Businesses in lower-income neighborhoods usually have trouble getting bank loans. Fortunately, there are investors looking specifically to help businesses in those areas in order to reverse the cycle of disinvestment.
An example is Mission Driven Finance, a San Diego-based investment company that doesn’t look at personal credit scores but “at the validity of the business and how well it can repay from the business earnings.” The company’s goal is to fill the gap between traditional profit-motivated investment and philanthropy.
One business that could have been helped by Mission Driven Finance is Project Reo Collective, a coffee shop in Paradise Hills, a lower-income neighborhood of San Diego which was not able to get a bank loan to expand after a year of operation.
Tommy Walker, one of the coffee shop owners, says that after a successful first year, he went to a bank to borrow $4,000 for an espresso machine. But, he was rejected because the business had not “been around long enough.”
Having trouble getting a small-business loan like Project Roe Collective is typical, according to a report by the nonprofit Woodstock Institute titled “Patterns of Disparity.” It shows that between 2012 and 2016, only about one in five businesses in low-income areas across the United States received bank loans or even business credit cards compared to almost three in five businesses in higher-income areas
This situation can drive businesses to predatory lending. That’s what happened to Natalie Gill. After profitably running her flower-arranging business out of her home for two years, she wanted to expand to a flower shop but her bank loan application was rejected. She was forced to take a loan from an online company at 18% interest payable in three years instead of a normal small-business loan at 5 to 10 percent interest.
Bank investment vs. community investment
Banks are restricted by certain criteria that must be met when choosing in whom they can give loans.
Fortunately, there are alternative ways of getting financing, such as from a company like Mission Driven Finance. In addition to investing in small community businesses, Mission Driven Finance also helps people looking for small-business loans. Their mission, founder Lauren Grattan says, is to invest in neighborhoods that really need it. Because successful businesses create more jobs and hire locally. The whole community reaps the benefits.