Good morning, PCV community,
In the last two weeks, we saw the first federal relief effort to help small businesses burn through all of its funds, to a fraction of those in need. Of the 30 million small businesses who were eligible for support, only a small percentage were able to get approved. Our friend and leading impact investor, Morgan Simon, points out in Forbes that small percentage included $20 million to Ruth Chris’s Steakhouse with 147 restaurants worldwide, $10 million to a biotech company in Singapore, and $10 million to Potbelly, with 400 locations across the US. Although most of these larger businesses were shamed into returning the funds, once again, we see an increasingly clear through line that businesses who were already disconnected from formal financial institutions – namely small businesses, and those owned by Black and Brown entrepreneurs – were on the losing end.
The second federal relief effort included a nearly $50 billion carveout for “CDFIs”, designated for community banks, credit unions, nonprofit loan funds, and CDFIs that do over $50 million in loans per year, or were pre-existing SBA lenders. Those criteria actually excluded the majority of America’s CDFIs, including us at PCV, who do non-SBA lending, or have smaller portfolios. Perversely, that leaves out a large segment of diverse-owned small businesses who were already those most disconnected from formal financial institutions. Although the SBA enacted several rule changes to try and reach smaller businesses in round 2, there are many lessons to learn in how to serve those who were already disenfranchised from banks — including the majority of PCV’s own lending portfolio.
Since March 1st, we at PCV have had a 1500% increase in traffic to our website each day, received over 500 loan requests, and our team is fielding hundreds of phone calls. CDFIs like PCV are responding to borrowers in crisis in communities from coast to coast. We can’t do it alone. We’ve written an open letter to foundations, impact investors, and banks asking for increased support to our industry. More on that below! We’ve also joined a letter from The Aspen Institute calling on the Federal Reserve and Treasury to backstop and buy CDFI loans, enabling us to help business owners suspend operations without destroying the owners’ credit or losing their existing assets.
Small Businesses will need patient working capital now more than ever. Our ability to source 0% debt as PRIs, recoverable grants, or unrestricted grant capital is essential to keep our mission-driven lending and advising program available. Especially to meet the needs of underserved entrepreneurs already disconnected from formal financial institutions, preserve some progress made using our Good Jobs toolkit, and advance a more inclusive recovery ahead.
One of the best things I’ve read this week is from our friends at the Candide Group, about how they’re responding as impact investors to the Covid crisis, the role of CDFIs, and the advice they give to other impact investors and philanthropists to step up for black and brown (especially Native) populations. Communities of color need these investors and foundations to step up more than ever. As they point out, The CARES Act did not address the lack of CDFIs that are eligible lenders under the SBA or the lack of infrastructure on tribal lands. It did not make allowances for immigrant business owners with ITIN numbers only. It did not center vulnerable communities, which means many of our CDFI friends who do qualify as PPP lenders need to scramble to put liquidity facilities in place with major banking institutions, and only where those relationships already exist. Most major banks don’t have a footprint in Black and Native communities, so this policy is doubling down on structural racism in the financial system.
A 2017 study from the Federal Reserve Banks of Atlanta and Cleveland found that black businesses owners apply for funds at a 10 percent higher rate than white-owned firms, but their approval rates are nearly 20 percent lower. When black entrepreneurs do get approved for financing, only 40 percent receive the full amount they requested, compared to 70 percent of white business owners. Forty percent of black business owners surveyed are so pessimistic about their chances of being approved for bank loans that they don’t even bother to apply. A recent study by the New York Fed classified nearly three-quarters of white-owned firms as “healthy” or “stable,” while only 43 percent of black-owned businesses earned those ratings.
Black and Brown-owned firms often rely on CDFIs, especially those like PCV who are ineligible for PPP. In recent years, large banks have closed more branches in majority-black communities than elsewhere, an exodus that’s stymied the flow of credit into local small businesses. And because banks receive bigger fees for bigger loans, they’re incentivized to prioritize the applications of larger firms.
The COVID-19 pandemic is, like many tragedies, a magnifying glass over structural inequity that is generations’ old. Today’s leaders may not be responsible for legacy structures, like red lining or Jim Crow. But sadly, the CARES Act’s failure to ensure funding is deployed into communities of color, where the need is greatest, threatens a generations of businesses owned by entrepreneurs of color.
And it isn’t just money that will drive a more equitable recovery and a good jobs future. The pandemic has aimed a spotlight on the health of working people — and employee health is an essential ingredient in business health. Jobs that are good for workers and good for business owners is the very point of PCV’s Good Jobs, Good Business model, and why we created our first cohort of Good Jobs advisors through our BusinessAdvising.org platform. As we think about the recovery ahead and how we want to build back better, reach out to us to connect with a Good Jobs or other expert advisors to help you think about how to pivot your business, hire back up, and open safely for your employees and customers. One of the things so many of us miss most in this time of sheltering in place is being out and about in our communities. Thriving small businesses are the heart of those places.\
The opportunity to build back better also provides a new window for the field of impact investing to step up its game, for business leaders to put their stakeholders and the environment ahead of shareholders, and for governments to expand and secure social safety nets, better regulate capital markets, to reduce the vulnerability of so many in shorter and shorter boom and bust cycles. We can and must collaborate better at scale and leverage blended finance to advance social and environmental impact and ensure an inclusive recovery. As always, join us.
Above all, be safe, be well. Let’s crush this curve, and build back better together.
President & CEO, Pacific Community Ventures