In part two of a multi-part series on minority-owned small businesses, we asked Henry Golatt, current Chief of Strategy and Partnerships for CDAC’s Clean Energy Initiative, (a program under the HBCU CDAC umbrella) to share his perspective. We wondered what resources can help minority-owned small businesses not only survive but scale as well, so we framed our discussion around the following question:
1) What are the best resources for these organizations to secure additional capital?
Mr. Golatt stated, “When it comes to access to capital, the U.S. Small Business Administration comes top of mind. As the only cabinet-level federal agency totally dedicated to small business advancement, the SBA provides counseling, capital, and contracting expertise. As a federal agency, it is the nation's go-to resource and voice for small businesses and serves as a facilitator of capital access. While the agency does not provide direct access to capital, it does provide loan guarantees through which a network of financial institutions, including traditional banks and non-traditional lenders, originate loans to small businesses.
Given SBA's behind-the-scenes posture, many small business owners might not fully appreciate the agency's role in helping them access capital. In this regard, SBA's participation reduces the risk to easily identifiable financial institutions throughout the country, thereby incentivizing them to make loans to smaller organizations. As a consequence, SBA's involvement helps increase volume, size, accessibility, and the affordability of loans to small businesses.”
Golatt further elaborated that when we talk about capital support resources for higher-risk borrowers (with businesses owned and operated by women and minorities most often fitting this profile), we can further segment capital access into three specific product offerings:
1. The 7(a) is the SBA's primary loan product allowing borrowers to access up to $5M. 7(a) loan funds can be used to purchase an existing business, working capital, debt refinancing, along with other general purposes.
2. The SBA's 504 loan product provides borrowers the ability to purchase property and commercial real estate as well as equipment and machinery. Borrowing limits under the 504 loan extends to over $20M.
3. The SBA Microloan Program provides loans up to $50,000 to help small businesses and specific not-for-profit childcare centers start up and expand. The average microloan is about $13,000.
Mr. Golatt indicated that because of the attractiveness of programs like the SBA 7(a), the U.S. Small Business Administration should be the first stop for higher-risk borrowers. And while the SBA serves as a beacon for overall small business development and provides critical access to capital, the Community Reinvestment Act (CRA) has exponentially expanded opportunities for minority-owned companies.
The CRA, authorized by Congress in 1977, requires banks and thrift institutions to make loans and report lending activities to Congress based on their geographical footprint. The CRA ensures that banks meet the credit needs of areas (including low-and-moderate- Income (LMI) areas). They also conduct regular business activities such as receiving deposits, albeit with recognizable caveats that have only increased with technology, including mobile banking.
Like the Community Reinvestment Act, community development financial institutions (CDFIs) date back to the 1970s. However, it wasn’t until then-President Bill Clinton signed into law the Riegle Community Development and Regulatory Improvement Act of 1994 that these institutions received the required leverage to become significant players with equitable access to capital. In this regard, The CDFI Fund is housed within the U.S. Treasury Department and governed by an advisory board that includes the SBA Administrator. The fund allows private community-based and mission-driven financial institutions to access and leverage funds directly from the U.S. Treasury Department for purposes of providing affordable lending in low-wealth communities. CDFIs use these funds to support, among other uses, small business, and microenterprise development.
For example, in December 2020, Congress authorized a third round of the popular Paycheck Protection Program through the SBA and funded at $284 billion. Utilizing CDFIs for disbursement of the funds, the program aims to improve the overall impact for the neediest small businesses' by targeting those with ten or fewer employees and expanding access to capital. Mr. Golatt advises minority business owners to identify and reach out to local CDFIs and closely follow the news over the next several months. He expects new information to come forth out of the Biden-Harris Administration that will impact the capital needs of small businesses.
We want to thank Mr. Golatt for his insight on available capital and we will be continuing this conversation in part three of our series on additional small business resources. Specifically, we will examine the steps that some companies are undertaking to survive COVID-19 as well as highlight innovative programs that have been developed to get them through the pandemic.
If you would like to find out more about HBCU CDAC and our small business programs, you can access more information here.