Marshawn Wolley: In business lending, equity pays

When it comes to Black businesses, equity pays.

My company, Black Onyx Management, conducted a survey about Black businesses and lending earlier this year, receiving nearly 250 responses statewide.

As part of our analysis, we disaggregated Black businesses certified by the city, because, as part of the certification process, they must produce financial statements and a business plan—key documents in the business-lending process.

More than 70% of this sample have been in business more than four years and just over 70% had more than two employees, with just over 47% employing two to five people.

With just over a third of the city’s Black-certified businesses responding, more than 56% reported never receiving a loan from a traditional bank.

Just over 25% of Black-certified businesses reported receiving a loan from one of the community development financial institutions in Indianapolis, which is significantly higher than the national penetration of CDFIs, which stands at a paltry 7%, according to the Federal Survey on Small Business Credit.

The majority of the loans to certified Black businesses have been less than $100,000.

It is no wonder that 71% of the respondents either did not apply for federal Paycheck Protection Program loans or weren’t able to complete the process.

Less than half reported applying for a loan during the life of their business. Nearly 20% of the businesses reported being discouraged, while 17% were debt-averse and about 15% thought the credit cost was too high.

Too many Black businesses do not see the traditional financing system as a partner for their growth. And the Black business community has been allowed to languish in this city. Indianapolis is ranked 55th out of 85 metropolitan statistical areas in business formation, according to a study of the region commissioned by CICP.

For a Black community—which by population could be the third-largest city in the state but has the lowest median income in the county and experienced double-digit employment from 2010 to 2019 as well as deteriorating homeownership rate—efforts at equity will have an outsized impact.

There is also promise in the Black business community. According to the city’s disparity study, Black businesses in Indianapolis outperform the mean annual business receipts nationally.

There is an opportunity to help Black businesses leverage the traditional financial system, but there needs to be some education of the local business-lending community on how best to support Black business owners, who, for a variety of reasons, might have weak relationships with traditional financial institutions.

Through education and improved practices when engaging Black businesses, equity can pay.

In a soon-to-be-published report, Brookings scholar Andre Perry notes that, if the number of Black-owned businesses in the Indianapolis MSA correlated with the number of Black residents at the same rate it does white residents, there would be a $52 billion economic impact and an additional 170,000 jobs in the region.

Of course, this economic impact calculation has a number of “ifs.” But some banks in the market are already demonstrating they can do things differently by developing specific programs aimed at Black businesses following the nation’s racial reckoning.

While the moral imperative of equitable lending processes matters, it by itself does not overcome the five C’s of credit: capacity, capital, collateral, conditions and character. In unleashing the potential of Black businesses as an economic driver in the region, education on both sides of the lending transaction becomes imperative.

Equitable lending to Black businesses could be one of the most significant economic development strategies the region can implement. That’s why equitable lending practices supporting Black businesses in Indianapolis are not only good business but good for the region. Equity pays.•

__________

Wolley is President and CEO of Black Onyx Management, Inc.

Click here for more Forefront columns.