Detroit Regional Chamber > Racial Justice & Economic Equity > Panel: How Black- and Diverse-Owned Small Businesses Can Access Funding

Panel: How Black- and Diverse-Owned Small Businesses Can Access Funding

October 22, 2021


Key Takeaways

  • Start building a relationship with financial institutions and lenders before you need capital. According to Jones, “waiting until you need capital to build that relationship is too late.”  
  • Find a financial institution with a good track record of working with good borrowers and businesses, who will take time getting to know your small business and provide advice on what is best for your business—not their company. 
  • Businesses of all sizes sought out capital during the pandemic, but Black and Latinx businesses struggled to gain access. This led to non-traditional lending sources stepping up to assist those businesses. 
  • Small business owners should talk to lenders and let them know what they need. According to Dunn, “As small business owners, you are the truth in this story. It’s about making sure you have the resources that you need.” 

On Wednesday, Oct. 20, the Detroit Regional Chamber and Pure Michigan Business Connect partnered to host the first webinar in the Chamber’s 2021-2022 Black- and Diverse-Owned Business Series – How to Access Small Business Funding.   

The webinar brought together a panel of financial and business experts from the Detroit region to discuss traditional and non-traditional funding opportunities and resources that small businesses can take advantage of to expand. The panel was moderated by Paul Jones, business support director at Invest Detroit, and comprised: 

  • Aileen Cohen, Diversity, Equity, and Inclusion Officer, Michigan Economic Development Corp. (MEDC)
  • James Dunn, Executive Vice President and Chief Operating Officer, First Independence Bank 
  • Derron Sanders, Strategic Advisor, Grow Michigan Fund II; Chief Executive Officer, SG Companies 
  • Shannon Smith, Vice President, Siebert Williams Shank Capital Management 

Cohen participated in the panel from the perspective of the state of Michigan, which helps all businesses; Dunn, small, startup businesses; Sanders, minority businesses; and Smith, Black and Latinx businesses.  

View responses to audience Q&A.

When to Start Building a Relationship with Lenders

Dunn shared that small business owners should start building a relationship with financial institutions before seeking capital. While a pre-existing relationship does not guarantee loan approval, it helps lenders get to know the business they are working with and provides referrals to other resources that could be useful for growth. 

“And then also, it gives the banker an opportunity to know who you are, what your business plans are, and how you’re preparing for them, what your business plans look like, and sometimes, they can direct you to into what you need to do to put your business on the ground and get it going,” Dunn said. 

Dunn also shared that small business owners should consider working with smaller banks like First Independence Bank before going to larger banks for capital. 

“One of the benefits of working with a smaller banking institution is that they’re a little more focused on smaller loan relationships, and it’s kind of their core business. They’re going to pay more attention,” Dunn said.  

According to the Small Business Administration, 71% of small business applications submitted to smaller banks were approved, whereas the approval rate at larger banks was 58%.  

Wraparound Services for Small Businesses

Sanders discussed different services that small business owners should proactively look for from their bank or lending relationships. The main thing he suggests is looking for advice. 

“When you look at Grow Michigan II, one of the taglines we promote is bridging the economic gap for all with capital and advice. The thing I like to highlight is the ‘all’ and the ‘advice,’” Sanders said. “Capital is one factor, but what they [small business owners] lack sometimes is advice, and sometimes that’s more important than the capital,” Sanders said. 

Sanders believes banks, capital sources, and non-traditional lending sources like Grow Michigan II should build a relationship with borrowers because it gives them insight into the businesses they are looking to fund, including why they started their business, how they are running their business, and what their short-term and long-term goals are. Having this knowledge helps them tailor advice to best help businesses grow. 

According to Dunn, financial institutions that do not provide advice and will lend based on a credit score could be a sign of predatory lending. Predatory lending is when a lender offers a loan with few barriers except for a high interest rate, making it easy money.  

“People will create a lending model based on a FICO score and earnings, and they’ll throw money at you. It’s not a high decision type of lending. What’s missing sometimes with that type of lending is there’s no consulting role. They’re not helping you as a businessperson to guide you into those questions you should be asking,” Dunn said. “You need a consulting role to help small businesses succeed.”   

In addition to finding a lender that provides advice, Sanders also stressed that borrowers should not start a relationship with lenders with a “beggar mentality.”  

“Know that we are going in with a great business plan, [and] that they are looking for us as much as we are looking for them,” Sanders said. “You want to make sure you work with an institution that has developed a track record. You want to do your research and know that you have options. There’s a lot of liquidity out there, and banks, financial institutions, and mezzanine debt funds like ours are looking for good borrowers,” Sanders said. 

The New Lending Environment

Smith shared what financial lending looks like today, amid COVID-19 and new FinTech developments, compared to what it looked like pre-COVID-19.  

“A lot of innovation happened,” Smith said, “Specifically, I think we saw a unique time where no matter the company, who ran the company, the revenue size—everyone was looking for capital to survive the shutdown.”  

Even though almost every business felt the pinch of the pandemic, Smith said that minority-owned businesses faced a unique but unsurprising barrier—one that was not caused by the pandemic but was highlighted by it. They faced the challenge of accessing capital, especially regarding receiving Paycheck Protection Program (PPP) funding. 

“We saw the emergence of what I’ve been labeling as the ‘robot banker.’ The silver-lining will show what automation could do to benefit minority-owned businesses by removing some human involvement that could perhaps explain some of the disparities we’re seeing in the businesses of the same types, similar revenues, but different colored founders,” Smith said. 

Another thing that came out of the pandemic was that foundations switched their funding criteria and made exceptions to get businesses through the pandemic outside of their objectives and pillars. 

“Before, during, and after COVID, we started to see intentional funds like ours, a non-traditional lender, the Clear Michigan Impact Fund, that said, ‘You know what, we believe the U.S., below-the-middle market businesses, especially Black- and Latinx-owned businesses, represent a large, attractive lending opportunity,’ so we stepped in,” Smith said. “Especially, if you look at the gap in GDP in a region like Michigan, where we could’ve been $29 billion stronger in the 2014 study—a 13% increase in GDP—if the racial gap in income had been closed.”  

Advocacy for Small Businesses

Cohen shared that there is ample funding coming into the state of Michigan at the local, state, and federal levels. However, without the assistance of technical service providers and lenders who share what is needed from businesses, organizations like MEDC will not know how to structure these funds to make the most significant impact.  

“We want to hear from the ground level what’s needed out there. That’s where the activity comes in. We recognize as a state that we are not on the ground. We’re one step removed from what the market conditions are right now, what borrowers and lenders actually want,” Cohen said. “We have been constantly reaching out to each and every one of those groups to figure out what is needed and how.” 

Ultimately, Cohen shared that the best advocacy comes from making sure small business owners stay in touch with local service providers. 

“It’s a once in a lifetime opportunity to utilize this funding to make an impact…to make sure we are going to use this money in the most impactful way we can,” Cohen said.  

Overcoming Barriers to Access Capital: Action Items

According to Dunn, the first thing small business owners should prepare before asking for financial assistance is a strong business plan. 

“When the lender is looking at ‘Can I support this business?’, but most importantly ‘How carefully considered is the business, how well-planned out, what’s the likelihood of success?’, I would suggest that with a very solid business plan, the likelihood that your business will be successful, it goes up tremendously as compared with ‘I have an idea. I’m just going to launch this,’” Dunn said. 

The business plan can include various details, such as the past, present, and future of a business, what it has made to date, what the projections are, and assumptions to those projections. According to Smith, the latter is one of the most essential details. He believes being able to walk lenders and investors through the assumptions is key. It will show them that you are being considerate about making sure you’re in a place to grow your business and have people around you who can help you build your business. 

Another important thing to consider when seeking capital is knowing what you are asking for and why. 

“Are you able to explain how you will spend every single penny? Even if those assumptions aren’t all the way true, it just shows that you have an understanding of how you’re going to invest capital into your business to grow to your next step,” Smith said. 

Sanders also recommends business owners remember to share their personal stories and personal credit when developing a relationship with lenders and not only to highlight their business accomplishments.  

“Your personal story, your personal credit, all the things—when you’re a small business, until you get to a certain level of scale, we are looking at you as an individual, separate and distinct to some extent from the business,” Sanders said. “We are looking at who the jockey is riding the horse, with the horse being the business.”  

This step includes making sure you are creditworthy by keeping a score in the high 700s or low 800s. It also means making sure when someone Googles you or your business that nothing derogatory comes up. 

“Let’s not forget how important the personal aspect of you tied to the business is, as well,” Sanders said. 

According to Cohen, one of the last things small business owners can do to find capital is take advantage of existing resources available with organizations like the Small Business Development Center (SBDC). They will be able to provide insight into grant programs and resources across the state of Michigan. 

Overcoming Systemic Challenges for Minority-Owned Businesses

“We are seeing this shift in sentiment from corporate America and just institutions around the importance of racial equity, especially as it relates to the credit market,” Smith said.  

Organizations like the Clear Michigan Fund, Grow Michigan Fund II, First Independence Bank, Invest Detroit, and MEDC provide opportunities for Black- and diverse-owned businesses to overcome institutional barriers to accessing capital. 

At the Clear Michigan Fund, Smith shared they focus on the “network effect,” which is when a small Black or Latinx business comes to them with a plan on how they want to grow, and the Fund identifies companies they are trying to build a bridge to and helps them connect.

“A lot of large corporates are also making these intentional efforts to diversify their supply chains. Their procurement departments are really taking it serious. There’s this relationship that’s starting to build on both sides for lenders, for companies, as well as those large corporates looking to give opportunities to more minority-owned businesses,” Smith said. “And it’s not a charitable act. It’s an act of just finding these businesses and giving them the contracts. These businesses have been doing the work, continue to do the work, and they just need the capital and that bridge to be built to then show that they can do the work.” 

Grow Michigan II and First Independent Bank are also working to provide capital to more minority-owned businesses through a partnership. To close the equity gap, Sanders shared how Grow Michigan II put forth $40-$50 million, with at least 50% being targeted to minority-owned businesses. 

Jones also shared how Invest Detroit provides capital to businesses located in Highland Park, Hamtramck, and Detroit, or cities with a large minority population. In addition, Cohen shared there is a significant focus on providing federal funds to socio- and economically disadvantaged businesses in Michigan.   

“We’re in a really unprecedented time where we have institutions, corporates, and a lot of players that are starting to shift their focus and understand the value of closing this equity gap,” Smith said. “As a minority-owned business across the country, especially in this region, it’s really a great time to tap into those resources, find those capital sources, but also come ready with your plan to be funded, because there’s a lot of investors and a lot of funds that are looking to invest in some great businesses.” 

View the How to Access Small Business Funding webinar here.

Audience Q&A Responses

The panelist also answered several questions from the audience after their presentation. See some highlights below.

Where can I find resources and contacts discussed?

In addition to the “ask” what are the typical repayment terms?
Terms are flexible as we (CVIF) work with our portfolio companies. For example, we’ve offered six months interest-only terms to start and then principal/interest payments for the remainder of the term.

Are there any grants as opposed to loans?
Check with your local EDO (Economic Development Organization) or Small Business Development Center (SBDC) for further information on grants.

How can we get help with our business financials?

Many small businesses were effectively left out of the many programs available because at the local level, the organizations responsible for allocating funds made decisions based on their own organizational biases. As a result, a LOT of small businesses, solo-preneurs, and seeds of potential were left out and many went under. What do you envision doing differently going forward so we don’t continue to see the sparks of great potential snuffed out by rigid rules and metrics that perhaps unintentionally but systemically discriminate and crush innovative visionaries?
With new programming, MEDC will be making intentional efforts to focus a large share of its programming on micro-businesses (less than nine employees) and socially and economically disadvantaged groups. Prior to programming being developed, we are still awaiting guidance from the federal government on how the funding is to be used.

Are there any capital resources that support low credit score individuals, lack of collateral, lack of 10% down, or that can’t support high interest rates? Mainly these are less than 10 employees, needing an average of $25,000. These are underserved individuals mainly.
Invest Detroit is a potential option since it has removed credit scores from its review. Opportunity Resource Fund is also a great resource.

Also left out grant and financing programs are business service companies in Michigan with over $10M in revenues and 250 employees. What is available for such companies?

What does CDFI stand for?
Community Development Financial Institution. They are a community-based lender that generally has more lenient credit standards while offering more technical assistance than a traditional lender.

Does Grow Michigan 2 fund or loan to math tutoring businesses?
Yes; Grow 2 would consider providing a loan to a math tutoring business.

How does a micro business that also is community driven access these capital streams?
Visit ProsperUS Detroit.

Blue Cross Blue Shield of Michigan is the sponsor of the event series.