A $6.5 million loan fund threw FICO scores out the window, and the results show a way forward for America’s struggling cities
Original Article by Matt Turner at Business Insider
Adrienne Bennett needed a short-term loan so that her business could pursue a big project, but she wasn’t sure a brick-and-mortar bank would be able to deliver. Trellis Mercer tried borrowing from banks and credit unions, but his credit history kept them away. As for Regina Gaines, she didn’t even bother going to a bank.
“I’m an African-American single mom, so I knew a bank wasn’t going to give me a loan, no matter my credit score,” Gaines said.
The three entrepreneurs, all in Detroit, ended up taking a different route that does away with a focus on FICO scores and credit history. Bennett, Mercer, and Gaines are recipients of loans from the Entrepreneurs of Color Fund, a $6.5 million program created by the Detroit Development Fund, JPMorgan Chase, and the W.K. Kellogg Foundation.
The fund typically makes loans of between $50,000 and $150,000 to entrepreneurs of color or businesses that primarily hire people of color. In less than two years, it has created about 420 new jobs in the city, according to Ray Waters, president of the Detroit Development Fund.
It’s tiny, for sure, but the entrepreneurs who’ve benefited from this approach say it’s a path that should be open to more Americans. It has the potential to broaden financial opportunity and catalyze the regeneration of cities like Detroit, they told Business Insider.
Focusing on Detroit, the fund is part of an effort to help spur economic growth in a city that has struggled for decades, and to support local entrepreneurs of color, a group which often feels a lack of support from traditional lenders. According to a 2013 study from academics Timothy Robb and Alicia Robb, African-Americans were 37% more likely than nonminorities to avoid applying for credit for fear of rejection.
“There are statistics that show than minority-owned businesses are more likely to be denied finance than a white business,” Carmen Heredia-Lopez, director of investments at the W.K. Kellogg Foundation, told Business Insider.
The backdrop of Detroit’s economic environment makes things only harder.
According to a 2016 study published in Journal of Urban Economics, the city was among the worst hit in the nation by the Great Recession. Unemployment reached a high of 28.4% in June 2009.
Things have improved, but Detroit’s economy still lags behind other big cities, and that can hurt borrowers when they go the traditional route. Other factors, like the decision to open a business in a low-income community, can also hurt.
“A lot of this is just putting numbers into some sort of algorithm, and if you’re above you’re good to go, and if you’re below you’re not,” Heredia-Lopez said.
The fund has already committed $4.1 million in funding, with another $850,000 in loans approved and 10 more in the pipeline. There’s $900,000 set aside to cover the cost of technical assistance, helping companies get prepped ahead of receiving a loan and then providing ongoing support.
And there’s a $500,000 cash-loss reserve. As of the end of the second quarter, one $30,000 loan had defaulted. With a chunk of that loan secured against assets, the write-off is likely to be just $8,000.
“That’s minuscule,” Heredia-Lopez said. “The banks rely on these scores, but I think this also proves there are alternative ways for an institution to look at these borrowers.”
The recipients of the funding describe a more understanding, patient approach to lending. Waters told Business Insider that many of the companies in the loan portfolio “aren’t just at the moment bankable.” Maybe they don’t have enough collateral or their balance sheet is “screwy,” or the credit of the business owner is lower than a bank might like to see. But they’re good companies.
“This is a very high-touch business, and we spend a lot of time with these customers,” he said.
Adrienne Bennett is CEO of Benkari Mechanical, the US’s first African-American female licensed master plumber. Her firm wanted to pursue a project at the new Little Caesars Arena, which will be home to the Detroit Red Wings ice-hockey team but wouldn’t have seen any payments for the first 90 days. That was too long a period to carry out the cost of labor without any revenue, she said.
“We would have been forced to go to a brick-and-mortar bank and we may not have been as successful,” Bennett said. “I’m not sure, but I do know that’s a big if.”
Funding from the Entrepreneurs of Color Fund enabled Benkari to take on the project, the plumbing systems for building C of the arena. Now Bennett has her sights set on winning bids for bigger projects.
“Now that we’re phasing out of that, we have to bid for new projects, and we have to win the bids. That’s a totally different scenario, having to sit down and go through the numbers,” she said. “We are bidding on bigger jobs, we’re working on sustaining larger contracts, a $1 million-plus.
“Those are the kinds of job that we’re bidding on and hoping to win.”
Trellis Mercer, the creative director at urban clothing label LoveLifeSwagger, says he had a few marks on his personal credit history that the fund was more willing to live with than a bank might have been.
“The underwriting and whole approval process, it was more lenient,” he said. “They were more willing to take the risk, and work with me.”
Mercer secured a $30,000 line of credit that enabled his clothing label to attend a trade show, opening up his business to prospective customers across the US. It now has a presence in 10 states and in Trinidad and Tobago, and has remodeled its store in Detroit.
“We’ve doubled our revenue, we’ve remodeled the store front, we’ve upgraded with all new fixtures, an art mural, a chandelier, a complimentary champagne bar. It’s now an upscale, urban, cultured shopping experience,” he said.
In addition, the Entrepreneurs of Color loan has enabled Mercer to access capital elsewhere.
“Having a loan has helped me establish stronger business credit,” he said. “It has helped me gain accounts for manufacturers. Now I’ve established a corporate credit history, and it is looking on the up and up.”
House of Pure Vin
“We got away from investing in the idea, the fact that I have to survive the period getting my store off the ground,” Regina Gaines, cofounder of wine shop House of Pure Vin, said. “I felt like the Entrepreneurs of Color Fund invested in the idea.”
The shop, which focuses on wine in the $25 to $45 range and specializes in Michigan wines, hosts free tastings, bringing in winemakers from around the world to educate customers, the majority of whom are African-American.
“This allowed us to really go for it, and this allowed us to take the risk, and as a result, we’ve been able to execute exceptionally well,” Gaines said.
The business, which took out a $145,000 loan, has generated $750,000 in sales in 20 months. It has also won awards. Employees get paid $15 an hour and the company is talking about profit sharing.
Gaines told Business Insider that borrowing from the Entrepreneurs of Color Fund felt more like a partnership than a traditional lending relationship.
“When you look at it from a totality, instead of how much money you have in your account, your credit score, your seniority, I think them taking alternative viewpoints in this has made them become more vested,” she said. “You treat people the way you want to be treated, and if you treat me right, I’m going to keep my side of the deal.”
To be sure, there’s more to helping a city get back on its feet than launching a loan fund.
Jamie Dimon, CEO and chairman of JPMorgan, told Business Insider earlier this year that what’s happening in Detroit is possible because of an alignment between the city mayor Mike Duggan and businesses. Dimon pointed to Dan Gilbert, the founder of Quicken Loans and BedRock, which owns nearly 100 properties in Detroit.
“If you look at Detroit, that mayor, it’s been a train wreck for 40 years, the population has gone from 2 million to 700,000. This mayor comes in, and he talked about streetlights, sanitation, jobs, policing, schools, affordable housing. He’s doing it all, and it’s growing for the first time in 30 years. Literally, one man. But that one man couldn’t do it without business. You’ve got wonderful people in Detroit, like Dan Gilbert. And business couldn’t have done it without a political environment where they wanted to improve things. If you had an antibusiness environment there, it would still be down there.”
Bennett and Gaines are a case in point. The Little Caesars Arena build that Bennett worked on is backed by Ilitch Holdings and is part of a $1.2 billion 50-block redevelopment effort. The Ilitch family are the owners of the Little Caesars pizza business, which started in Detroit in 1959, and the development includes a new headquarters for Little Caesars and the Mike Ilitch School of Business at Wayne State University.
House of Pure Vin meanwhile is based in a BedRock building, and lists the likes of entrepreneurship hub Techtown Detroit and Detroit Economic Growth Corp. as partners.
In addition, the 50 or so businesses that have received funding from the fund represent a tiny sliver of the 32,000 minority-owned small businesses in Detroit.
And to be sure, the money spent by JPMorgan Chase benefits the bank too. The fund isn’t designed to be a moneymaker (the loans have a typical interest rate of 7.5%, which goes toward covering the costs of the fund), but Waters told Business Insider that when the businesses become bankable, “We would very much like to move them to a Chase bank.” And as the biggest bank in Detroit, JPMorgan Chase stands to benefit from an economic resurgence.
But there are lessons in Detroit for those willing to take the time and listen, according to those in the city. For one, the Entrepreneurs of Color Fund can be doubled in size, given the demand, according to Heredia-Lopez. Waters said he hoped to have news on expanding the fund to $12 million in the next couple of months, an increase that would allow the fund to affect 100 businesses.
Then there’s the potential to take the model devised in Detroit to other cities, something Heredia-Lopez said she was hoping to see. For Bennett, that can only be a good thing.
“Business is tough, we’re here every day, we’re doing what we need to do,” she said. “There are companies out there — all they need is the opportunity. They have the right work ethic. They just may need that one person to support them. If there were other banks willing to do, it could make a lot of difference.”