Black-owned businesses face a system set up against them. COVID-19 makes it worse

It takes a lot to turn an idea into a small business: A storefront or some office space. Equipment, inventory, personnel, not to mention marketing, permitting and insurance.

All that costs money. Without funding, those businesses can’t launch or else quickly fail. And without cash to smooth over rough patches, a single emergency can destroy a company. That’s why it can be so devastating to be turned down for a business loan — which disproportionately happens to Black-owned businesses.

Such businesses face a number of hurdles.

Their relationship with banks can be impeded by their smaller size and by discrimination. Business owners are often expected to know the intricate details of the loan process — and can be penalized with denials if they don’t. And while the wealth gap is a major factor, research is also showing that even in households with similar financial resources, home equity does not translate equally into start-up capital for Black and white homeowners.

Delores Brown often encounters these questions about funding in her role as director of loans at Vermont Slauson Economic Development Corp., which offers small-business loans and other financial products. About 80% of its clients, which include a number of Black-owned businesses, have been rejected for business loans or otherwise had their applications put on hold.

Many of those businesses don’t have the necessary documentation, such as payroll records in a specific format, to be approved. And that is an indicator of the larger inequities for Black business owners.

“When you walk into the traditional bank environment ... they’re expecting that you already understand the lending process,” Brown said. “Most small African American, or even any business of color, basically has to leverage everything they have in order to believe in themselves to be able to say, ‘I am going into business.’ They don’t have the resources around them that would necessarily be afforded to another business of persuasion.”

Black-owned businesses have long faced challenges in getting financing. In 2018, only 31% of them received all the funding they applied for, compared with 49% of white-owned businesses, 39% of Asian-owned firms and 35% of Latino-owned businesses, according to a 2019 report from the Federal Reserve Bank of Atlanta.

In that same time frame, 38% of Black-owned small businesses did not receive any of the financing they applied for, compared with 33% of Latino-owned businesses, 24% of Asian-owned businesses and 20% of white-owned businesses, the report said.

Experts say part of the problem could be that these businesses are often small and might not command the type of attention that a corporate chain would, particularly during the frenzy of applications for Paycheck Protection Program loans. But another reason these businesses don’t have the relationship they think they do with their bank is “absolute racism,” said Teri Williams, president and chief operating officer of OneUnited Bank, the nation’s largest Black-owned bank.

“They just do not perceive us as being successful,” she said. “Their first reaction is the expectation that we’re not, and then we have to prove that we are.”

The COVID-19 pandemic has only exacerbated the situation.

Restrictions aimed at slowing the spread of the coronavirus led to the permanent closure of 41% of Black-owned businesses between February and April, according to a study from the National Bureau of Economic Research.

Black-owned businesses were more likely to be in industries hit hard by coronavirus-related restrictions, such as retail and hospitality, according to a study by the Economic Policy Institute, a labor-oriented think tank.

And when some relief finally came in the form of PPP loans for small businesses, Black business owners faced hurdles in getting approval, according to the EPI study. A major hurdle was the lack of preexisting relationships with the larger banks that were first to administer the loans, the study said.

Even before the pandemic, many small, Black-owned businesses were struggling, said Juliet E.K. Walker, founder and director of the Center for Black Business, History, Entrepreneurship and Technology at University of Texas, Austin. And now, she said, without funding to secure loans and with coronavirus-fueled restrictions on business operations, “will they be able to survive?”

There are regulations in place to try to prevent the under-financing of businesses owned by people of color, but they have not been entirely effective.

The federal Community Reinvestment Act was passed in 1977 to fight racial discrimination in lending. The law pushes financial institutions to serve low- and moderate-income neighborhoods, and requires federal regulators to assess the record of each bank in fulfilling obligations to these communities.

For example, Wells Fargo received an “outstanding” rating last year, with particularly high marks in making community development loans, according to the bank’s public CRA performance evaluation. In 2018, Bank of America also received an “outstanding” rating.

The Trump administration enacted new rules implementing the CRA in May that broadened the types of activities banks get credit for, such as loans for sports stadiums in some cases, or offering credit cards to low-income customers. Advocates said the new rules would make it easier for banks to comply with the law, but community groups fear the revised rules weaken the law’s ability to prevent banks from ignoring lending responsibilities in poor communities of color.

Collecting data on lending practices for small businesses owned by people of color would help ensure the process is fair.

That was the purpose of a requirement in the Dodd-Frank act of 2010, which mandates that the Consumer Financial Protection Bureau collect this kind of data. But the act doesn’t include a deadline by which the collection had to start — so, a decade later, it still has not begun.

After a lawsuit, the CFPB will start the process of establishing a rule for the reporting of these data in September. Most data on small-business lending by race, ethnicity or gender have come from surveys, according to the Federal Reserve.

“If we had the data prior to this moment ... we might have understood the vulnerable position many small businesses are in,” said Jesse Van Tol, chief executive of the National Community Reinvestment Coalition advocacy group.

His organization conducted a study in 2018 that sent Black, white and Latino men into Los Angeles-area banks to inquire about small-business loans under $100,000 to test whether there were differences in treatment by race.

Despite having slightly better income, assets and credit scores than their white counterparts, the Black and Latino testers were asked to give more personal information about their eligibility than white testers, the study found — treatment that, along with other kinds of poor customer service they received, could discourage business owners from seeking financing.

Even when Black and white households have similar financial resources, there’s still not the same level of access to commercial loans, said Rachel Atkins, a post-doctoral faculty fellow in the management and organizations department at the NYU Stern School of Business. For example, Atkins’ research is showing that Black homeowners weren’t as able to use their home equity for start-up capital as white homeowners could.

“There’s just too much evidence that Black business owners are not able to access commercial lending to the same degree,” Atkins said.

After Chanda Simon-Thomas was denied a loan by Bank of America to start a 7-Eleven franchise in Westmont because she had “too much debt,” she turned to Navy Federal Credit Union and First Commercial Bank, a subsidiary of a Taiwanese bank, where she was approved.

This wasn’t the first time Simon-Thomas had been denied a business loan from a large bank. In 2014, she, her sister and her brother-in-law decided to reopen a historic bar called The Living Room in Jefferson Park.

They worked with business experts to put together a binder detailing their proposal down to the time they expected to see a profit. Their credit scores were good and they had equity in property.

But just one day after taking the binder to a Chase bank, they were denied. Then they were denied by Wells Fargo. Eventually they took out a high-interest loan of about 30%. It was their only option in the short amount of time they had to make a decision on the location.

“This was definitely a longtime dream,” Simon-Thomas said. “When you feel so passionate about something, and you really, really have dreamt about being in a certain type of business, you will take what you can get.”

They got the business off the ground in 2015, but the loan payments sucked out any profit, particularly after an unanticipated plumbing problem put pressure on their finances.

Simon-Thomas and her family ended up selling the business.

“It ended up really defeating us … not being able to really see profit,” Simon-Thomas said. “We were just never able to eventually get over the hump.”

The 7-Eleven franchise she now co-owns with her husband was purchased for the benefit of her 2-year-old son. One day, her son will inherit the business, as well as the property she and her husband own, and her son “would be able to use those things to support whatever his goals are and hopefully pass them down to his children,” Simon-Thomas said.

It’s also important to her that her son have the option of owning his own business and working for himself.

“I don’t want him to deal with the discrimination, the stereotypes ... the competitive disadvantages that he will have,” Simon-Thomas said. “Hopefully it gets better by the time he gets older, but what I’ve seen and what’s happened for the last 400 years, I don’t see it changing. I would rather him be in control of his own destiny.”

Small-business lending is partly based on the lender’s judgment that an owner has “got what it takes,” Van Tol said.

“That’s where bias can creep in, implicit or explicit,” he said. “That’s also where just who you have a relationship with and who you know comes into play.”

That lack of a bank relationship discouraged Jeanette Bolden from seeking loans with larger banks. Bolden is a third-generation owner of 27th Street Bakery in Central-Alameda, which specializes in sweet potato pies.

The coronavirus has strained her business, and although she did receive a PPP loan through Citibank, she’s planning to look at other loans through the city or other organizations.

“The individuals at the bank, it’s hard to get a relationship with them because they’re always changing,” Bolden said. “A lot of times when you’re calling and talking to somebody on the phone ... they’re not familiar with your business. They just see numbers on a piece of paper.”

As a community development financial institution, Vermont Slauson Economic Development Corp. takes a deeper dive into clients’ businesses to ensure their success, Brown said. The institution is focused on developing a community’s economy in a way that traditional banks are not.

That’s why the corporation walks small-business owners through the loan process and makes sure they have all the necessary paperwork, even it if takes a few months.

A lack of knowledge about documentation or back-office work shouldn’t be misconstrued as a lack of business acumen, said Williams of OneUnited, which is also a community development financial institution. Many successful business owners are good at their craft and provide good service but are just not savvy about what documentation banks want.

“Just because you didn’t dot your i’s and cross your t’s on the documentation doesn’t make you a bad businessperson,” she said.

Underfinancing can put business owners at a disadvantage right from the beginning. New firms often need time to refine their products or services to match customer tastes, NYU’s Atkins said.

“No business is going to hit it out of the park right away,” she said. “You need enough capital to engage in a certain amount of trial and error.”

Even long-standing businesses need financing to weather tough times — whether that’s a months-long pandemic closure or just a supply-chain hiccup.

“People who are in better positions in getting lines of credit from commercial lenders or financing from personal assets that they can put into their business are going to be better able to withstand those bumps in the road,” Atkins said.

The same applies to Black business owners simply looking to expand.

In 1993, Percell Keeling bought a 5,500-square-foot lot anchored by a historic landmark building on the corner of West Slauson Avenue and Overhill Drive in Los Angeles’ View Park-Windsor Hills neighborhood, where he planned to relocate his health foods store after his landlord sharply raised the rent.

Keeling struggled with Wells Fargo and L.A. County’s Community Development Commission for about a year to secure a loan to rehabilitate the building, he said. He already owned the property, had a track record of success and had money in the bank — “all the things that typically they say that you have to have,” Keeling said.

Eventually the loan came through, pushed forward in no small part by two Black women who worked at the bank and the county commission, respectively, he said. He still remembers their names.

Today, Keeling’s Simply Wholesome health foods store and restaurant carries more than 6,000 products and does business with more than 100 small businesses owned by people of color, said Apryl Sims, the company’s general manager.

“You just got to keep grinding,” Keeling said. “You try as much as you can again to try to put money away, but because the powers that be are not in your favor, it’s just the reality. We always, as far as African Americans are concerned, have always known this.”

Times staff writer Suhauna Hussain contributed to this report.