Minority-Owned Small Businesses Were Supposed To Get Priority. They May Not Have

May 11, 2020
Originally published on May 12, 2020 5:15 am

The first time Rosemary Ugboajah applied for a small-business relief loan, it didn't go well. She needed the money for her small Minneapolis-based company, which has created ad campaigns for brands like the NCAA Final Four.

So she went to her credit union.

"They were hard to reach, but eventually I got through to someone and they emailed me back saying they can't process the loan because they don't process SBA loans," she said. "I wasn't aware of that."

Lawmakers did set aside $30 billion for smaller lenders, in part with the aim of helping business owners of color — like Ugboajah.

But a new report from the Small Business Administration's inspector general found that businesses owned by people of color may not have received loans as intended under the Paycheck Protection Program. There was no evidence, the report said, that the SBA told lenders to prioritize business owners in "underserved" markets, including business owners of color — something the CARES Act had specifically instructed the SBA to do.

The report also recommends that the agency start collecting demographic information. Without that information for past loans, it will be hard to know how well the program served business owners of color.

Some businesses owned by one person — such as some sole proprietorships, like Ugboajah's Neka Creative — were only allowed to apply for funds one week after other businesses. That put them in the back of the line to get the money, which ran out quickly during the first round.

After trying and failing at two other banks, Ugboajah managed to find one that was accepting applications from new customers, and she quickly applied. But that also went poorly.

"The next week, I got an email from them saying, you know, the money's running out. And they're now just going to prioritize their clients that have borrowed before," she said with a weary laugh.

Ugboajah has applied there again during this second round of funding but hasn't heard back yet.

But she could use the money, and fast — her team is currently working through the pandemic without pay.

"We had a healthy pipeline coming into this year. And as soon as this came down, everything went on hold and then disappeared," she said.

An additional problem for these owners is that their businesses are more likely to be sole proprietorships, according to Ashley Harrington, senior policy counsel at the Center for Responsible Lending.

"When we're talking about businesses of color, most of them are very small businesses. So they're sole proprietorships or they have less than 10 employees or in fact more likely to be a sole proprietorship than any of the other small businesses," Harrington said.

Ugboajah has six people on her team — and they're all contractors — making her business one of those one-person sole proprietorships. African American-owned businesses are particularly likely to be one-person firms.

And relationships with banks matter, according to Michael Roth, managing partner at Next Street, which works with local governments on small-business policy.

"Black- and Hispanic-owned businesses, because of their lack of access to capital from banks and financial institutions and friends and family, are far more likely to use personal funds to finance their businesses," he said. "And generally, that's run out of personal checking accounts."

That could be a problem for some businesses in the program, because some banks would loan only to people with business accounts. So owners without those — who were, for example, running their businesses out of their personal accounts — were shut out.

Ugboajah says that if she doesn't get the funding, it won't take her business down completely, but it could make life harder.

"The main thing that we're on the verge of losing is our office space. But, yeah, we won't go out of business," she said.

But it has already hurt the contractors who rely on her for income, she added: "One of my team members has taken a job with Amazon, for example. But we're still pushing to get business in."

For now, she says, they're working on a new project: to make sure health information about the coronavirus can reach poor and immigrant communities, as well as communities of color.

Copyright 2020 NPR. To see more, visit https://www.npr.org.

RACHEL MARTIN, HOST:

There's a big question looming over the Paycheck Protection Program that the federal government set up. That aid money is not reaching business owners of color. Why not? NPR's Danielle Kurtzleben looked into it.

DANIELLE KURTZLEBEN, BYLINE: The first time Rosemary Ugboajah applied for the small business relief loans, it didn't go well. She needed a loan for Neka Creative, her small Minneapolis-based company, which has created ad campaigns for brands like the NCAA Final Four. So she went to her credit union.

ROSEMARY UGBOAJAH: They were hard to reach, but eventually I got through to someone, and they emailed me back saying they can't process the loan because they don't process SBA loans. I wasn't aware of that.

KURTZLEBEN: Then after trying and failing at two other banks, she managed to find one that was accepting applications from new customers, and she quickly applied. But...

UGBOAJAH: The next week, I got an email from them saying, you know, the money's running out (laughter) and they're now just going to prioritize their clients that have borrowed before.

KURTZLEBEN: Ugboajah has applied there again during this second round of funding but hasn't heard back yet. But she could use the money and fast. Her team is currently working through the pandemic without pay.

UGBOAJAH: We had a healthy pipeline coming into this year. As soon as this came down, everything went on hold and then disappeared.

KURTZLEBEN: Lawmakers set aside $30 billion for smaller lenders with an aim of helping business owners of color like Ugboajah. But a new report from the Small Business Administration's inspector general found that minority-owned businesses may not have received loans as intended because the agency didn't tell lenders to prioritize those borrowers. The CARES Act had rules specifically laying this out. The report also recommended that the agency collect demographic information going forward. An additional problem for these owners is that they are more likely to be sole proprietors. In other words, their businesses are owned by one person, according to Ashley Harrington, senior policy counsel at the Center for Responsible Lending.

ASHLEY HARRINGTON: When we're talking about businesses of color, most of them are very small businesses, so they're sole proprietorship or they have less than 10 employees and in fact more likely to be a sole proprietorship than any of the other small businesses.

KURTZLEBEN: Ugboajah has six people on her team, and they're all contractors, making her business one of those one-person sole proprietorships. Some of those were only allowed to apply for PPP funds one week after other businesses. That put them in the back of the line to get the money, which ran out quickly during the first round. In addition, relationships with banks matter, according to Michael Roth. He's managing partner at Next Street, which works with local governments on small business policy.

MICHAEL ROTH: Black and Hispanic-owned businesses, because of their lack of access to capital from banks and financial institutions and friends and family, are far more likely to use personal funds to finance their businesses. And generally, that's run out of, you know, personal checking accounts.

KURTZLEBEN: That could be a problem for some businesses in the program because some banks would only loan to people with business accounts, so owners without those were shut out. Ugboajah says that if she doesn't get the funding, it won't take her business down completely, but it could make life harder.

UGBOAJAH: The main thing that we're on the verge of losing is our office space. But, yeah, we won't go out of business.

KURTZLEBEN: But it's already hurt the contractors who rely on her for income.

UGBOAJAH: One of my team members has taken a job with Amazon, for example, but we're still pushing to get business in.

KURTZLEBEN: For now, she says, they're working on a new project to make sure health information about coronavirus can reach poor and immigrant communities, as well as communities of color. Danielle Kurtzleben, NPR News. Transcript provided by NPR, Copyright NPR.