Three things financial institutions can do to ensure we recover from this crisis, together

In mid-March, the markets had already dropped around 25% as the coronavirus spread across the country, shuttering states and closing businesses. The Federal Reserve responded with a $1.5 trillion injection into the markets to ensure the economic crisis didn’t worsen. Almost exactly a month later, in mid-April, the $350 billion Payroll Protection Program had run out of money. Many small businesses were unable to get loans they needed to keep their doors open.

Additional funds were eventually allocated to re-open the program, but for many businesses and communities, it was too little, too late. This is especially true for Black and brown communities, hit hard by the pandemic and then again by the civil unrest associated with the national protests against police brutality. Black-owned firms have lower-levels of revenue and Black entrepreneurs are less likely to get loans than their white peers. Recent research on the Payroll Protection Program shows that up to 90% of businesses owned by people of color have been or will likely be shut out of accessing its funds.

This stark contrast — immediate, overwhelming relief for financial institutions, and slow, limited support for small businesses, and especially businesses owned by people of color — has people rightly frustrated and angry at our financial system. Why do banks get the relief they need, when they need it, but small businesses, which employ a little under half of the people in this country, have to jump through hoops for smaller amounts of money?

There are many challenges with our financial system, but ultimately it is a tool to be used to reach a goal. That goal can be greater and greater short-term profit, or it can be used for long-term, equitable value creation. If we do want to have a system in which small businesses and communities thrive, we can follow the example of A10 Capital.

A10 Capital is a commercial real estate financing firm based in Boise, ID, that has recently been helping small businesses access loans through the Paycheck Protection Program (PPP). A10 Capital has a long history of providing loans with a focus on the borrower.

Joe Forney, A10’s Paycheck Protection Program Manager, and his team knew many of the potential small business borrowers eligible for the PPP wouldn’t have existing relationships with banks and therefore have difficulty getting through the PPP application process. “Our customers are great people running businesses that are vital to our community, but many of them can’t afford a CFO or even a bookkeeper to help them navigate the PPP,” he said. To meet this need, they established a funding relationship with a community bank.

They originally offered this service only to small businesses connected to their commercial real estate loan portfolio, but then expanded it nationally. In the first round of funding, they were able to facilitate 800 loans totaling over $200 million, with some as small as $1,500.

In my work at CapEQ, I support financial institutions, governments, nonprofits and other intermediaries to develop programs that leverage the tools of capitalism to help people in need. A10 is one of many examples of financial institutions using the tools they have to do right by people. If you lead a bank or other financial institution looking to do the same, you can learn from A10’s example by doing these three things:

1. Partner with an organization focused on the community –Instead of screening people based on existing relationships, partner with community organizations who can serve as a bridge for those who need it most. Whether a CDFI, community bank or another local group, these organizations have the experience and infrastructure to understand and meet the needs of their communities. A10’s relationship with a community bank allowed them to deploy capital to the areas of high need much quicker than a national bank. (The federal government has already started to take this advice by allocating funding directly to CDFIs in subsequent relief bills.)
2. Align your borrower and originator incentives — The whole point of PPP is to help fellow Americans who are suffering, and it is important those implementing it reinforce that idea. To incorporate this spirit of helping, A10 Capital had agent fees paid to sales associates in two installments. The first half of the agent fee is paid to the sales associate when the loan is issued and the second half when and if the borrower completes the forgiveness process. A10 intentionally set up this compensation structure as an incentive to make sure borrowers are supported through the complicated forgiveness process and can receive the full benefit of the program.
3. Provide a personal touch — People are struggling right now, and they need help and guidance, which A10’s PPP support program offered. Many of their borrowers haven’t had to deal with federal loans before and needed help doing so. If you think this personal touch seems like more than your team can handle now, consider hiring “customer support managers” or similar positions, which can have the bonus of helping those recently laid off.

Unfortunately, we know the need is high right now, and the funds are limited. And of course, before this crisis hit, the playing field was not level and success was often determined by race.

This means that unless we are intentional about focusing on the communities who most need support, those that will recover first will be those that were the most privileged before: those with banking relationships, ample access to capital, and those that are white and well-educated. We are in for a long, painful recovery. But if banks can do the three things recommended here, we can ensure that as we climb out of this hole, we will do it together as Americans.