The Cycle Of Disinvestment In Lower-Income Communities

by Claire Trageser, KPBS

It’s not uncommon for people who want to start businesses in lower-income neighborhoods to have trouble getting bank loans. But increasingly, there are investors looking specifically to help businesses in those areas, with the aim of reversing the cycle of disinvestment.

“There’s always reasons to say no to a borrower. We are looking for reasons to say yes,” says Lauren Grattan, a founder of the San Diego-based investment company Mission Driven Finance. She explained that her company doesn’t look at personal credit scores. “We instead look at the validity of the business and how well can you repay from the business earnings.”

Her company’s goal is to fill the gap between more traditional profit-motivated investing and philanthropy that focuses on economic development.

One business that could have used help like this is Project Reo Collective, a coffee shop in Paradise Hills, a lower-income neighborhood of San Diego.

The coffee shop is situated in a small strip mall near a Mexican restaurant and a cell phone store. On most days, the cafe is filled with people working on laptops or hanging out while drinking Mexican mochas or lavender lemonades.

“Project Reo Collective started out as five families who got together … cleaning up the neighborhood here,” says Tommy Walker, one of the owners. “A lot of people in the neighborhood said, ‘We wish we had somewhere to hang out, somewhere we grab a cup of coffee, meet our neighbors, do some homework or study.’ “

You have a cycle that kind of perpetuates that neighborhood being less friendly to business. Businesses don’t get started. So employment stays depressed. The job opportunities aren’t there in the neighborhood. Businesses that are there don’t expand.

Walker says that after a successful first year, he went to a bank asking to borrow $4,000 for an espresso machine. But, he didn’t have any luck.

“They said, ‘No, you guys don’t qualify because you haven’t been around long enough,’ ” he says.

A problem of disinvestment

Having trouble getting a small-business loan like this is typical, according to data compiled by the nonprofit Woodstock Institute in a report titled “Patterns of Disparity.” It shows that between 2012 and 2016, only about one in five businesses in low-income areas across the United States received bank loans or even business credit cards. That’s compared with almost three in five businesses in higher-income areas.

“You have a cycle that kind of perpetuates that neighborhood being less friendly to business,” says Spencer Cowan, the researcher who compiled the data. “Businesses don’t get started. So employment stays depressed. The job opportunities aren’t there in the neighborhood. Businesses that are there don’t expand.”

He says it can also drive businesses to predatory lending.

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