More Lending for Small Businesses Stuck in Coronavirus Limbo

(Bloomberg Businessweek) -- Community development financial institutions are a special breed of lender. They offer affordable loans and clear guidance to businesses that can’t get either from conventional banks. Many business owners dealing with the ripple effects of the pandemic could benefit from CDFIs but aren’t aware they exist. Pat MacKrell runs a big one called Pursuit, which serves businesses in New York, New Jersey, and Pennsylvania. The 65-year-old organization has three arms that collectively make hundreds of loans annually, for anywhere from $10,000 to $5.5 million. Those include loans it makes through the Small Business Administration’s 504 and 7(a) programs; it has processed about  7,000 Paycheck Protection Program loans since the program launched in March. (Pursuit’s application deadline for PPP was July 31; if the program is extended beyond the SBA’s Aug. 8 deadline, Pursuit is taking applications here.) The president and chief executive officer of the 140-employee Albany, N.Y.-based organization spoke with Bloomberg Businessweek about persevering under difficult circumstances. This interview has been edited.

How worried should we be about the pandemic’s effects on small businesses today?

Very worried. I’ve been using a Winston Churchill quote internally: “Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.” That's sort of where we are. A lot of businesses that made neighborhoods strong are going to suffer more. A lot were a breath away from failure before Covid started. They didn’t have strong balance sheets before Covid; they’re not sitting on a pile of cash. They’re hand to mouth. Many may close. 

What needs to change to get funding to minority business owners, who have fared worse than their White counterparts? 
The No. 1 reason that small businesses don't get loans is because they don't apply. You have to overcome the long-embedded and well-reasoned sense in many minority communities that they're not going to get a fair shake at a bank. You really need banks to actually make loans and maybe celebrate them to help people understand. The reality is: Many minority-owned businesses get the runaround at banks. Owners seeking loans don't get a fast no or a fast yes. They get bounced around. They try to get someone on the phone, and they can't.

Also, minorities have been adversely affected by credit scoring. If someone has a low credit score, you have to have someone look behind the scenes to see whether their 610 credit score is the result of not paying one hospital bill's $25 co-pay that no one in their right mind understands. So many people are impacted by these crazy, crappy charges. You have to be willing to figure out what is really going on.

That’s Pursuit’s philosophy?
You tell us what you want, and we'll suggest the cheapest way for you to get it done. We’re industry agnostic: Unless you're selling sex or drugs, we're in it. We make loans available to businesses that would not otherwise qualify for credit under reasonable rates and terms. We are an alternate lender—not a depository institution, not a bank. We offer our clients capital and business advisory services with the goal that they become attractive to banks for conventional financing.

Why don't more small businesses know about you and your counterparts?
We're not spending money to put up billboards or do TV commercials. Some of the biggest frustrations, as a CDFI, is when financial institutions or community groups don't make that little bit of extra effort to identify us as someone that can help small businesses. Conventional banks generally aren't saying, “Sorry, we don't lend to businesses like yours, but we do lend to these entities so that they can lend to businesses like yours. Here's their contact information.” There's no real incentive for banks to do that.

How can business owners find lenders such as yours?
The SBA has a program called Lender Match. If a business is unable to get financing, they can use the tool. It will ask them for some basic information. The info will be circulated to entities that have expressed a desire to do that type of lending. We do a fair number of loans through it. It's a great tool from a national perspective. In addition, almost every county across the country has an economic development department that can make suggestions.

What should you keep in mind as a prospective borrower? 

Beware of online lenders. There's some really bad dudes working in this space. There's some online lending that is exorbitant, predatory. I think many people who run small businesses get euchred into the online lending space because they're exhausted from working all the time. They’re trying to find money, it's 11 o'clock on a Thursday night, and they have payroll to make on Friday. They're intellectually and physically exhausted from working. They're vulnerable.

How do your rates compare with other so-called alternative lenders?

We're way under online places that charge 40, 50, 60%. Those are crazy rates. Our rates are generally limited by the SBA at prime plus 2.75%. So we're between 5 to 7%. That's appropriate for us in light of the risk we're taking. We tend to deal with riskier loans. Some prospective customers push back. They say: “You're charging 7%. I understand people are getting money at 3.5%.” I say, “Yes, but you're not a 3.5%-risk borrower.”

Should people who haven't applied for PPP do it if there’s another extension or another round?

If you're eligible, you're a knucklehead if you don't apply. If there is going to be a heroes’ and a villains’ list for the program, all of these wannabe Paycheck experts who have been scaring the bejeebers out of all these businesses will be at the top of the list. They scared and discouraged people from exercising a right that they had—that only a fool would pass up. The worst thing that can happen is that you have to give the money back and you pay 1%.

What other loan programs could help small businesses? 

In the near term, businesses are going to need some working capital beyond the Paycheck program. They should look at the SBA’s 7(a) program to use for working capital or to refinance online loans or credit cards. They could use the 7(a) program to consolidate payments and reduce the interest to a single-digit number and get more time to pay. The same program could work for renovations to make the business Covid-compliant or change its model from physical retail to online subscriptions, for example. 

What else should business owners to keep in mind? 

Lenders will likely be looking at management more closely than ever before, because the normal measure—historic cash flow—may not be there. They're going to ask: How did this business cope with the unexpected? How did it survive, thrive, whatever? They’ll evaluate the strength of management.

The good news is—when we have a therapeutic or a vaccine—those businesses that have managed to survive, it's going to be a blowout. There will be a significant number of startups. There are also going to be people crawling into the carcasses and skeletons of failed businesses to turn them into viable businesses. Instead of investing $150,000 to open a bar, they drop $25,000 to take over a closed one that still has its coolers and glassware and signage. They might not even change the name. That sounds cold, but that's the reality. There will be a resurgence of small businesses because there will be demand.

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