Written by Adetola Olatunji
Access to capital is one of the top challenges that entrepreneurs face when scaling their businesses. Critical for growth-oriented businesses, funding is often crucial for business owners taking steps such as expanding into new locations, hiring and training new staff and purchasing new equipment. However, small businesses, and particularly those located in inner cities, continue to struggle to find the capital they need. Recent ICIC research has addressed this issue, and Goldman Sachs 10,000 Small Businesses and ICIC’s Inner City Capital Connections program work to help bridge the gap between small businesses and finance providers.
Major hurdles inner city entrepreneurs must overcome when accessing capital include institutional obstacles and limited access to resources or information. The historically limited focus on the inner city from traditional lending institutions, noted by Michael Porter as a result of higher transaction costs in these areas, can limit the upward mobility of inner-city entrepreneurs. Additionally, inner city business owners may be less likely than other entrepreneurs to seek a loan. In some cases, this trepidation may be warranted due to credit history, but often it is a result of lack of familiarity with how to communicate effectively with capital providers. A recent Inner City Capital Connections survey found that 35 percent of program participants cited a lack of connection with a capital provider as a major stumbling block on their journey to securing a loan.
According to Fortune Magazine, there are two major reasons that small business loans are traditionally associated with high costs, low levels of efficiency and low representation: 1) lenders can’t find the right borrowers and borrowers can’t find the right lenders, and 2) small business loans are a high stakes game, and it’s hard to correctly determine just how high those stakes are. Private sector players both large and small are starting to take advantage of their unique position to catalyze inroads for entrepreneurs seeking capital. To do so effectively, many of these players use technology as a disruptor.
In an effort to leverage its private sector brand in the small business lending space, UPS Capital recently announced an expansion of its partnership with Kabbage, a technology and data platform that provides small business lending. The partnership both allows Kabbage to leverage the UPS brand and enables the companies to collaborate to use technology to speed up the loan application process. UPS Capital and Kabbage announced this month that they will track the seasonality and health of its customers to provide loans to UPS customers in real time.
A Wall Street Journal article recently reported that Goldman Sachs is in the early planning stages of extending its powerhouse brand to a new consumer lending unit that will offer loans online through either a website or an app. This unit may present Goldman Sachs another way to work directly with entrepreneurs, as it currently does through 10,000 Small Businesses, its $500 million investment in established entrepreneurs through greater access to education, capital, and business support.
While recognizable brands such as UPS and Goldman Sachs leverage their brands and assets to increase the ease and speed of the loan application process, newer players in the space leverage their understanding of underserved communities to help inner city entrepreneurs navigate the high stakes lending game. For example, Camino Capital, started out of Harvard Business School by two brothers, is making a splash for its use of technology to support businesses that traditionally do not qualify for loans. According to BostInno, these co-owners created an online advisory platform that uses a short credit assessment form to assess each business client. By exposing entrepreneurs to loan opportunities that look beyond their credit score, Camino Capital helps clients communicate confidently about their business performance and overcome negative assumptions based on past financial challenges. This strategy is largely impactful in empowering inner city entrepreneurs to surmount the fear of approaching the loan application process.
Small business owners, particularly in the inner city, historically have played on an uneven playing field when it comes to accessing capital. However private sector initiatives, both large and small, are using technology to break down institutional barriers. In its desire to be innovative, the private sector can provide greater access to information and to an easier process for entrepreneurs. With the number of inner city business owners needing access to capital as high as ever, it seems clear that the more private sector players that can get involved in this game, the more entrepreneurs will ultimately benefit.