, although recent surveys suggest that they are just as likely to apply.
Even among financially healthy or stable businesses, a third of black-owned businesses with employees have obtained bank financing in the past five years, compared to 54% of white-owned businesses, according to the report.
Finding ways to put capital in the hands of entrepreneurs in underserved communities will be especially important during the recovery from a health crisis that has exacerbated economic inequality, said Seth Green, founding director of the Baumhart Center for Social Enterprise & Responsibility at Loyola University of Chicago.
“Without strategies like this, we could lose a generation of entrepreneurs because the demands of traditional finance are too difficult to meet, especially when emerging from the pandemic,” he said.
The East Garfield Park-based lender will also help businesses set deadlines to meet certain goals and help them stay on track, McConnell said. Advisory services are free and are not limited to borrowers.
Credit scores can be affected by financial issues unrelated to a person’s potential as a business owner, such as debt resulting from a medical emergency. And when banks ask borrowers to pledge the value of assets like their home, it penalizes business owners in areas with lower property values.
“You automatically tell potential West Side and South Side borrowers, ‘You can get less,’ and that’s wrong,” McConnell said.
Allies for Community Business will always pull a potential borrower’s credit report, but will consider different factors in deciding whether or not to approve a loan. last year and may not have sought bankruptcy protection within the past two years or peaked at other existing forms of credit.
All borrowers are encouraged to personally guarantee the loan.
The loan amount from Allies for Community Business – between $ 500 and $ 100,000 – will not change, nor will the standard two-year term. Interest rates will remain at 9%, with closing costs of 1%.
That’s higher than traditional bank loans and companies should check their options, said Ted Rossman, industry analyst at Credit Cards.com. But it’s inferior to some alternatives, especially others aimed at businesses without collateral or good credit, as lenders typically offer lower interest rates when they know a business is healthy, he said. declared.
Other lenders are trying to expand access to credit. Last fall, Huntington Bancshares Incorporated announced a $ 25 million small business loan program that will provide US Small Business Administration-guaranteed loans of $ 1,000 to $ 150,000 to minority-owned businesses, women and veterans with lower credit score requirements, free and longer financial education classes. term repayment options.
Many community development financial institutions serve business owners who borrow amounts that are too low for traditional banks or who would have difficulty qualifying, although lenders generally consider traditional criteria such as credit scores, credit ratings, etc. Green said.
The amount Allies for Community Business will lend this year depends in part on the pandemic. The organization disbursed more than $ 35 million in loans and $ 360 million in grants in 2020 because it helped distribute public and private COVID-19 emergency aid. The year before, it managed a $ 4.7 million portfolio, with JP Morgan Chase and Chicago Community Trust as its primary sources of funding.
Accion never had a minimum credit score requirement, but credit scores were used to determine the maximum loan amount, and loans over $ 25,000 required at least some collateral. The absence of a collateral requirement is not unique to small loans: the US Small Business Administration does not require lenders to take collateral on 7 (a) loans less than $ 25,000.
It’s unclear how many business owners have found these requirements limiting, in part because Accion has often recommended reducing the amount of a loan rather than denying an application outright, McConnell said. If an entrepreneur declined the smaller amount because it was not enough to fund their project, it would not appear in the loan data.
Allies for Community Business plans to track loan performance over time and compare loans made under the new standards to past loans.
“There is this terrible underlying assumption that has substantiated loans in minority communities that they are riskier, and I think it is wrong,” McConnell said.
Many small businesses will need not only emergency aid, but also medium to long-term financing to rebuild after the pandemic, and those that have seen their revenues drop or their credit ratings down may still have more difficult to access capital, Lotika said. Pai, Managing Director of Access to Capital at the Women’s Business Development Center.
If someone is denied a traditional bank loan, turns to credit cards or other higher interest rate options and misses a payment, it further lowers their credit rating, she said. .
“It’s a vicious cycle that’s really hard to break out of, and I think it’s reflected in the history of communities of color,” Pai said.
The Allies for Community Business program is “definitely a step in the right direction,” she said.
Even small business owners who thought they would have no problem qualifying for a bank loan say they struggled.
When Regine T. Rousseau attempted to obtain a bank loan for his first business, a salon, in the late 2000s, the repeated refusals seemed “dehumanizing” to him, even though a non-profit organization ultimately helped Rousseau and his business partner to get one.
“We had everything we were told we needed. We had good credit, assets, six-figure incomes, ”she said.
She sold the salon, which has since closed, to her business partner, and began working full-time at Shall We Wine, her Bronzeville-based wine and spirits marketing and events company.
In 2018, she needed funding to invest in a planning system to keep up with the hundreds of entrepreneurs who worked for her and help her manage her cash flow, but was reluctant to try and apply for a loan again.
Rousseau obtained a loan of $ 20,000 from the company then named Accion.
While the funding helped, the coaching and mentoring also helped, she said.
“I don’t think I understood the value later, especially during COVID,” she said. “When you see how quickly something unexpected can devastate many businesses, you really understand the value of an organization like Allies. If it’s not them, who is going to fight for the little man or the little woman? “