How To Strengthen Black-Owned, Minority-Owned, and Women-Owned Businesses as a Lender
When the Commercial Loan Broker Institute launched in 2015, we were watching changes in the lending world that made it even harder for businesses with the greatest needs, and the greatest opportunities, to access funds from traditional lenders. We founded CLBI to help reverse that hardship and uplift the businesses that need access to funding the most. We made it our mission to train and support commercial loan brokers to help these businesses obtain the right types of loan at rates that will help them gain financial resilience.
Darrick Brown, founder of CLBI and former Director of Diversity and Small Business Lending at Wells Fargo, describes the circumstances of today’s banking industry saying, “Banks have always been challenged when it comes to lending in many business categories. The bank’s charter says that they must lend responsibly to protect and grow the funds deposited by customers. What that means most of the time is that bank lending is built around the lowest risk categories – companies that have a high cash flow and a long history. We call these underwriting guidelines the lending ‘black box’ because the rules are hidden from view by the general public. In practice, startup founders, creative developers, and innovators need not apply. Historically and today, that often excludes minority-owned businesses.”
Historically, credit unions, local banks, and community banks provided funds for local minority owned businesses when traditional big banks would not.
These banks were integral parts of the communities they served. Many communities started their own banks including Black, Latino, Chinese, Native American, and women-owned financial institutions. These institutions took deposits from their community and lent to their community, creating a virtuous financial cycle that lifted all boats.
Today, local and community banks are regulated by the same rules as large banks. Their ability to adjust to community needs and demands isn’t what it once was, and the ability for a community to reinvest in itself has had to move into the new arena of private lending and loan brokering.
For many fast-moving, small, and mid-sized businesses local banks don’t have the bandwidth nor the expertise to understand the needs of businesses that come to them for funds. The big picture? Business borrowers, especially in markets underserved by banking institutions, need more options. That’s where loan brokers have made their mark, increasing access to funds otherwise denied to minority-owned businesses.
“When I stepped out from the banking industry to work with clients on my own, I knew there had to be another way to fund the committed, hard-working, thoughtful, creative business people I met with every day. Many business owners I spoke with were leaders in the making – if they could become capitalized in the right way,” Darrick said. “At first, it was a hard road learning how to source loans, negotiate deals, and get paid in the process, but you can launch much faster than I did. Having been a loan broker for so many years, I and my team have developed a process that can help individuals launch their loan broker businesses in as fast as three months. All it takes is commitment to learning the industry and a passion for playing an important role in the financial development in your community and region.”
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The Origin of Minority Owned Banks
Capital Savings Bank was the first fully Black-owned and operated bank. Founded in 1888 in Washington, D.C., it held over $300,000 in deposits within four years of operation. With solid public confidence and strong deposits, Capital Savings Bank had the funds to lend, bolstering black-owned businesses that traditional banks turned down for funding.
Banco Popular was founded in 1893 in Puerto Rico. Through innovative approaches, the bank worked with the working class and poor to establish savings accounts. Stored in steel boxes, participants would collect spare change, then bring their personal savings to the bank periodically to deposit. The bank expanded over time, opening its first New York branch in 1961. Located in the Bronx, the bank continued to serve the Latino community, ranking as one of the top 100 banks from 1965-1973.
Chinese banks formed in San Francisco and Los Angeles, among other areas. Following the 1906 San Francisco earthquake and fire, Canton bank was founded to support the Chinese community to rebuild properties and businesses. The original Canton bank closed in 1923 due to falling into financial trouble after many years of successful service to the community. Several others, following the same community development model, operated in California. The Bank of Canton of California operated from 1937 to 2002, bolstering China Town in San Francisco, until it was subsumed under The United Commercial Bank, a holding company for such financial institutions.
WHAT CHANGED FOR MINORITY-OWNED BANKS?
Today, banks backed by the Federal Government follow strict regulatory guidelines making it far more difficult for them to lend within targeted communities. When a community, or more to the point, individuals within a community are evaluated under those guidelines as lacking cash flow or assets, they are often precluded from borrowing, regardless of their mission and vision.
This can result in these business owners turning to merchant cash advances or extremely high interest, predatory lending mechanisms. The use of these financial vehicles can then further disrupt the companies’ books, creating more obstacles to attaining affordable loans in the future.
How can communities adjust and modify their strategies, moving local businesses and residents toward financial growth? To answer this question, and as a direct response to banks and the FED’s tightened lending criteria, a new era began of private lending facilitated by a network of loan brokers.
LOAN BROKERS FILLING THE GAP FOR MINORITY-OWNED BANKS
Loan brokers act as advisors and coaches in the lending industry. Businesses that have been turned down time and time again can work with a loan broker to reposition their business and operations plans, map a new path to financing, and apply with lenders who specialize in their industry or credit profile.
Minority-owned businesses are more likely to rely on high-interest merchant cash advances offered through business credit cards or unscrupulous financial institutions, often making their operations riskier than they were before they took the loan. Interest rates on a merchant cash advance can be twice that of other, more targeted financing types that solve urgent business needs but without the same level of risk.
Loan brokers are dedicated to providing a high-level of personalized client service that outperforms banks and online lenders.
In an online loan clearing house, when a borrower fills out an online application, an algorithm matches them with the fastest closing option with the least risk and best return – for the lender. Banks present a limited set of products that are predetermined to benefit the bank and protect the banks’ account holders.
The loan broker takes a different approach. They start the process by getting to know the client’s operations, aspirations, and next steps. They do a deep dive into their business or real estate investment plans, what assets they currently hold, and what looming challenges they face. This information is then used to chart the course for obtaining affordable financing.
Through this process, loan brokers source more options and more targeted choices for borrowers.
Banks are limited by their lending “black box.” Online lenders are capped in the amounts they can lend and provide little or no training and support in relation to the funds they distribute. Because loan brokers are independent, they can work across the full set of non-traditional funding sources, private lenders, credit unions, and big banks to source the deals that provide the best options for borrowers. By working directly with lenders through a process that includes information gathering and negotiation, they can help businesses position themselves before they put forth an application.
By gaining a full picture of where the business has been and where it is going, the broker can present a set of options – multiple sources of funds, terms the client might select from, costs of money, and repayment timelines. By advising on the right loan type, the broker supports the borrower in protecting their assets by making choices that make sense for their business.
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The possibilities today in the private lending sector are vast. As banks have become more restrained, those with capital to lend have realized that their return on investment is significantly limited when using traditional banks. They also realize that the low end, aggressive lending tactics of payday lenders and merchant cash advance lenders are short sighted. They lend quickly, but tie up borrowers in ever increasing amounts of debt. With mounting debt loads, the earner’s ability to pay diminishes, and returns grind to a standstill.
The middle market often offers the best balance of risk and return for both the lender and the borrower. This middle market is made up of business founders with great ideas and a path to success. It also includes everyday operators – suppliers, contractors, logistics, construction, manufacturers, restaurants and more. These are the small businesses that may not have the power of a chain or national brand behind them, but that create the foundation for development, construction, community building and jobs.
The middle market, made up of a combination of private, bank, and sometimes Small Business Administration backed loans, provides funds for growth through working capital, lines of credit, refinance, property and commercial real estate acquisition, construction and equipment, among others.
Across all of these lending types, loan brokers are benefiting both clients and lenders. They help borrowers avoid the time-consuming headache of blindly applying to lenders who are a poor match and ultimately decline the financing request. Simultaneously, they help lenders to avoid mountains of loan applications that are incomplete or in poor alignment with the lenders’ credit box. Knowledgeable loan brokers who understand their local markets and will pre-screen and facilitate complete loan packages, make success far easier and faster for borrower and lender alike.
In many ways, the loan broker has evolved to become the new community banker.
By developing insight and experience, the loan broker provides the financial coaching and development once delivered by local banks. Through a proactive development process, the loan broker, along with local businesses, create a virtuous cycle that empowers and develops those communities with the resources necessary to thrive. Minority-owned businesses receive the funds they need to succeed, more local jobs are created, more local families are cared for, and new opportunities are built for the entire community.
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