Latino communities may face a generational setback in growing wealth, as the pandemic-driven downturn exacerbates an already present gap in funding for their small businesses.
Juan Rios sits among the buttonhole, tacking, and sewing machines at his business Chicago Custom Tailor Shop on San Antonio’s North Side.
The four room shop is a snug fit. There’s little opportunity for social distancing. The sound of a single sewing machine floats through the transom from one of the small rooms behind Rios. One of the tailors was altering some pants.
The tailor cuts the pants loose from the machine and lays the scissors down with finality.
They can do anything you need, Rios said over the sound. At that moment Rios was considering trying something he’s never been able to do in 24 years — get a business loan.
“It’s gonna be tough. Being a small business like me, nothing coming in already. Gotta pay the bills anyway,” he said with a thick accent.
Rios moved to San Antonio from Chicago 25 years ago and even before that he used personal loans to fund his businesses — some with as high 18% interest.
The banks told him his business was too small, he remembers. The shop has never had more than seven employees at a time, and is now down to two plus him. The few times he attempted the loans influenced him to stop trying.
“I do not know exactly what it is. We are too small and they [may have been] afraid we are not gonna pay for it. That’s what I think — part is discrimination probably,” he said.
Bank loans to small businesses under $100,000 dropped across the board by nearly 50% between 2007-2018, according to federal data.It shows small, minority-owned businesses struggle to access bank financing.
The Federal Reserve shows Latino business owners like Rios are more likely to face funding gaps, compared to their white-owned counterparts, and then turn to personal loans and credit cards.
For Latino business owners — this downturn is looking bad according to Noel Poyo executive director of the National Association for Latino Community Asset Builders.
“This is going to be a long term macroeconomic hit on the U.S. economy. And then a sort of generational asset destruction for communities of color and low-income people in particular.”
The great recession set Latinos back a long way, and he said this could be worse.
The good news is the nation knows we need to get cash into the hands of business owners; Poyo lauds the idea of the paycheck protection program, the $350 billion for small businesses to keep people on the payroll.
The bad news is that by largely going through banks, the government is leaving communities of color —- communities less likely to have an existing relationship with a bank — out.
“It’s not about not having good enough access. It is being shut out entirely,” said Poyo.
He compared the flow of money to the game Plinko, from the show The Price is Right. Contestants drop a puck down a giant board with pegs. The puck hits the pegs in seemingly random ways until it falls into a slot labeled with a certain amount of money
In Poyo’s analogy the puck is money, and it rattles around eventually landing in someone’s account. The accounts of low income, and people of color’s accounts are on the board.
“And so if dollars are all being channeled into certain baskets, we need to think about rearranging the pegs or using a new board or however you want to strain this metaphor,” he said.
One way to do this is by pushing the Treasury and Congress to use Community Development Financial Institutions.
CDFIs aren’t banks — though at times they are federal credit unions. CDFIs offer loans to underserved communities. Data from the University of New Hampshire shows roughly 80% go to minority or women-owned small businesses, or are in economically distressed areas.
But only a fraction of the more than 1,000 CDFIs are certified to loan these federal relief dollars.
“These are already Treasury-certified financial institutions,” he said. “They didn't get certification from Treasury because they were like, you know, walked off the street.”
Poyo and other advocates want the Treasury to green-light all these institutions. Congress is considering a second infusion of money into small businesses.
The San Antonio-based CDFI LiftFund is going full steam offering the relief loans. But the organization only offered around 1,100 loans across 13 states in 2018. The scope of the current downturn is far greater than it can handle or may even have capital to lend.
“That is why today we have announced a commitment of $50 million for loans to small businesses across Texas to continue our long standing support of this vital engine of Texas, Texas and economic growth and employment,” said John Waldron, Goldman Sachs Chief Operating Officer.
The firm announced $25 million of that would go to the LiftFund. — to keep those dollars flowing.
Goldman Sachs is putting $550 million towards CDFIs nationally, but it isn’t clear if it will be enough for these micro businesses that have been devastated by the downturn.
Advocates have been calling on the Treasury to make upfront funding available to CDFIs to bridge the gap.
Juan Rios at Chicago Custom Tailor Shop didn’t go through Lift Fund and he’s begged off bank small business loans for years.
“If you wanna make a dollar, you have to work for a dollar. If you're gonna wait three hours for someone to tell you something in the bank, you're losing money,” he said.
And there is no guarantee.
“No guarantee at all,” Rios said.
Thankfully this time he says the bank came to him. Comerica bank emailed him and he filled out his PPP application in recent weeks. He hopes he receives $25,000 soon.
Paul Flahive can be reached at Paul@tpr.org and on Twitter @paulflahive.
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