San Diego Businesses In Low Income Or High-Minority Areas Far Less Likely To Get Bank Loans
When you walk down a street and see one business after another you may not think about how they got started. Some like Lee launched with the owner's savings or money borrowed from family and friends or financing from a bank. But as Cape UBS investigative reporter Claire Trageser found businesses in low income areas are far less likely to get bank loans which can create patterns of disparity that have far reaching impacts most flower shops I feel like you go in and you have to say you know I'm looking for something from my grandma. I want to spend fifty dollars and you have no idea what size that's going to be what their styles are going to be what bases you've get. Natalie Gill has been running the flower store. Native Poppy and Northpark for almost three years she had a vision for a different kind of flower store. For us it was very it's very clear eating at small medium large you know the prices you know and it's going to look like her business is flourishing. But things didn't always look so rosy. She put twenty thousand dollars of her own savings into opening the store but needed about 40000 more. I went to a bank asking for a loan and the process was complicated and long. I had two years of experience with profit but it was just I got rejected for every loan I tried for. So she did something risky. She took a loan from an online company. It was a twenty four thousand dollar loan that would get deposited into my bank account. The next day but it was at 18 percent interest and I had to pay it within three years which was a risk I was willing to take because I had no other options. Gill's experience is a typical one says Spencer Cowan a research consultant he prepared a report for the nonprofit Woodstock Institute on bank lending. Using data banks report to the federal government he then updated that data and localized it to San Diego County for PBS. Cowen found that only about one in five businesses in low income areas have received a bank loan compared to almost four in five businesses in high income areas. That means four out of five don't even have a business credit card. Not even a capital one. American Express Business Card to manage cash flow. You know you're essentially a cash basis business at that point. You know if you need to buy office supplies you know you have to either get a merchant cash advance or tap into your own personal funds. He says that drives businesses to predatory lenders that can leave them worse off and has even bigger consequences. Businesses don't get started. So employment stays depressed. The job opportunities aren't there in the neighborhood. Businesses that are are there don't expand because they can't afford to. So you have a cycle that kind of perpetuates that neighborhood being less friendly to business less. Fertile as an incubator for business projects real collective started out as five families who got together from cleaning up the neighborhood here. Tommy Walker is one of the owners of project REO collective a coffee shop in Paradise hills that opened two years ago as we cleaned up the community. A lot of people in the neighborhood was saying we wish we had somewhere to hang out somewhere we'd grab a cup of coffee meet our neighbors do some homework. Scotty true to Cowens findings. Project trio started not with a bank loan but with investments from five families. And when they went to a bank asking to borrow four thousand dollars for an espresso machine they said no you guys don't horrify because you haven't been around long enough. They ended up borrowing money from one of the owner's parents and now they're serving Mexican mochas and lavender lemonades. But Walker says they shouldn't have had to do it on their own. Some neighborhoods might not get. The recognition or even the financing that they deserve or even just you know the help that they need. He says he hopes other neighborhoods follow their example by working against the odds to make new businesses happen and Cape PBS reporter Claire Tresor is here now to answer a few questions about her report. Clare welcome. Thank you. The disparity between low income and high income business lending is really shocking. Do banks and mainstream lenders give any reason for the disparity. Yeah well when I first saw the the data I was interested to see you know is it that there's actually may be fewer businesses in these low income areas but that was included in the report and that that doesn't account for it. So I think there's an idea among banks that businesses in low income areas are just going to be less likely to succeed because the people who live there have less money that wasn't included in this study but there are other studies that looked at that but they have found that that that's not borne out by the data either that businesses in low income areas are able to succeed sometimes at the same rates as in higher income areas. You know there's an old saying that the only way to get a loan from a bank is to prove that you don't need it. So are the businesses you spoke with. Are they on firm financial ground. Yeah they are. In the case of native poppy which is the first the flower shop business that's been in business for three years. I didn't get to include this in the story but the owner actually talked about in her first year of business she to prove to banks and to other lenders that she could finance herself. She didn't spend any money on herself at all for the entire year. Not she said you know I didn't buy gum. I didn't buy a magazine and buy anything. And then I talked about she took out this online loan and she said she maxed out two credit cards and she was able to pay all off within the first three years. So yes you know she's succeeding. I think she's just maybe hasn't been in business long enough to to show to banks that she's able to succeed. And then with the project trio the five families they have the support of all these families who are financing them and they've been successful as well. You spoke about the effect on the neighborhood and community. If businesses have a tough time getting loans to get started or expand can tell us more about that. Yeah. Well all of the businesses that I talked to hire locally and you know make a point of hiring locally especially product Rio. There are certain to hire people from their neighborhood. So there's obviously that very direct impact. I know that a point that often comes up in southeast San Diego is that so much of the money from residents who live in that district is spent outside of the district because there just aren't the businesses there to spend the money. So you know the more businesses that are in these areas the more places there are for people to spend money. And then I think there's just the impact of giving people nice businesses to visit. We went to Project RIO on a Sunday afternoon and it was packed. It was full of people doing homework having meetings just hanging out. You know it's a nice place to go. So neighborhoods feel like they need more of those businesses to to spend time in. Now is there any way of telling if this statistics on fewer loans for minority businesses is based on economics or bluntly racist attitudes. Well I mean they they don't survey reasons that banks are not giving loans. And you know even if they did I doubt that anyone would say it's because of the color of someone's skin. But I think that there is a point that especially for immigrants there are so many obstacles to to come to overcome to get these bank loans. You know there new even to the country may be new to the language. So there's paperwork just the background knowledge that you need all of these things to find out about to get the loans in the second part of my story airs tomorrow I talked with the owner of El Brega which is a Mexican restaurant in City Heights and she says that they didn't even try for a bank loan because first of all she didn't expect to be able to do it and it wasn't until her restaurant had been in business for a little bit longer that she was hooked up with a local nonprofit who could kind of help her to see. Here are some options for getting funding. Now if businesses do resort to getting a loan from a sketchy sort of high interest lender what are they risking. Well most of those lenders have very high interest so that's number one higher than you would get at a bank. So you just end up paying so much more for taking out that loan. And then if you are not able to pay it off you know you can go into bankruptcy you can lose parts of your business lose assets in the second part of my story tomorrow I talked with the owner of the Homebrew or which is a beer brewing supply company in Northpark and he ended up taking out a loan from that company Square that sells the little white chips you know that you used to pay on iPad's pads and smartphones. And they just take 20 percent from whatever you sell. So you know you don't get a choice about oh I'm going to pay this or am I going to pay my electric bill. No they're just taking that money out of your sails now. Banks and lenders must be aware of the kind of statistics that you found out in this report and how few business loans they approve for low income businesses. Is there any effort underway to change that. Not that I'm aware of. One thing that I didn't get to include in this story is a law was recently signed in California that would require more disclosure for those online lenders to make them the same same level of disclosure as consumer. You know other consumer protection laws so they would have to say upfront this is how much interest you'll pay. This is you know over this much time because right now there aren't those requirements that WA doesn't have a specific date to go into effect but it was recently signed in California. I've been speaking with KPBS reporter Claire Trageser, Claire thank you. Thank you.
Where a business is located in San Diego County can have a big impact on whether it receives a bank loan, according to federal data.
The data shows that businesses in low-income or high-minority census tracts were far less likely to receive funds from banks.
A federal law, the Community Reinvestment Act, requires large banks to report the number and amounts of loans of under $1 million that they make to businesses by census tract. This includes traditional loans, lines of credit and credit cards.
The Woodstock Institute, a nonprofit research and advocacy organization, conducted a report on this data in 2017. Spencer Cowan, the author of the report, updated the data and localized it to San Diego County for KPBS.
He found that between 2012 and 2016, only about one in five businesses in low-income areas of San Diego County received a bank loan, compared to almost four in five businesses in high-income areas.
"That means four out of five don't even have a business credit card," he said. "You're essentially a cash basis business at that point. If you need to buy office supplies you have to either get a merchant cash advance or tap into your own personal funds."
Cowan also found that San Diego businesses in low-income census tracts received under 5 percent of the total number and amount of loans, while businesses in upper-income census tracts received just under half of the total number and amount of loans.
The lack of lending creates patterns of disparity in cities, he said.
"Businesses don't get started, so employment stays depressed," he said. "The job opportunities aren't there in the neighborhood. Businesses that are there don't expand because they can't afford to. So you have a cycle that perpetuates that neighborhood being less friendly to business."
What's more, businesses unable to get bank loans may turn to predatory lenders that can leave them worse off, Cowan said.
That was true for Natalie Gill, who has been running the flower store Native Poppy in North Park for almost three years. She had a vision for a different kind of flower store.
"Most flower shops, you go in and you have to say, you know I'm looking for something for my grandma, I want to spend $50," Gill said. "And you have no idea what size that's going to be, what their styles are going to be, what vases you get."
Native Poppy, which shares space with a coffee shop, is set up differently. They have a flower menu that helps customers make decisions.
Gill's business is flourishing, but things didn't always look so rosy. She put $20,000 of her own savings into opening the store but needed about $40,000 more.
"I went to a bank asking for a loan and the process was complicated and long," she said. "And I needed the money right away. I had already signed the lease taking a bet that I would get the funding. I had two years of experience with profit, but I don't know what it was, but I got rejected for every loan I tried for."
So instead, she did something risky: she took a loan from an online company.
"It was a $24,000 loan that would get deposited into my bank account the next day," she said. "But it was at 18 percent interest and I had to pay it within three years, which was a risk I was willing to take because I had no other options."
George Thornton had a similar experience. He's the owner of the North Park beer brewing supply store The Homebrewer, and in 2014 decided to expand his store to also become a brewery, Home Brewing Company.
But he had trouble getting a bank loan.
"I had about eight different brokers tell me in their initial contact that there would be no problems at all based on our three to four years in business, and the revenue we were generating on the retail side," Thornton said. "Inevitably, when they looked at my personal credit score, and credit card debt that we had accumulated because of the business, they always told us that there would be no way they could work with us."
But Thornton was committed to expanding, so he took out a loan from the company Square, which makes those white chips you use to pay by credit card on a tablet or smartphone. The terms of the loan were steep: Square would keep 20 percent of all sales Thornton made using the white Square chip until the loan was paid off.
"Businesses turn to all sorts of creative measures to make it work," said Lauren Grattan, a founder of Mission Driven Finance, a San Diego investment company. "They're turning to informal networks, or sometimes turning to online predatory lenders that will just bury their business."
Grattan works with business owners to help them find funds that best fit their needs, and makes a few loans directly to small businesses.
As hard as it is for any small business owner to get funding, it's even harder for businesses in areas largely populated by minorities.
According to Cowan's analysis for KPBS, as the percentage of minorities in a given area increases, the percentage of businesses getting loans decreases.
In San Diego census tracts that are 80 percent or more minority, about 35 percent of businesses get bank loans, Cowan found. In low-minority census tracts, more than 75 percent of businesses get loans.
That rings true for Tommy Walker, who two years ago teamed up with four other families to start a coffee shop called Project Reo Collective in Paradise Hills.
"It started out as five families who got together from cleaning up the neighborhood here," he said. "As we cleaned up the community, a lot of people in the neighborhood said, we wish we had somewhere to hang out, somewhere we grab a cup of coffee, meet our neighbors, do some homework or study."
True to Cowan's findings, Project Reo started not with a bank loan, but with investments from the five families. And then when they went to a bank asking to borrow $4,000 for an espresso machine, they were rejected, Walker said.
They ended up borrowing money from one of the owners' parents and now they're serving Mexican mochas and lavender lemonades.
But, Walker said, they shouldn't have had to do it on their own.
"Some neighborhoods might not get the recognition or even the financing that they deserve or even just the help that they need," he said. "But as long as you have families like us, we want to put it out there to let any other neighborhood know, just go out there and just make it happen."
Rodnia Attiq also started her business, the Mexican restaurant El Borrego in City Heights, without a bank loan. In fact, she didn't even try to get one.
"We didn't believe in loans and all that money from other people, from banks, because we're small business owners, we never thought a bank would hear us," she said.
She and her mom started selling lamb tacos in 2005 to fill what they saw as a gap in the city's food scene.
"My mom said, 'you know what, there are no lamb tacos in San Diego, so let's do it,'" Attiq said. "And we start in the driveway. It was only Saturdays and Sundays from 8 in the morning until 2 p.m. and we were running out of lamb. At maybe 1 p.m., we had no lamb at all, and that's why we said, 'you know what, this could be a business.'"
Recently, Attiq has been working to expand her restaurant to make an outdoor event space in the vacant lot out back.
"Our venues are going to be the secret garden of the restaurant," she said.
She applied for and was granted a Small Business Administration loan, not from a bank, but from a local nonprofit that oversees these government loans.
"We're taking that next step and getting to the next level that we have been working for the last 13 years," she said. "So I think we're finally getting there."
Attiq said the project won't just expand her business, it'll allow her to hire more employees and give people in City Heights a place to gather for big events and enjoy her food.