How Can Minority Lending Do Better? A Conversation with Henry Childs, II

What can be done to help solve the minority funding gap? Featuring Henry Childs, II: the world’s #1 minority business strategist.

A man's hand protects a hanging scale stacked with coins.

Small businesses owned by Blacks and other monitories have suffered most during COVID. Black and LatinX businesses also face a long history of economic disadvantage when it comes to access to capital and credit.

In this Fundbox podcast, Henry Childs, II, talks about what can be done to help solve the huge funding gap facing Black and other minority small businesses, especially start-ups. Henry Childs, II is the world’s #1 minority business strategist and CEO of the Minority Wealth Commission.

Transcript:

Fundbox:
Currently in the United States, minority small businesses are struggling through a financial crisis being disproportionately affected by the economic impact of COVID-19. With more than twice as many Black and Latinx small businesses failing, as White-owned businesses during the first three months of the pandemic, but this problem goes way back before 2020. Historically on average, minorities have less access to capital and are less likely to receive loans. When they do, they typically receive lower dollar amounts and pay higher interest rates.

What are some of the factors that led to this disparity, and what can be done to help improve minority small businesses' access to credit and other financing? Today, in our Fundbox Podcast, I'm honored to introduce our special guest, Henry Childs the II. He is the world's number one minority business strategist, CEO of the Minority Wealth Commission, and a former National Director of the US Department of Commerce's Minority Business Development Agency, the MBDA. Henry Childs is an expert in Black wealth and a champion in the fight for financing the minority economy. Henry, thank you so much for joining us for this important conversation.

Henry Childs II: Thank you for having me. I'm excited to talk with you today.

Fundbox: Great. Our pleasure. Let's start by taking a look back at when COVID came around. A majority of small businesses were hit hard. In total, about 3.3 million small businesses shuttered, at least temporarily, but minority businesses were hit the hardest. The National Bureau of Economic Research found that COVID-19's economic shutdown caused a 41% decline in the number of African-American owned businesses from February to April. That sidelined 440,000, almost half a million African-American proprietors and entrepreneurs. Latinx business owners declined 32%, while Asian business owners fell 26%, White business owners declined 17%. What do you think was behind this disparity during the pandemic?

Henry Childs II: That's a great question. I think it was really two things. Number one, when the government shut down, only certain businesses were deemed essential. Most minority businesses were not in those. Number one, they were impacted because they're in different industries. The second thing was, as you know, when COVID hit, it accelerated this digital transformation. Unfortunately, most minority businesses, which you mentioned before, tend to be small. Only 2% of minority businesses have earned revenue over of a million dollars and most don't even have one employee. In a digital economy, let's just say you owned a restaurant.

If you shut down, obviously, people can't come into your store to eat, you're going to close, but there're similar restaurants where they stay open were the ones where you go order your food on an app, and then get it delivered through some type of delivery service. That was another one of the problems with minority businesses. They just hadn't transformed into the digital economy.

Fundbox: I know that another problem might be the fact that the PPP was misnamed as the Paycheck Protection Program. The fact that 96% of Black-owned businesses are sole proprietors or independent contractors, I'm sure that it was a while before the news caught on that people were even eligible.

Henry Childs II: The PPP, I'm just going to be honest with you, is a complete disaster. I knew that going forward because at that time like you said, I was running the Minority Business Development Agency. There were two huge areas. Number one, as you know, SBA designates small businesses 500 employees or less now. If you have 500 employees, in my world, you're not a small business, and then they set it up that you have to go through your bank to even get to the PPP. We know that Blacks and Hispanics are historically underbanked. You put those two together, you're competing with these large, small businesses, and you can't get access to your bank, and it was a recipe for disaster.

Fundbox: We'll talk a little bit more follow-up questions about the PPP, but right now I want to focus more on historically what's been happening with minority lending. Black business owners had been at a major disadvantage when it comes to access to credit and liquid capital long before COVID. There's a huge funding gap facing Black and other minority small businesses especially startups. In the most recent small business credit study, Black-owned sole proprietorships were less than half as likely to get financing as of White-owned competitors.

In a 2018 report, the SBA found that the reliance on personal and family savings are the most common sources of financing, especially among Black and Latinx entrepreneurs. However, Black households' median net worth is about a 10th of that of White households. With more limited personal and family savings, Black business owners are also more likely to rely on credit cards, which puts them at a disadvantage because of the higher cost of capital. Lower wealth also results in lower credit scores, which reduces access further to financing options, pushing Black entrepreneurs towards lower financed ventures like sole proprietorships and business types that have lower survival rates.

Henry Childs II: Thank you. You hit it right. There's some systematic issues, discriminatory problems, but it's really the wealth issue that you hit. We've run studies, and if you're a Black entrepreneur, you start off with 1/3 of the startup capital gap as your White entrepreneurs. That means you can get from friends and family-- banks aren't loaning to you. We know the numbers per VCs and PEs. They're about 1% for venture-backed Black firms. There's a whole reason why I started raising these funds. People were locked out so I decided to raise $250 million for people of color because at this point, we just don't have time to run more studies and push people to these avenues. We're just trying to construct this ourselves and help people access financing.

Fundbox: The time for research is done. We know there's a disparity. Let's do something about it.

Henry Childs, II:
We just need banks to be intentional of our chauvinist problem because you're absolutely right, credit score is a huge issue especially in the Black community. Even when we see Blacks and Whites with the same credit scores and some of the same assets, whether it'd be your homeownership, whether it'd be something else, still Blacks are not getting a loan to the same amount as Whites. What I think we're going to do, and I'm going to give praise to JPMorgan Chase on that. I'm working with JPMorgan Chase to do two things.

Number one, increase the number of Black households that are fully banked right now. Only 46% of Black households are fully banked. Then number two, they're going to do a mentorship program with Black banks and CDFIs. That's important because CDFIs and your thrift things, those are normally the capital access partners for some of these minority businesses. JPMorgan Chase is leading on this. I'm working with them to help Black people get fully banked and basically get credit so they can start their business.

Fundbox: Just for people who aren't familiar with CDFIs, explain about the community bank system.

Henry Childs II: The Community Depository Financial Institution, they're really your neighborhood banks, and we call them your bank of last resort. They're the bank you go to when the big three won't lend to you. You go to a CDFI, and they have a partnership with these communities. They're there with you, they partner with you, they actually stay in the community, and they have, I think, 50% of the people they lend to are people of color. Really for people of color, this has been their banker of choice but they're undercapitalized. Most CDFIs don't have enough liquidity to do as much lending as they could, so we're providing liquidity to them.

Fundbox: Going back to the PPP, I know the inspector general was really critical of the SBA, saying that they wanted to make sure that 60 billion of this PPP fund, would go to people who were shut out of the first round, particularly for minority, and women-owned, and rural businesses. That was hard to do because there's nothing on the PPP for them to really designate whether it was going to a minority business unless you are a Native American business. There was a check mark for that. What eventually happened was they decided, "We'll ear-mark this 60 billion to go to CDFIs." What happened then? How did these community banks get the word out that these PPP funds were available in their communities?

Henry Childs II: It was a hard fight, it really was, and it was basically word-of-mouth. Then for us, it's all just say we get the Minority Business Development Agency-- I can't tell you how many webinars we did, I can't tell you how many virtual town halls, I can't tell you how many websites that we introduced people to for what you just said to get the word out. What happened was when businesses first tried to go, and they got stiff-armed by the big banks, they gave up. Then the second wave was CDFIs but at this point, people were like, "I'm not going to get the PPP."

They're trying to figure out where they're going to get the financing to keep their business afloat, to pay employees, feed their families. The CDFIs did a great job. I just wish that the Congress would have listened to us very early on because we told them SBA can't designate by ethnicity. There's no way to know that.

Fundbox: It was puzzling too because to make that demand, which was a great thing sort of an affirmative action for lending, but when you have the Equal Credit Opportunity Act where you can't use race as a factor for that for very good reasons, I was curious to see how they're going to make that happen. It was unfortunate that wasn't able to get the word out even better. What can lenders, especially Fintech lenders, do to better serve minority communities?

Henry Childs II: I really think it's understanding the businesses better. When I deal with lenders, it's not that they don't want to lend to people of color. Their number one issue is they say they can't find them. They're not on the network. You know how these ecosystems build, and especially the tech side tends to skew towards Silicon Valley. You have some pop ups in Atlanta, some in New York. If you're outside those areas, chances are you're not going to have access to these lenders. One of the things that we ask them to do is partner with us, the minority wealth commission.

Basically, we have about 7 million minority businesses in our pipeline, whether it'd be through Hispanic chambers, Black chambers, Asian chambers, trade associations. We have the businesses. We're training them up so that when you are looking to lend, we make sure they have the right credit scores. It's really just a one-stop-shop for these people looking to invest in people of color.

Fundbox: How are online and mobile-friendly lending solutions, especially Fintechs, helping to eliminate the risk of racial discrimination by taking the face-to-face element out of the lending equation, and replacing it with more egalitarian underwriting measures, such as artificial intelligence-driven analysis of a specific business financials?

Henry Childs II: I think that it's a great alternative to going to your traditional bank. I've sent people there all the time. What's great about it is number one, especially if you're young, your mobile phone is your life. It basically is your business in your hand. It's very easy to hit this app to upload whatever information it is, whatever financials you need, and then get a decision very quickly. That's what I love about some of this Fintech stuff. You don't have to drag all your documents to the bank. They don't ask you everything, for your blood type, and then you have to wait a couple of weeks for decision.

These processes are much smoother. The only thing that I ask is, I see some of the rates going up, and I don't want them to climb into the credit card, APR category where Henry Childs gets a loan, and then they're charging me 18% on that. That's the only thing. I just see it creeping up and I just hope that doesn't happen.

Fundbox: You mentioned this before about the underbanked and unbanked. FDIC data shows that less than 46% of black households were fully banked in 2017. Understandably, there's a lot of mistrust of the financial industry among minority borrowers, especially small businesses. What can help rebuild this trust?

Henry Childs II: That's a really good question. I want to have a really smart answer. It's a good question, especially when we just see that things happen with Wells Fargo, we see some things with Citibank now, and we see even the misuse of PPP funds. It's hard to convince some people of color to go to a bank, especially when what they thought a bank was for savings, you're earning pennies on now. What we say is, you need to be banked for things for instance, like when the PPP comes, and you have to go through your bank, it's better if you have one.

The things that we can do are things like what we're doing with like JPMorgan Chase, and you just have to be intentional about going after these groups. You have to do carve-outs. If that means lowering your credit score, divest some of these businesses, if it means doing a partnership with the CDFI, doing a partnership with an equity capital partner, you just have to do it because you're right, to especially have to speak for black people, there is a distrust of banks. I think that hurts the banks and definitely hurts people of color.

Fundbox: What are some alternative funding options for minority business owners?

Henry Childs II: I'm glad you asked that. I think it's equity. I'm probably going to surprise you. There's so much money out there right now. Every time I talk to an institutional investor, the first thing they talk about is how much dry powder they have, which is money that they have that's not put to use, but they need help investing in the minority economy. That's the solution that we bring to the table, is we help these institutional investors understand the risk that they're taking, and then really understand some of the returns that they're going to get because investing in a business of color is no riskier than investing in a White business and the data shows that.

They just have to be comfortable with this. I think it's on us to basically supply these ready-made [unintelligible 00:15:27] to them. That's why with our first fund, our sweet spot was 3 million to 15 million because these are mature firms. These are businesses are just looking for expansion. Then once they get used to doing that, then we can move to some of the riskier, some of the VC, some of the start-up phase. We wanted to build this pipeline of the businesses that are ready to go now. They just need to be injected with some capital to expand.

Fundbox: That's great. Well, tell us more about the organization you founded. The Minority Wealth Commission is the largest diverse National Organization for minority wealth creation and you're the man behind it.

Henry Childs II: It is. Yes. What I like about the Minority Wealth Commission is two things. Number one, it brings all the minority groups together. We have the US Hispanic Chamber. We have the US Black chamber. We have the National Asian Chamber. We have the National Minority Supplier Development Council, which does minority spend. We have the National Association of Investment Companies, which is the largest group of diverse asset managers. Then we have people like Amazon and JPMorgan Chase. We have the right people at the table. The second thing that I like about it, is that it's really focused on eradicating the racial wealth gap.

I felt like the reason policy was going wrong was because people were focused on poverty alleviation, which is great, but it's not wealth creation. We are trying to tell people how to create wealth. Only a third of black people or even in the stock market, we know that they own their homes. These simple wealth creation tools are necessary, because everything else is about poverty alleviation, which is affordable housing, getting people to workforce. All those things are necessary, but nobody is focused on capital accumulation and that's what we do.

Fundbox: Then add on to that the prospects of generational wealth. What can be done to help lift that up as well?

Henry Childs II: The key metric for our fund is, we're looking to create $10 million, a new net worth in every minority investor we invest in. Then we also do some capacity building. We have some infrastructure PE fund, to make sure that those people stay in the communities where they're accumulating this wealth, because what we're seeing the path is people will make their money, and then they flee which is good for them but it's not good for the community. We're doing both. We're making sure that we're creating wealth, and then we're also making sure that we're doing the capacity building so people can actually live in these communities and want to live in these communities.

Fundbox: How can we as citizens, corporations, and even lenders like ourselves, help transition the US economy into a totally inclusive and participatory system for providing access to finance?

Henry Childs II: That's a great question. I really think it's just understanding the data because to me, I think it's a national imperative that the United States gets more minorities into the economy. The racial wealth gap, there's study after study, the one I like to quote, says, "If there was racial parity, the US GDP would increase 2% to 6%." It just makes good business sense. I'm not talking social justice stuff. I do economics, I'm a business person. It makes good business sense when your fastest-growing demographic to make sure that they have the wealth to invest back in the economy, to make sure that they- Right, so that's what we're doing. We're hitting people with data. We're working with institutional investors to make sure the United States stays an economic superpower.

Fundbox: When the minority majority is also wealthy, then that helps everybody.

Henry Childs II: Exactly.

Fundbox: I know, you're also very technology-focused. How does the minority wealth commission drive and support the adoption and use of AI and other technologies, and innovative projects to help minority small businesses gain an equal footing on credit and liquid capital?

Henry Childs II: I love technology. Sometimes people think I'm a robot. I am 1,000% on AI. Right now, our number one focus is helping minority businesses transition into the digital economy, because if you're not a digital business, your doors are going to shut. We saw Disney have to do a reorg to start streaming to meet customers where they're at. That's the number one thing, is getting these businesses digital. The second thing that we're doing is we're pushing hard on artificial intelligence because artificial intelligence over the next 20 to 30 years, that is what's going to separate the next thing companies.

It's going to be all AI companies.

It's the reason why you saw people like Softbank going hardcore in AI investing in anything that they've got. Any artificial intelligence because they know that's going to be the future. What we're doing is we're making sure that we have a fund for black people to do AI too so we're not left behind.

Fundbox: Great. Is there anything else that you'd like to add?

Henry Childs II: Yes. I just want to make a pitch that this just makes economic sense. If you just look at the future businesses right now, the post-millennials are the youngest most diverse generation in US history, there's more post-millennials than baby boomers. These are the people who are going to be consuming your goods. These are the people who are going to be starting your business. You're really investing in a future by making investments in young people and people of color right now. There's great organizations like the Minority Wealth Commission who we know they're worried about risk, we know they're worried about all the things they normally do. We walk them through there so that they can see clearly their return on capital and how we're putting their dollars to work.

Fundbox: Terrific. Is there anything that is helpful for minority businesses if they visit you, or is there something you can help them directly with, or are you working mostly with the investors?

Henry Childs II: No. We help them directly too. The core of the Minority Wealth Commission is their ethnic chambers and associations. We do all the technical assistance and business development to get you ready to get one of these large- scale investments. We're building a pipeline to get you from wherever you are, the life cycle of your business journey, from start-up all the way to maybe legacy or you're looking to sell your business. We have resources for everybody.

Fundbox: Great. Well, thank you very much. Let's know how to get a hold of you and the Minority Wealth Commission. Is there a website that people can go to?

Henry Childs II: Yes, there's a website www.minoritywealthcomission.com. If you want access to our fund it's www.fvlcrum.com. That's F-V-L-C-R-U-M. You can find us on Twitter @Henrychilds2.

Fundbox: Great. Thank you very much for joining us, Henry. This has been a terrific educational opportunity. Good luck to you and good luck to everyone. Thanks for joining me.

Henry Childs II: Thank you for having me. Thank you.

Fundbox: For Fundbox, I'm Dan Biewener. Please join us at fundbox.com. Also, check out our blog at fundbox.com/blog.

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