Opening Up Capital to Underserved Small Businesses
Since the Great Recession, lending to underserved small businesses, particularly minority-owned businesses, has fallen considerably. Household equity, once frequently used as collateral, collapsed in the wake of the housing crisis, leaving what would normally be considered creditworthy borrowers without access to capital. Time and again we have seen reports on the financing barriers that small businesses face. These studies have published colorful charts and powerful statistics, along with recommendations to address the problem. However, these recommendations often fail to acknowledge the political and social realities on the ground, what borrowers want and what lenders can actually provide, and the studies themselves shrink from the responsibility of presenting a practical implementation timeline to turn the proposed recommendations into actionable solutions. This has to change.
On September 26, the Milken Institute and the U.S. Small Business Administration launched the Partnership for Lending in Underserved Markets (PLUM) initiative. The two-year pilot program is an attempt to move beyond pen and paper to developing and implementing actionable solutions to enhance access to capital for minority-owned small businesses.
Eugene Cornelius, SBA; Aron Betru, Milken Institute; Joseph Haskins, Harbor Bank; Ann Marie Mehlum, SBA
The Institute and the SBA will initially focus on Baltimore and Los Angeles, two cities that have a large number of such businesses. Each carries a unique entrepreneurial history but has witnessed a growing capital access gap that hinders its small-business community. The PLUM initiative is the first of what we hope will become multiple engagements in municipalities across the U.S., where lessons learned from the initiative can be implemented—tailored to and reflective of the diversity of the various minority-owned small-business ecosystems.
To spearhead the drive toward actionable solutions, the SBA and the Milken Institute will form a task force for each city that will include representatives from the small-business community; local, state and federal officials; academics; traditional lenders and alternative-finance platforms; data providers; technical assistance providers; and others. Participants will focus on addressing three key areas that surfaced during a roundtable meeting at the White House in June. They are: regulatory and policy issues, economic development opportunities, and lender capabilities and capacities in underserved small-business markets. Potential actionable solutions will be derived from the discussions over the next two years and recommendations will be tested to determine their viability in, and contribution to, reducing or removing the obstacles minority small-business owners face in Baltimore and Los Angeles.
Congressman Elijah Cummings
An estimated 8,000 small businesses see their requests for credit declined each day, and the capital gap on Main Street currently hovers at around $50 billion. The fact is, not every small business is inherently risky. In fact, roughly one-third of Main Street businesses could be considered creditworthy using alternative metrics in the underwriting process. Yet in an era where lenders are more risk-averse, when regulatory officials have tightened their oversight and where technical assistance may not be enough, capital and investment opportunities remain on the sidelines, hindering the potential success of small businesses, especially those that are minority-owned.
What small businesses don’t need is another report covering the difficulties they face in accessing credit. What they want is actionable results that can open up the capital access pipeline to spur expansion and growth. With small businesses the lifeblood of the economy, it’s time to unclog the arteries. The Milken Institute and SBA Partnerships for Lending in Underserved Markets initiative intends to do just that.