When it comes to obtaining small-business loans, especially among minority-owned firms, too many Chicago-area entrepreneurs are getting a cold shoulder from the banks.
That’s one of the troubling discoveries from a new report on lending patterns by the Woodstock Institute, a locally based nonprofit research and policy group that tracks community investment trends.
In identifying this shortfall, the report also brings home how essential traditional bread-and-butter bank lending is to neighborhood businesses. Nothing fancy is required, just a commitment by banks to delve deeper into these communities and a willingness to search out good opportunities.
The market is especially ripe with borrowers that require small loans to pay for expansion, hiring or just keeping operations humming during slow periods.
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"Unfortunately, the banks are not as open or as welcoming as they should be," says Dory Rand, president of Woodstock.
Based on loan data reported under the federal Community Reinvestment Act, Woodstock found the number of bank loans to neighborhood businesses in the Chicago area for under $100,000 declined by 49 percent between 2008 and 2014.
Feeling a lot of that pinch are small enterprises in low-income and minority communities. For example, Woodstock determined that between 2012 and 2014, businesses in low-income areas got only 3.5 percent of all bank loans for $100,000 and under.
Many of these companies are established players, not upstarts. They include the old-fashioned essentials like bakeries, home repair shops, house cleaning and food service firms — businesses that contribute to a thriving neighborhood scene.
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Why don’t the banks see more value here?
Realistically, your typical banker probably finds these enterprises a bit boring. After all, we’re not talking eye-popping, high-tech start-ups.
These are also very labor-intensive loans. Bankers have a limited amount of time, so they tend to go for bigger corporate clients with greater growth potential and the promise of generating more related fees.
"I’ve been told it takes just as much bank time and effort to make a $100,000 loan as a $1 million loan," Rand says.
Also, many downtown and regional banks don’t have the physical presence in some neighborhoods they once had. In recent years, scores of bank branches have been closed and replaced by online banking and ATMs.
Moreover, some community lenders have fallen on hard times, because of the home mortgage crisis or their own bad lending decisions, and are trying to regroup.
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The latest example was the former African-American owned Seaway Bank, which was recently taken over by federal regulators and sold to a Texas banking group. How the South Side-based Seaway decides to reconnect with its immediate community remains to be seen.
Because of this churn, lenders can lose a connection to the small-business base that needs them the most.
That’s unfortunate, because when traditional banks are absent, neighborhood entrepreneurs are compelled to find money in other ways.
Often, they stretch their resources by using high-interest-rate credit cards or by tapping the burgeoning number of online small-business sites, which offer fast cash and a slimmed-down application process.
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By the way, those online lending sites are coming under increased scrutiny from the U.S. Treasury Department and watchdog groups. They fear these lenders operate in the same realm as payday and auto title lenders that impose sky-high interest rates, hefty fees and onerous repayment terms.
For example, Woodstock’s analysis of 15 online loans found the interest rates ranging from 26 to nearly 368 percent.
Under the Community Reinvestment Act, banks are required to reach out to all neighborhoods. They also have the privilege of making prudent loans with taxpayer-backed and federal-insured deposits.
The Chicago area’s many neighborhood enterprises offer banks the prospect of making money while improving the lot of some local businesses.
Let’s see how many banks are shrewd enough to cash in on this opportunity.
roreed@chicagotribune.com
Twitter @reedtribbiz
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