Emergency Loans Should Eliminate Barriers, Not Create Them.
For almost a year now the COVID-19 pandemic and economic crisis has ravaged small businesses across Los Angeles.
In response, many CDFIs, public agencies, and other lenders have launched “emergency loan” programs to help small businesses remain solvent. While low interest loan programs and business coaching services are needed now more than ever, effectively implementing these programs requires awareness, humility, and cultural competency to ensure we are not creating more barriers for the people we aim to serve.
As we’ve worked to support small businesses throughout the pandemic, it has become apparent to us that many of them are being deemed ineligible for available resources because of the dire economic conditions they are facing; in particular, low credit scores as a result of relying on consumer credit lines to stay afloat, and net negative income streams resulting from severe reductions in clientele. Throughout the pandemic we’ve asked small businesses to “adapt” their businesses so they remain open and competitive, yet when it comes to emergency loans and relief programs designed to help businesses and spur economic recovery, lenders have not significantly adapted their traditional criteria to meet small businesses owners “where they are.”
Beyond the economic hardship that makes it difficult for small businesses to qualify for emergency loans, there are other issues during the application process that create barriers for small businesses. Many of these emergency loan programs require that applicants present identifications documents such as “DUNS” numbers, Tax IDs, or social security documentation; while we understand that these documents may be needed to comply with regulations, we want to stress that for a street vendor or an informal small businesses obtaining these documents is a major barrier to accessing capital. This burden of identification, coupled with other issues like long application review times and English only applications, only compounds the barriers small businesses face to accessing these important emergency loans.
If most lenders approach their emergency underwriting in much the same way as their underwriting during “normal” times -- heavily weighing credit scores and net positive revenue requirements -- then we risk further marginalizing small businesses and micro entrepreneurs at a time when they need the most support for maintaining their businesses and livelihoods. This approach is unfair to the small businesses these programs are meant to serve and lenders must adjust these emergency programs to truly spur a just recovery.
Lenders must recognize that a crisis of this nature warrants changing evaluation criteria to account for small business owners' economic hardship. With burdensome requirements or the threat of rejection from emergency loan and grant programs, many small business owners are looking for alternative credit resources, unfortunately, mostly from usurious sources like payday lenders or high-interest credit cards.
Inclusive Action began adapting to the needs of our borrowers last year. We modified our loan programs and how we serve vulnerable small businesses during this unprecedented time. And we've even taken steps to design new loan products to better serve our entrepreneurs. We have a lot to learn, but the following are some of our initial thinking on how lenders can meet the moment:
● Re-evaluate lending risk and how credit scores are prioritized. The pandemic impacts everyone's credit score somehow. Moving forward, lenders should consider how a client’s credit is weighed during the underwriting process. Specifically, this means that lenders should:
Account for the negative impacts of predatory loans;
Expect that many entrepreneurs will have a high credit line usage during this time;
Anticipate a high number of credit inquiries;
Expect delinquencies; and
Situate all credit issues within the context of a person’s entire business and character profile. Small business owners are more than their credit score.
● Remove the "positive cash flow" expectation for businesses during the current fiscal year. Many entrepreneurs are showing a "negative cash flow" due to the pandemic. Lenders should not immediately decline loan applications from entrepreneurs who currently have a negative cash flow but should instead review whether they had a positive cash flow before the pandemic and the potential for one beyond it.
● Remove felony disqualifications. Most felonies bear no relevance to a borrower’s financial responsibility. Furthermore, it's an unnecessary punishment for entrepreneurs who may be just as deserving of emergency aid as anyone else.
● Recenter the purpose of "Emergency Loans." lenders should offer emergency loans to entrepreneurs who have a viable chance to survive this emergency; this requires a different perspective when underwriting and providing other resources. A pandemic-oriented underwriting process should consider an entrepreneur's willingness to pivot instead of looking for evidence that they have already made adjustments. Entrepreneurs can document this "willingness" through a written acknowledgment that they commit to ongoing business coaching and information exchange on future health protocols.
While the list is not exhaustive, it is a first step we lenders should take if we are to live up to the demands of equity and economic justice. We've asked entrepreneurs to do so much to adapt to this pandemic economy, but lenders must adapt to meet them at least halfway.