Like many entrepreneurs, K. Kalimba Kindell and Delfaye Jason went to bank after bank before finding a lender that would work with them.
They both had good credit and had run small consulting businesses in the past, but they spent a year being rejected by lenders unconvinced by their plans to open a therapeutic spa that offers massages, facials and wellness programs. They had the backing of a franchise, but banks viewed the business as a risky startup.
The process was disheartening. They often had to resubmit the same paperwork to lenders that they felt made little effort to understand their business. “We had (loan) processors in California that knew nothing about our character or our business background or the St. Louis area,” Jason said.
With persistence, they eventually got traction with U.S. Bank and Midwest BankCentre, and received two loans — both backed by the Small Business Administration — totaling $300,000. Their store, MassageLuXe, has now been open on South Grand for two years and has 16 employees.
But getting those SBA loans, which provided crucial startup funds for Kindell and Jason, represented an achievement that has become increasingly rare for African-American entrepreneurs in the region.
In 2007, black-owned businesses in Missouri received 236 SBA-backed loans totaling $20.1 million, according to Post-Dispatch analysis of SBA data. Five years later, that number dropped to 15 loans totaling $2.8 million. During the first 10 months of the 2013 fiscal year, black borrowers received 17 loans totaling $5.7 million.
In contrast, the $359 million in loans white-owned firms received in Missouri in 2012 was well above the 2007 total of $281 million, though the overall number of loans declined from 1,455 to 960.
When the economy crashed, banks tightened credit requirements, loan demand dropped and small business lending slumped. In response, the SBA, which works to get loans to borrowers whom banks might not otherwise lend to, took several steps to encourage more lending.
The agency raised borrowing caps on the loans it guarantees, added more lenders to its programs, streamlined paperwork, reduced borrower fees and made more businesses eligible by raising the maximum revenue levels for its programs.
As a result, the dollar amount of loans, both locally and nationally, has surged. Across the U.S., the SBA approved around $30 billion in loans during each of the last three years, the three best years on record. The SBA’s St. Louis district, which includes the eastern half of Missouri, approved a record $211 million in loans in 2013.
But the growth hasn’t been evenly distributed.
In Illinois, the decline was just as stark; 669 loans totaling $56.6 million were made to black borrowers in 2007. In 2012, that number had dropped to 62 loans totaling $29.4 million. During the first 10 months of 2013, blacks received 32 SBA loans in the state.
Those figures exclude loans in which the borrower’s race was not provided — about 6 percent of overall loans in Missouri in 2012, and 7 percent in Illinois.
Dennis Melton, the director of the SBA’s St. Louis office, said the agency works hard to reach out to all underserved communities — minorities, women, veterans and rural business owners. “Is that a focus in this office?” he said. “You better believe it.”
But ultimately, Melton said, the decision to lend comes down to whether a potential borrower meets lending criteria. “We’re sometimes successful, and sometimes not,” he said, “because it always comes down to a credit decision.”
The decision is also left to a bank. To encourage lending, the SBA guarantees up to 85 percent of a loan through its largest program; it doesn’t issue loans itself.
The agency offers a variety of services for small businesses, and its primary vehicle to boost lending is by offering guarantees to lenders. If you were to divide loan applications into yes, no and maybe stacks based on degree of risk, Melton said, the SBA’s focus is the “maybe” stack.
The SBA doesn’t track approval rates, so it’s unknown whether blacks are being denied loans at disproportionate rates. A 2012 study conducted for the agency using small business survey data (not SBA loan data) found that even when controlling for creditworthiness and other factors, blacks and Hispanics were less likely to have loan applications approved than whites.
The author of the study, Kauffman Foundation researcher Alicia Robb, said in an interview that minority borrowers are “turning to mainstream lenders less because they have a fear of denial, which is warranted.”
There are myriad other factors likely at play: During the recession, incomes in the St. Louis area dropped more for blacks than for other groups. Banks have tightened lending standards and are looking to lend to established businesses and entrepreneurs with greater wealth and stronger credit histories, ruling out many minority-owned firms.
In particular, SBA officials point to the decline of smaller loans, which are disproportionately used by minority- and female-owned businesses, as a crucial factor. (SBA lending to female-owned businesses in Missouri and Illinois is down since recession, but not as much as lending to blacks.)
In 2010, Congress raised loan caps on SBA programs from $2 million to $5 million. The average size loan issued in Missouri has more than doubled since before the recession, to about $385,000 in 2012.
“It takes the same amount of effort to underwrite a $5,000 loan as a $500,000 loan,” said Eddie Davis, director of the Center for African-American Business Acceleration in St. Louis.
Making bigger loans to established companies is more profitable than small loans to startups, and from an economic perspective, Davis said, the very cautious approach many lenders take makes perfect sense. Some banks also sell SBA loans for a premium on the secondary market, further incentivizing larger loans.
Most businesses Davis works at are in the startup or embryonic stage of development, he said, and mainstream lenders and SBA loans simply aren’t an option for them.
The growth of microlending helps meet some of the demand, he said, but still falls short. There’s a “gaping hole,” for businesses that want around $50,000 to $100,000, he said, above where microlenders help but below where banks take interest.
While SBA loans account for only a small portion of small business lending, Robb said, the decline in SBA lending to black borrowers is troubling. Those who can’t get capital will struggle to create quality products and services or generate new jobs, she said, “It has a negative impact on the entire community.”
“Credit markets should function and viable businesses should get funding,” she added, “and we see that’s not happening in a lot of cases.”
FEWER SMALL LOANS
Much of the decline can be traced to the 2011 cancellation of the SBA’s Community Express program, which guaranteed loans of up to $250,000 to underserved groups and businesses in low-income areas.
The program led to more small loans but had high default rates, and regulators criticized lender underwriting practices. An SBA Inspector General report found that some of the most active lenders issued greatly reduced loan amounts with little regard for borrower business plans or cash flows, meaning some borrowers received far less than what was needed to fund a business.
In Missouri and Illinois, one of the most active lenders in the program was Innovative Bank, which was seized by federal regulators, who lambasted the bank’s underwriting practices and sued its former directors. Innovative was acquired by a company that was merged into California-based BBCN Bank.
Because Innovative was acquired by what is now BBCN, SBA records list BBCN as the lender for about 1,600 loans made in Missouri and Illinois. For more than half of the loans — 919 in total — an unpaid balance was charged off as a loss by the SBA. Black-owned businesses received 830 of the loans, 593 of which were charged off.
A BBCN spokeswoman said in an email that it was Innovative that “did lending in the market,” and didn’t respond to reporter requests to clarify if that meant Innovative was responsible for every loan in both states.
U.S. Bank, one the leading SBA lenders in Missouri, was also one of the most active in lending to black-owned businesses in St. Louis before the recession, but has made far fewer loans in recent years, which the bank attributed to the reduced funding for and eventual elimination of Community Express.
A bank spokeswoman said it hadn’t changed its approach in St. Louis, and works to expand lending in minority communities through partnerships, marketing and directly contacting businesses. The bank also invested in a fund managed by local nonprofit Justine Petersen, which makes microloans primarily to minority borrowers.
While the SBA has no initiative that specifically targets lending to minorities, Melton said the agency constantly makes outreach efforts to advertise programs, and said its recent decision to eliminate borrower fees and lender guarantee fees for loans of less than $150,000 could help make more loans available for minority borrowers. The SBA also lends money to Justine Petersen, which in 2012 made nearly $1 million in loans to black-owned businesses in the St. Louis region using SBA dollars.
Melton highlighted two other programs that he said could help, one of which focuses on making loans of up to $350,000, and another that guarantees loans made by community-based financial institutions, typically nonprofits.
Adolphus Pruitt, head of the St. Louis City NAACP, was disappointed with the SBA’s efforts and questioned whether it was being aggressive enough in reaching out to black entrepreneurs.
The drop in loans to blacks “was just astonishing,” he said. “It’s not a pretty picture. If (someone’s) job depended on their ability to mine the marketplace to find viable minority businesses,” Pruitt said, the situation would improve.
Others argue the SBA is limited in what it can do.
Galen Gondolfi, a spokesman for Justine Petersen, said that because loans are “branded SBA, the SBA gets shamed, but it really comes back to the banks.”
He said it’s unfair to lump all banks together, and that some were making genuine efforts to expand lending to minority-owned businesses. However, he noted that Justine Petersen was applying to be an SBA 7(a) lender — which would allow it to make larger, SBA-guaranteed loans — because the demand for business loans among underserved groups isn’t being met.
Without enough funding, many minority business owners will exhaust personal resources, burn through credit cards and struggle to expand, said Kevin Wilson, head of the Missouri Small Business Development Center. “The SBA represents only one piece of the puzzle,” he said, “and there’s a more systemic issue in society that we have to address.”
An earlier version of this story incorrectly spelled the last name of Justine Petersen spokesman Galen Gondolfi.