The Unequal Opportunities in Small Business Lending
A Candid Conversation Between Two Female Fintech Executives
In a recent video call, Denada Ramnishta, SVP of Lender & Partner Strategy at Lendio, sat down with Opportunity Fund CEO, Luz Urrutia, to discuss small business lending and the gaps that exist for underrepresented small business owners.
The following transcript has been edited for length.
DR: I cannot tell you how tickled I am to be doing this with you and getting to talk to you — sort of the new face-to-face. So thank you for doing this with me.
LU: Absolutely! Thank you for asking. I was looking forward to meeting you face-to-face, and here we are.
DR: Before we dive into Opportunity Fund, I would ask you for everyone’s benefit, to talk a little bit about your background and what drew you to finance.
LU: It’s hard to believe, but since the age of four, I always told my parents that I was going to be a banker. It had nothing to do with anything other than the fact that my parents were entrepreneurs, and my mother used to go to the bank every day. Every time she’d walk out of the bank, she’d have this happy face and literally, that was what I planned — I planned to be a banker.
I’m originally from Caracas, Venezuela. I came to the U.S. in the early ’80s to finish my undergraduate and get my MBA. I first started working for Wachovia Bank, where I would spend 18 years (Wachovia is now Wells Fargo). I asked for a credit card. I’d been an adult finishing my undergraduate and they turned me down because I didn’t have credit. I thought that was odd that they were willing to give me a job, but they wouldn’t trust me with a $500 credit card. I quickly recognized how difficult it must be for immigrants, and people who don’t have credit. So I thought one day I would make sure that I build a financial services company that is all-inclusive, that brings everybody in and helps people to start their own path.
After a really successful career at Wachovia, I realized that I was serving some of the same people that hundreds of other banks were serving, but the people that needed it the most were not getting served. So I made the decision to find some friends and family and go open a bank for the underserved. When I was raising the money, I went to ask for capital with some of the executives that I had hired. I didn’t get all the money, and my mother said to me, ‘Do you wonder if the reason why you’re not getting the money is because you’re a woman and all those executives you brought with you are women?’
I was dumbfounded. I asked, ‘How could you possibly say that?’ And she said, ‘Well maybe you need to take one of your board members who is a man and see what happens.’ Sure enough, the same business plan, walking into the same company in New York, and we got three times the amount of money we had been offered before.
So all of that led me to the journey that I’ve been on for the last 17 years, which is really to get people that don’t have the same level of opportunity access to the responsible financial services that they need. Because I believe that financial services, properly structured and properly delivered, can have an everlasting impact on the lives of individuals.
DR: We share a lot of commonalities in terms of our journeys in immigrating to this country for a better life. Along the way, understanding that there are opportunities to change the path for others who come after us so their journeys are better. So when we think about the minority-owned businesses, immigrants, and woman-owned businesses, what are some of the barriers that exist that prevent those individuals from access to capital?
LU: One of the things is these segments generally do not have long-standing banking relationships. Growing a business takes capital, either in the form of equity or loans. To access loan capital, you need a credit score and you need collateral. Otherwise, banks won’t lend to you, and other non-bank lenders may not either. If they do, in many cases particularly with lenders that are not responsible, they are really preying on businesses — charging exorbitant rates that are ultimately destroying businesses.
We also cannot ignore discrimination. It’s the elephant in the room. We have seen that there is a systemic bias in our financial system. Look at you and I, we know the idea that immigrants, people of color, or women are lower credit quality is not true. We have proven that we can lend safely and profitably into those communities.
So I think that there are a number of things impacting access, but the fact is that collateral and lack of credit history are at the top, and then generally immigrants and people of color just don’t get a fair shot.
DR: Yeah, understood. Let’s talk about the other elephant in the room, which is COVID-19. How have minority and underserved businesses been affected through COVID differently?
LR: You know entrepreneurs of color have been the hardest hit, dramatically so. 2.2 million, or 15 percent, of the nation’s small businesses are currently closed due to COVID-19. Unfortunately, minority-owned businesses are the ones that are bearing the brunt, with more than 26 percent of black-owned businesses and 19 percent of Latino businesses closing.
So the full economic impact from this pandemic was bad and it’s worsening, particularly for businesses that are underserved or are operated by immigrants, low-income entrepreneurs, women, and people of color. I think that the tragedy of all this is when small businesses fail, the owners, the families, the employees and their communities all suffer.
So it’s this ripple effect that we’re seeing right now. Businesses now are going to have to think about how they pivot. They’re going to need new working capital so that they can rebuild, restart, regenerate, and that’s the difficult part. So those businesses that have the opportunity to pivot and to reopen, but they’re going to need a lot of help and a lot of support.
DR: I hear you. So let’s talk a little bit more about Opportunity Fund, its mission, and how it balances risk management along with its mission? Is it even an issue?
LU: It is. The fact that we’re a nonprofit doesn’t mean that we can’t strive and shouldn’t strive to be sustainable. As a matter of fact, that is how we can have impact, is by being self-sustainable. It’s really important to understand that we lend money to small businesses that we believe can pay us back. So we underwrite every business loan, we report credit to the bureaus, and we want to make sure that we’re either helping people get credit or improve their credit score. So that’s why it’s important that when we make a loan, that we have certainty that the borrower can afford and can pay us back. We believe that when our borrower succeeds, we succeed.
One of the reasons as a nonprofit that we are able to provide lower rates is because we have lines of credit at very low costs from banks that offer Community Reinvestment Act lines of credit. That’s sort of our lifeline. That’s one of our core competencies is our ability to borrow at low rates, because we can transfer those low rates onto the lending that we do.
As a non-profit, we also raise philanthropy that helps us subsidize very small loans for shorter terms that are not necessarily profitable. So we are a mission organization, that’s how we began, but we don’t lose sight of the fact that we are a lender and that we have to comply with policies, procedures, technology, data and analytics; all of the same things that you would see at a for-profit lender. At the end of the day we’re dealing with people’s futures, and that’s a big responsibility.
DR: Yeah, and that sustainability ensures that you can continue your advocacy for the population that you serve — the underserved. Advocacy has been a big part of Opportunity Fund’s mission. What are you working on right now? What can or should other lenders and leaders in the industry get involved in?
LU: Well a number of things focused on making sure that the lending space is healthy and functions for all, not just for some. Things like the Borrower Bill of Rights, the Federal Truth in Lending Act, CRA reform and CDFI allocation.
I personally have been very active in lobbying with the CFPB to implement section 1071 under Dodd Frank because I believe that you can’t manage what you don’t measure. Without knowing what kinds of loans are going to what populations and what types of products are they receiving, it’s really hard to understand there are problems. We know there are problems, but I do believe that light is the best of disinfectants and bringing clarity to the small business lending landscape is really important.
DR: Yeah. I love that effort around measurement because as you said, you can’t really fix what you don’t really recognize. So obviously there is a big drive for CDFIs to support equal opportunity lending, but I’m also a strong believer that it is the responsibility of every player to play their part in equal access to capital. In an ideal world, what does truly equal opportunity in lending look like?
LU: So to me, it’s again when there’s actual data recording the evidence that banks and all lenders are deploying at a minimum, equal amounts of capital to minorities, people of color and women that they’re deploying to whites. Whether it is mortgage lending, small business lending, consumer lending, there’s plenty of evidence to say that this is not the case, we’re not even close. So equal opportunity is when all that can borrow and that can repay a loan are given the opportunity to take a loan.
DR: Yeah, amen to that. So before COVID, we were about to gather in Salt Lake City at Lendio with other CEOs in the space to really talk and tackle issues that pertained to all of us and our customers, right? That didn’t happen. COVID ensured that, but I had this vision of you being there and addressing your peers, the leaders and the CEOs of these lending institutions. What would you say to them? What would be one or two messages that you would have to say to them around this issue?
LU: First and foremost, do they recognize that there is an issue in their organizations? Are they doing everything that they possibly can in order to give equal access the way that equal access should be applied for every small business owner? They should be looking at their lending practices, at their policies, they should be understanding data. When they’re looking at their mortgage portfolios, their small business portfolios, how do they know who they’re lending to? And when they see disparities, when they understand what the obstacles are, they should address the obstacles. They should put a plan in place, and they should resolve it.
I think there’s a lot of talk right now because of everything that our country is living through. It started with COVID, turned into an economic crisis and then launched into racial inequity. You know the situation that had been around for 400 years, it just blew up in the last month or two because of the tragic events that happened. I think for every CEO, for everybody that’s given the honor to lead an organization providing services to individuals in their communities, it is our responsibility to understand what are the barriers and what are the obstacles that are stopping us from being fair and providing access to everybody equally. Once you understand that, being open about it internally with the staff, externally with community partners, and with others and saying, ‘We are going to put a plan together and we need help to make sure that we are being held accountable.’ That is what a CEO should be doing.
DR: That’s a great message. It’s interesting because when I think about this, as you know, at Lendio, we have been able to help over 100,000 customers with PPP loans and that’s something that we’re very proud of. But there is one question that our CEO, Brock Blake, asks consistently, and it’s not how many we have funded or where we’re at in funding, but how many remain that we can’t place. That resonates with me; how many have we not saved?
The last question that I have for you is one that you tackled, but I would be remiss if I didn’t call attention to it one more time, because it is so inspirational. And frankly it goes beyond just our industry in general, but how does, or how has your background impacted the way that you lead your company and your people?
LU: You know, I am where I am because a lot of people gave me opportunities, and so I don’t forget that. I don’t forget my roots. I firmly believe that we’re here for a reason that’s much, much bigger than ourselves. So I always try to think ‘how can I help solve a problem for someone or a business?’ When it comes to Opportunity Fund, even as a nonprofit, I always try to keep a balance between the mission and the sustainability of the organization. I strongly believe that in order for an organization to continue driving impact at scale, it will start with the mission and then allow the mission to drive the direction of the organization. I always say, if we’re not sustainable, we can’t stick to our mission, but without putting our mission first and foremost, we will not have a successful business. And I think that’s not just for nonprofits, I think that goes for any business or organization.
DR: Well it has been such a pleasure speaking with you. I have to say that as proud as I am of what we’ve been able to achieve working together to really help minority-owned businesses, what I’m most excited about is what lies ahead because we have so much work to do. And through this partnership, we’ll continue to hone in on giving others the chance that both you and I were given through this journey, right? So high-five to that, thank you for your time.
LU: Thank you Denada, and thank you for your partnership. To you and Brock and everybody, it’s really an honor to have an organization of your caliber working with us. Thank you.
