Lending in a Pandemic
By Maribel Garcia + Andrea Avila
It’s hard to lend in a pandemic, especially when lending to entrepreneurs from underserved communities. For us at Inclusive Action, this was never more evident than last week; we were processing an emergency grant and loan for Mario, a street vendor that has been selling nieve de garrafa (artisanal, hand-churned ice cream) for over ten years on the corner of Dozier Street and Ford Boulevard in East Los Angeles.
Before finalizing each loan, our economic development team works with each client to help them and their businesses get “loan ready.” This is done through what we call the pre-loan technical assistance phase, where we help clients complete their loan application and compile financial documents. It is a crucial step for those seeking to help historically underserved communities, who often lack access to services like tax preparation, accounting, and even basic access to technology. Mario is one of many entrepreneurs with whom we have worked to overcome barriers and access our low-interest loans.
While assisting Mario during the pre-loan technical assistance phase, we learned he had not filed tax returns for the previous year. Mario had a number of negative experiences with his tax preparer and had grown suspicious of their services. He suspected he was a victim of tax fraud because his son was denied financial aid at his college due to a “red flag” on his tax returns. This wouldn’t be a surprise, as many Black and Brown communities are preyed upon by predatory financial services; Reuters reported nearly a decade ago that minorities are more likely to be targets of predatory financial practices and unfortunately these practices continue.
To help Mario get his taxes in order, we connected him to Maria, a tax preparer who provides free services via the IRS’ VITA program. Maria discovered that Mario’s previous tax preparer had unethically prepared separate tax returns for Mario and his partner; not because his partner needed to file a separate return, but likely because the preparer wanted to receive the extra filing fee. Mario disclosed his self-employment income but his preparer instead forged W2’s which triggered the “red flag” for fraudulent activity that prevented his son from receiving financial aid. Mario had no idea that this was going on for nine years. On the contrary, he thought he was paying more for quality service.
Another barrier we helped Mario overcome is his lack of income verification. In a typical year, we work with loan applicants that lack financial statements and help them document their earnings. We reassure clients that they can indeed make their loan payments and that their businesses will grow from the input of healthy capital. This, however, is incredibly hard to accomplish because of the burden that COVID-19 has placed on low-income entrepreneurs like Mario.
Like many others, Mario had difficulty helping us document his current month-to-month financials because he simply would not deposit his cash earnings into his bank account. Instead, Mario would take his cash earnings directly to his landlord so he could pay portions of his past due rent. Many of the entrepreneurs we serve have had similar issues. Our clients are struggling to pay what they can so they can keep their homes. Their priority is, rightfully so, not to prove they are good borrowers but to provide for themselves and their families. It is hard to demonstrate an ability to repay and manage the hardship of COVID-19.
Experiences like this remind us that as we move into 2021, small business lenders and community development practitioners, like ourselves, must meet community members “where they are”. Our Program and Operations Director, Eva, always reminds us to ask - “whom does this serve?” - when working with our clients. The way we design our programs and the expectations that we have of our clients must be revised to serve them if our goal truly is to help them recover.
Here are a few adjustments that we’ve made since the pandemic began:
Increased pre-loan technical assistance. Just like with Mario’s case, we need to help people get help. COVID-19 presents new challenges to find resources, convene in public spaces, and even submit documentation, especially for those who don’t have access to technology. Assisting people with pre-loan technical assistance helps our community access what may be available;
Appointment based office hours with access to printers and scanners for documents. Submitting applications and documents online can be a burden for the population we serve. Some applicants do not have access to smartphones or computers. We need to provide alternatives;
Applications processes may need to be redesigned. Applications should be as simple as possible and should be available in a borrower’s primary language. In helping applicants fill out applications for relief aid, we ask ourselves “whom do these questions serve?” In many instances, they make the applicant relive a traumatic experience. If the purpose is to help those most in need, the process should be seamless for them. We do not need to overwhelm applicants with questions that only serve our desire to provide metrics for others;
In-person outreach still works! Of course, there are a number of implications to this. Our team members need PPE and proper protocols to keep them safe. This in-person outreach also requires new ways of approaching people and building relationships behind a mask. Many people are suspicious! This is, unfortunately, because many people have been taken advantage of during (and of course before) the pandemic. We’ve had people refuse our grant flyers because, in their words, “[they’re] not falling for that again;”
Small business and personal expenses are often interlinked. Many entrepreneurs are struggling to pay their rent at their business and home. We have to be flexible when we ask for funds to be exclusively used for business purposes. To continue to work, entrepreneurs need to keep a roof over their heads;
Entrepreneurs need our support to learn to use technology. One of the tools we are using to minimize contact is DocuSign, a new technology for many of our clients. As we go through the lending process, we explain to them what the system is, its usage, and offer to walk them through it step-by-step over the phone. Many of our clients decide they want to learn how to do it on their own. Especially during the pandemic, they’ve come to see the need to learn how to use technology. While ensuring it’s a very easy process, we also reassure clients that we’re available to assist in case they need it. Our goal is to empower clients to use new technology so they can utilize that knowledge in the future.
After weeks of working together, Mario got his Small Business Recovery Grant. Upon hearing the good news Mario delivered fresh mole, chicken, and bread to our office. The gratitude Mario displayed, as with most applicants so far, is immense. It breaks our hearts because it vividly demonstrates that people aren’t asking for a favor. People are asking for real help and opportunity. Real help is hard to get when low-income entrepreneurs are surrounded by predatory services. It is hard for those most in need to secure a lifeline of emergency relief when we weigh them down with the responsibility and burden of providing proof.
It’s hard to lend in a pandemic, but that won’t stop us from making it as easy as possible for our clients to get money.