When Steve Hall met Shanetha Pollnitz, the owner of the building where Pollnitz’s child care center was located had just put the building up for sale. Pollnitz wanted to buy the building and strengthen her business, but like many entrepreneurs of color, she didn’t have deep pockets or experience with commercial lending. In Hall, LISC’s Senior Director for Small Business Lending, she had come to the right person. Through the Small Business Lending program and other means, LISC is leveraging its strengths as a Community Development Financial Institution (CDFI) to help small business owners, particularly entrepreneurs of color, close the opportunity gaps that can keep their businesses from growing.
Challenges for entrepreneurs of color
Entrepreneurs of color can face some unique challenges in establishing thriving businesses. As Hall explained recently, “When you talk about minorities, women, vets [as business owners], maybe they don’t come from the same family background as an affluent person from the suburbs. They didn’t get the same opportunities to invest. Maybe their discretionary income was so minor, they don’t have money to put 10 percent down [on a loan]. They don’t have that generational experience of wealth they can lean on.” For a lot of LISC’s small business borrowers of color, “it’s the first time they are owning commercial real estate or expanding their business or borrowing more than $100,000.”
Hall went to say that the challenges are not just financial. Minority entrepreneurs often lack connections to the network of professionals that business owners rely on to help them invest and expand, such as attorneys and accountants. Without these advantages, Hall said, “it takes longer. They may have a bankable deal, but not on the timeline that banks want to consider when they are identifying potential targets.”
The role of the CDFI
CDFIs like LISC play two unique roles in supporting minority entrepreneurs to overcome these roadblocks. First, they can help meet the businesses’ capital needs through special lending products that traditional banks don’t offer. With philanthropic backing, CDFIs are able to withstand greater risk, offering more favorable rates and terms, requiring less collateral and tolerating a loan-to-value ratio that exceeds what conventional financing offers. Therefore, CDFIs are able to serve entrepreneurs who might not qualify for conventional lending products. LISC Small Business Lending offers a range of products that meet entrepreneurs where they are. For those that lack the capacity to meet more rigorous underwriting standards, LISC’s KIVA microlending program matches crowd-sourced funding and can supply loans up to $5,000.
Second, the CDFI’s mission typically is not just to supply financing, but build capacity in borrowers and the industry. With training, technical assistance and capacity building, CDFIs can help strengthen borrowers’ business operations and balance sheets. In time, some of these small businesses become eligible for traditional financing. As part of that capacity building process, LISC is connecting entrepreneurs to professionals that can provide needed services and help them through the development and expansion processes. To fill these roles, LISC has established programs at the national level and in local sites, notably Chicago and Boston.
Building entrepreneur financial capacity in Chicago
LISC Chicago works with small businesses as part of its effort to comprehensively improve quality of life in targeted neighborhoods. While helping partners implement quality of life plans, LISC Chicago staff quickly recognized that small business, entrepreneurship, jobs and vibrancy along neighborhood commercial corridors play a big part in building stable, sustainable economic infrastructure in Chicago’s neighborhoods. LISC Chicago began looking for ways to supply small business lending and capacity building tools to advance neighborhood partners’ existing objectives. In 2018, LISC partnered with JPMorgan Chase and Acción Chicago to bring JPMorgan Chase’s Entrepreneurs of Color Fund to Chicago’s South and West Sides. Through the $6.5 million fund, Acción provides loans under $100,000, LISC provides loans over $100,000, and both organizations supply technical assistance to borrowers and potential borrowers.
According to LISC Chicago Deputy Director Caroline Goldstein, LISC also discovered that many of clients that come through its network of Financial Opportunity Centers (FOCs) seeking personal financial coaching, credit counseling and workforce training are entrepreneurs or have interest in starting a business. At the same time, entrepreneurship support programs in Chicago reported to LISC that many of their clients needed the services FOCs provide to improve the financial position and creditworthiness of their businesses. LISC Chicago is now piloting a program in which an FOC partner and an entrepreneurship program integrate financial coaching and credit building into entrepreneurship services and vice versa, meeting a wider range of needs for both programs’ clients.
Supporting the small business sector in Boston
In Boston, “our role is to figure out how we can build a vibrant ecosystem for entrepreneurs of color,” said LISC Senior Program Officer Karleen Porcena. Porcena went on to explain that there is a vibrant entrepreneurship movement in Boston, but it is very segregated; entrepreneurs of color have not historically been at the same tables or received the same opportunities as non-minority business owners.
LISC Boston has been supporting local entrepreneurship accelerators and incubator spaces for years. Early on, their support for entrepreneurship arose through community organizing work as a strategy for encouraging local ownership and preventing displacement in transitioning neighborhoods, so LISC Boston made it a focal point of its economic development strategy. The local LISC office now hosts “pitch contests,” in which entrepreneurs of color compete to give the best pitch for their businesses. “It’s a celebration of entrepreneurs in Boston,” said Porcena. “It’s really a way to highlight innovation in communities of color.” LISC Boston invites local news, residents, customers and potential investors to the contest in order to showcase the entrepreneurs to the widest possible audience; this year’s event attracted more than 100 people. And LISC’s commitment to entrepreneurs of color doesn’t stop with merely hosting the event. “Everything about the event - communications, the food, the space, A/V – it’s all provided by people of color,” said Porcena. “That felt important. Procurement people [at local institutions] say they can’t find minority businesses, but they are there. It’s about being intentional about who you choose to work with.”
LISC Boston also supports minority-owned small businesses through its Impact Lending program, which aims to provide loans and technical assistance to build small business capacity and also to connect minority-owned businesses with procurement opportunities in large anchor institutions such as Northeastern University. And through a new initiative, Boston Builds Credit, LISC will bring on a financial coach to help small businesses build their creditworthiness.
But helping the entrepreneurs themselves is only half of the equation, Porcena noted. “A lot of the time we tend to focus just on the entrepreneur and what their needs are, but we have to think about the ecosystem as a whole and how we are better preparing entrepreneurs to get contract opportunities by getting anchors ready for it.” This entails helping procurement professionals at large institutions, who have millions of dollars in contracts to award, to think outside the box and see all that entrepreneurs of color have to offer.
Making it work on Chicago’s West Side
For Shanetha Pollnitz, the child care operator in Chicago, the opportunity to buy her building, a mixed-use structure with four rental units upstairs, was too good to pass up. But as LISC’s Steve Hall noted, purchasing commercial real estate is very different from buying a home. “Most business people would like to own the real estate they’re in,” Hall said, “but they don’t know what to do to acquire it, much less a space with existing tenants.” In addition, Pollnitz’s building had a number of issues, including housing compliance, that the community wanted the owner to address. The seller was underwater on the mortgage and was not motivated to negotiate on the price, and to complicate matters, Pollnitz had just completed an $80,000 renovation in her existing facility, so she could not simply just walk away.
Despite all the challenges, “LISC hung in there,” Hall said. LISC made a $442,000 loan commitment to Pollnitz’s business, covering real estate costs, debt consolidation and property improvements. In addition to financing, Hall’s team provided hours of hands-on technical assistance, including assistance on how to go from renting to owning the property. During construction, the LISC team visited the site regularly and talked to the contractors, the borrower and the borrower’s attorney. “We gave her some valuable TA that really went beyond what you would get from a normal institution,” remembered Hall. “There is a lot of anxiety for small business owner to make a leasehold improvement and then to buy. She had invested all of her additional capital already. It was really rough emotionally for the borrower. We were consistent in our resolve to hang in there with her, work through the contractor issues, make sure she had good licensed professionals helping her and resolve the outstanding resident concerns with the city.”
The project started in March 2017 and closed in May 2018 and Pollnitz is still doing some final improvements to this day. “Now it’s fantastic,” said Hall. “It’s a beautiful facility.” The child care facility was redesigned with assistance from LISC and a YWCA grant to make the space more efficient, and the outside playground has been renovated. Improvements have been made for the residential tenants as well, but most important, the space is now Pollnitz’s own thanks to help from LISC. There are some unique challenges facing entrepreneurs of color, Hall acknowledged, “but with our suite of products we have multiple options to help them achieve their dreams.”